UNIT I

Introduction to Indirect Taxation and GST

1.1 Basis for Taxation

DIRECT AND INDIRECT TAXES

     Taxes are broadly classified into direct and indirect taxes.

Direct Taxes: A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) who are liable.  A direct tax is one that cannot be shifted by the taxpayer to someone else. A significant direct tax imposed in India is income tax. In simple words it is a tax directly paid by the Person to the Government.

Indirect Taxes: If the taxpayer is just a channel or medium and at every stage the tax- incidence is passed on till it finally reaches the consumer, who really bears the burden, such tax is indirect tax. An indirect tax is one that can  be shifted by  the taxpayer to someone else.

Its incidence is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods.

Also called consumption taxes, they are regressive in nature because they are not based on the principle of ability to pay. All the consumers, including the economically challenged bear the brunt of the indirect taxes equally.

Indirect taxes are levied on consumption, expenditure, privilege, or right but not on income or property. Earlier, a number of indirect taxes were levied in India, namely, excise duty, customs duty, service tax, central sales tax (CST), value added tax (VAT), entry tax, purchase tax, entertainment tax, tax on lottery, betting and gambling, luxury tax, tax on advertisements, etc.

However, indirect taxation in India witnessed major shift on July 01, 2017 with into a unified indirect tax regime wherein a large number of Central and State indirect taxes were combined into a single tax – Goods and Services Tax (GST). The introduction of GST has been a very significant step in the field of indirect tax reforms in India. Customs duty continues in post-GST regime.

Differences between Direct Tax and Indirect Tax

ADVANTAGES OF DIRECT TAXES

There are some key benefits of direct taxes such as-

•  Curbs Inflation- In case if there is monetary inflation, the government can increase direct tax rates so that the goods and services demand can be reduced. As the demand falls, it helps in condensing inflation.

•  Equitable- Direct taxes are also known to be equitable as the progression principle is at its foundation. People with lower income pay lower taxes, and people with higher income pay higher taxes.

•  Reduces Inequalities- The higher taxes collected from the rich are used by the government to launch newer initiatives for the poor. The initiatives provide income sources to people with lower income, helping them improve their living standards.

DISADVANTAGES OF DIRECT TAXES

Direct taxes also have some drawbacks such as

•  Considered a Burden- As taxpayers are required to pay direct taxes like income tax in a single lump sum every year, they are considered a burden. Moreover, even the documentation process is generally complex and time-consuming.

• Evasion is Possible- While the government has made tax evasion very difficult now, there are still many fraudulent practices through which individuals and businesses can avoid or pay lower taxes than they should.

• Restrains Investments- Due to the imposition of direct taxes like securities transaction tax and capital gains tax, a lot of people avoid investing. So, in a way, direct taxes restrain investments.

ADVANTAGES OF INDIRECT TAX

Some significant benefits of indirect taxes are listed below-

• Poor Contributes Too- It is essential for the country that every individual contributes towards its development. As the poor are often exempt from paying direct taxes, the indirect taxes ensure that even poor contribute towards nation-building.

• Convenience- Unlike direct taxes which are generally paid in a lump-sum, indirect taxes like GST are paid in small amounts. When you purchase a product or service, a small amount of GST is already included in the price, and this makes its payment more convenient for the taxpayers.

• The collection is Easy- If you want to know what is the difference between direct and indirect tax, one of the biggest of them is how they are paid. Unlike direct taxes, there are no documents or complex procedures involved in paying indirect taxes. You are required to pay the tax right when you purchase a product or service.

DISADVANTAGES OF INDIRECT TAXES

A few cons of indirect taxes are as follows-

• Regressive- Indirect taxes are widely known to be regressive in nature. While they make sure that everyone pays taxes irrespective of their income, they are not equitable. People from every income group are required to pay indirect taxes at the same rate.

• Makes Products and Services More Expensive- As indirect tax is added to the price of goods and services, it makes them more expensive. For instance, products like cigarettes, high-end bikes, premium cars, etc. are included in the 28% tax slab of GST.

• Lacks Civic-Consciousness- As indirect tax is added to the price of the product or service, the consumers are generally unaware of the tax they are paying. This is opposite to direct taxes where the taxpayer clearly knows the taxes he/she is paying.

