Since the beginning of the new Millennium, India has repeatedly flirted with the idea of imposing a nationwide Goods and Services Tax (GST). However, legislative activity that has taken place over the last few weeks indicates concrete momentum towards this long-standing goal.
The GST Constitution Amendment Bill
The GST Constitution Amendment Bill (GST Bill) passed the Lower House (Lok Sabha) in May 2015 and passed the Upper House (Rajya Sabha) on August 3, 2016, with further amendments. On August 8, 2016, the Lok Sabha unanimously approved the amendments, meaning the bills are aligned and the path is clear for a complete re-design of indirect taxation in India. With the force of the empowering constitutional amendment behind it, a national GST may take effect as early as April 1, 2017.
The proposed national GST in India aims to replace a hodgepodge of existing federal
and state levies on supplies of goods or services.
Current Indirect Taxes in India
The proposed national GST aims to replace a hodgepodge of existing federal and state levies on supplies of goods or services. Currently in India, each state administers its own value added tax (VAT) law that applies to supplies of goods within the state. There is no uniform standard VAT rate among the states. A Central Sales Tax (CST) applies to interstate supplies of goods, which in essence sources the transaction to the state of origin for VAT.
At the federal level, the central government currently administers a Service Tax of 14%. Taxable services are also subject to a Swachh Bharat Cess of 0.5% and a Krishi Kalyan Cess of 0.5%, which are special-purpose federal taxes to fund improvement of sanitation and agriculture respectively.
Miscellaneous federal and state levies also currently populate the India taxation landscape, such as:
- Central Excise Duty
- Countervailing Duty
- Customs Duty
- Central and state surcharges and cesses with respect to supply of goods and services
- Entry tax
Each of these levies applies based on a different set of rules and currently adds to the complexity of doing business in India.
How GST Works
GST will be a uniform value added tax on supplies of both goods and services nationwide. It will replace the federal and state levies currently in effect on goods or services (with the exception of Basic Customs Duty). Under GST, tax is sourced at destination.
According to the Draft Model GST Law published by the India Ministry of Finance, with respect to a taxable supply that takes place entirely within one state, GST will consist of two elements:
- Central GST (CGST)
- State GST(SGST)
The taxation structure of intrastate supplies is similar to that in the Canadian province of Quebec where the federal GST and provincial Quebec Sales Tax (QST) basically apply to the same tax base, but remain two distinct taxes.
A single combined rate of Integrated GST (IGST) will apply to interstate taxable supplies. IGST is analogous to Harmonized Sales Tax (HST) in Canada, which is a single rate combining the federal and provincial sales taxes in a given HST province. One of the major amendments to the GST Bill made in the India Upper House is elimination of a proposed additional 1% tax on interstate supply of goods.
The next step is for the GST Bill to be ratified by a majority of states. As of September 1, 2016, 16 states have ratified the GST Bill, meeting the required majority for subsequent Presidential Assent of the Bill. Both the federal government and states will need to pass GST-enabling laws before the target date of GST rollout on April 1, 2017.
Some key details of the model GST law still need to be worked out, most notably the standard rate. However, this is the most positive momentum toward a centralized tax system in India that we have ever seen. Sovos Compliance is closely monitoring the situation and will make all the necessary changes in our global tax calculation engine to keep our clients compliant.