SOURCES AND AUTHORITY OF TAXES IN INDIA

India’s tax system is a three-tier federal structure which is made up of the following:

1. Union List (List 1 of the 7th schedule to the Constitution of India) contains those matters on which the Central Government has the power to make laws [Article 246(1)].

2. The State List has only those matters on which the State Government has the power to make laws [Article 246(3)].

3. The Concurrent List has those matters on which both the Central and State Governments have the power to make laws [Article 246(2)].

Law made by Union Government prevails whenever there is a conflict between the Centre and state concerning entries in the concurrent list.  But if any provision repugnant to earlier law made by parliament is part of law made by the state, if the law made by the state government gets the assent of the President of India, it prevails.

Distribution of powers of taxation

• List 1 in the 7th schedule to the constitution has the powers of the Central Government listed in Entries 82-92B.

• List 2 in the schedule has the powers of the State Government listed in Entries 45-63.

• As regards list 3, it doesn’t deal with taxation and hence both centre and state do not have any concurrent powers of taxation.

• Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to the centre.

Constitutional Provisions Regarding Taxation in India

The roots of every law in India lie in the Constitution; therefore, understanding the provisions of the Constitution is foremost to have a clear understanding of any law. The Constitutional provisions regarding taxation in India can be divided into the following categories:

• Only by the authority of law can taxes be levied. (Article 265)

• Levy of duty on tax and its distribution between centre and states (Article 268, Article 269, and Article 270)

•  Restriction on power of the states to levy taxes (Article 286)

• Sale/purchase of goods which take place outside the respective state

• Sale/purchase of goods which take place during the import and export of the goods

• Taxes imposed by the state or purpose of the state (Article 276, and Article 277)

• Taxes imposed by the state or purpose of the union (Article 271, Article 279, and Article 284)

•  Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)

Article 265

Without the ‘authority of law,’ no taxes can be collected is what this article means in simple terms. The law here means only a statute law or an act of the legislature. The law when applied should not violate any other constitutional provision. This article acts as an armour instrument for arbitrary tax extraction.

In the case Tangkhul v. Simirei Shailei, all the villagers were paying Rs 50 a day to the head man in place of a custom to render  free a day’s labour. This was done every year and the practice had been continuing for generations. The Court, in this case, held that the amount of Rs. 50 was like a collection of tax and no law had authorized it, and therefore it violated Art 265. Article 265 is infringed every time the law does not authorize the tax imposed.

In the case, Lord Krishna Sugar Mills v. UOI, sugar merchants had to meet some export targets in a promotion scheme started by the government but if they fell short of the targets then an additional excise duty was to be levied on the shortfall. The court intervened here and said that the government had no authority of law to collect this additional excise tax. What this means in effect is that the government on its own cannot levy this tax by itself because it has not been passed by the Parliament.

Article 266

This article has provisions for the Consolidated Funds and Public Accounts of India and the States. In this matter, the law is that subject to the provisions of Article 267 and provisions of Chapter 1 (part XII), the whole or part of the net proceeds of certain taxes and duties to States, all loans raised by the Government by the issue of treasury bills, all money received by the Government in repayment of loans, all revenues received by the Government of India, and loans or ways and means of advances shall form one consolidated fund to be entitled the Consolidated Fund of India. The same holds for the revenues received by the Government of a State where it is called the Consolidated Fund of the State. Money out of the Consolidated Fund of India or a State can be taken only in agreement with the law and for the purposes and as per the Constitution.

Article 268

This gives the duties levied by the Union government but are collected and claimed by the State governments such as stamp duties, excise on medicinal and toilet preparations which although are mentioned in the Union List and levied by the Government of India but collected by the state (these duties collected by states do not form a part of the Consolidated Fund of India but are with the state only) within which these duties are eligible for levy except in union territories which are collected by the Government of India.

Article 269 provides the list of various taxes that are levied and collected by the Union and the manner of distribution and assignment of Tax to States. In the case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others, placing faith in a judgement of the Apex Court in the case of Gannon Dunkerley & Co. and others v. State of Rajasthan and others, the advocate from the appellant side submitted that to arrive at a Taxable Turnover, turnover relating to inter-State transactions, export, import under the CST Act are to be excluded. Thus, the provision of the State Sales Tax Act is always subject to the provisions of Sections 3 and 5 of the CST Act. Sale or purchase in the course of interstate trade or commerce and levy and collection of tax thereon is prohibited by Article 269 of the Constitution of India.

Article 269(A)

This article is newly inserted which gives the power of collection of GSTs on inter-state trade or commerce to the Government of India i.e., the Centre and is named IGST by the Model Draft Law. But out of all the collecting by Centre, there are two ways within which states get their share out of such collection

1. Direct Apportionment (let say out of total net proceeds 42% is directly apportioned to states).

2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a selected prescribed percentage goes to the States.                

 Article 270

This Article gives provision for the taxes levied and distributed between the Union and the States: 

• All taxes and duties named within the Union List, except the duties and taxes named in articles 268, 269 and 269A, separately. 

• Taxes and surcharges on taxes, duties, and cess on particular functions which are specified in Article 271 under any law created by Parliament are extracted by the Union Government.

• It is distributed between the Union and the States as mentioned in clause (2).

• The proceeds from any tax/duty levied in any financial year, is assigned to the states where this tax/duty is extractable in that year but it doesn’t form a part of the Consolidated Fund of India.

• Any tax collected by the centre should also be divided among the centre and states as provided in clause (2).

• With the introduction of GST 2 sub-clauses having been added to this Article- Article 270(1A) and Article 20(1B7).

The Supreme Court of India has set a famous judicial precedent under Article 270 of the Constitution of India in the case T.M. Kanniyan v. I.T.O. The SC, in this case, propounded that the Income-tax collected forms a part of the Consolidated Fund of India. The Income-tax thus extracted cannot be distributed between the centre, union territories, and states which are under Presidential rule.

Article 271

At times the Parliament for the Union Government (only when such a requirement arises), decides to increase any of the taxes /duties mentioned in article 269 and Article 270 by levying an additional surcharge on them and the proceeds from them form a part of the Consolidated Fund of India. Article 271 is an exception to Article 269 and Article 270. The collection of the surcharge is also done by the Union and the State has no role to play in it.

Cess and surcharge

There seems to be a lot of confusion between cess and surcharge. Cess is described in Article 270 of the Constitution of India. Cess is like a fee imposed for a particular purpose that the legislation charging it decides. Article 271 deals with a surcharge which is nothing but an additional tax on the existing tax collected by the union for a particular purpose. Proceeds from both the cess and surcharge form part of the Consolidated Fund of India In the case of m/s SRD Nutrients Private Limited v. Commissioner of Central Excise, Guwahati, the Supreme Court was presented with the question:  If on excisable goods an education cess can be levied before the imposition of cess on goods manufactured but cleared after imposition of such cess. The judgement given in this case was in favour of the manufacturer but the judges, Justice A K Sikri and Justice Ashok Bhushan observed that education and higher education cess are surcharges.

Grants-in-aid

The constitution has provisions for sanctioning grants to the states or other federating units. It is Central Government financial assistance to the states to balance/correct/adjust the financial requirements of the units when the revenue proceeds go to the centre but the welfare measures and functions are entrusted to the states. These are charged to the Consolidated Fund of India and the authority to grant is with the Parliament.

Article 273

This grant is charged to the Consolidated Fund of India every year in place of any share of the net proceeds, export duty on products of jute to the states of Assam, Bihar, Orissa, and West Bengal. This grant will continue and will be charged to the Consolidated Fund of India as long as the Union government continues to levy export duty on jute, or products of jute or the time of expiration which is 10 years from its commencement.

Article 275

These grants are sanctioned as the parliament by law decides to give to those states which are in dire need of funds and assistance in procuring these funds. These funds /grants are mainly used for the development of the state and for the widening of the welfare measures/schemes undertaken by the state government. It is also used for social welfare work for the Scheduled tribes in their areas.

Article 276

This article talks about the taxes that are levied by the state government, governed by the state government and the taxes are collected also by the state government. But the taxes levied are not uniform across the different states and may vary. These are sales tax and VAT, professional tax and stamp duty to name a few.

Article 277

Except for cesses, fees, duties or taxes which were levied immediately before the commencement of the constitution by any municipality or other local body for the purposes of the State, despite being mentioned in the Union List can continue to be levied and applied for the same purposes until a new law contradicting it has been passed by the parliament.

In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh, the appellant was manufacturing medicines for making which they had to use alcohol, the licenses for which were procured under the Hyderabad Abkari Act and had to pay some fees to the State Government for the supervision. But the parliament passed the Medicinal and Toilet Preparations Act, 1955 under which no fee had to be paid but the petitioner challenged the levy of taxes by the state after the passing of the Medicinal and Toilet Preparations Act, 1955 because according to Article 277, entry 84 of list 1 in the 7thschedule, the state could not levy any fee. The difference between tax and fee was explained. Proceeds from tax collection are used for the benefit of all the taxpayers but a fee collected is used only for a specific purpose.

Article 279

This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the proceeds which are left after deducting the cost of collection of the tax, ascertained and certified by the Comptroller and Auditor-General of India.

 Article 282 

It is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is not restricted.  In the case Bhim Singh v. Union of India & Ors the Supreme Court said that from the time of the applicability of the Constitution of India, welfare schemes have been there intending to advance public welfare and for public purposes by grants which have been disbursed by the Union Government. In this case, the Scheme was MPLAD (Member of Parliament Local Area Development Scheme) and it falls within the meaning of ‘public purpose’ to fulfil the development and welfare projects undertaken by the state as reflected in the Directive Principles of State Policy but subject to fulfilling the constitutional requirements. Articles 275 and 282 are sources of granting funds under the Constitution. Article 282 is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is not restricted. In the case Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State of Madras, the Supreme Court held that the practice of religion is a private purpose. And donations and endowments made are therefore not a state affair unless the state takes the responsibility of the management of such religious endowment for a public purpose and uses the funds for public welfare measures. So it can be seen that Article 282 can be used for a public purpose but at times in the name of public purpose it can even be misused.

 Article 286

This article restricts the power of the State to tax

1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the territory of the state.

2) Only parliament can lay down principles to ascertain when a sale/purchase takes place during export or import or outside the state. (Sections 3, 4, 5 of the Central Sales Tax Act, 1956 have been constituted with these powers)

3) Taxes on sale/purchase of goods that are of special importance can be restricted by the parliament and the State Government can levy taxes on these goods of special importance subject to these restrictions (Section 14 and Section 15 of Central Sales Act, 1956 have been constituted to impose restrictions on the state Government to levy taxes on these goods of special importance).  In the case of K. Gopinath v. the State of Kerala, Cashew nuts were purchased and imported by the Cashew Corporation of India from African suppliers and sold by it to local users after processing it. The apex court held that this sale was not in the course of import and did not come under an exemption of the Central Sales Tax Act, 1956. The issue before the court was to decide whether the purchases of raw cashew nuts from African suppliers made by the appellants from the cashew corporation of India) fall under the nature of import and, therefore protected from liability to tax under Kerala General Sales Tax Act, 1963. The judgment here went against the appellants.

Article 289

State Governments are exempted from Union taxation as regards their property and income but if there is any law made by the parliament in this regard then the Union can impose the tax to such extent.

Key Takeaways:

1. A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) who are liable.
2. An indirect tax is one that can be shifted by  the taxpayer to someone else.

1.2 Introduction to GST

GENESIS OF GST IN INDIA

• In the year 2000, the then Prime Minister mooted the concept of GST and set up a committee to design a Goods and Services Tax (GST) model for the country. In 2003, the Central Government formed a task force under Vijay Kelkar, which in 2004 strongly recommended fully integrated ‘GST’ on national basis.
• Subsequently, the then Union Finance Minister, Shri P. Chidambaram, while presenting the Union Budget (2006-2007), announced that GST would be introduced from April 1, 2010. Since then, GST missed several deadlines and continued to be uncertain.
• However, GST regime gained momentum in the year 2014 when the NDA Government tabled the Constitution (122nd Amendment) Bill, 2014 on GST in the Parliament on 19thDecember, 2014.  The Lok Sabha passed the Bill on 6thMay, 2015 and Rajya Sabha on 3rd August, 2016. Subsequent to ratification of the Bill by more than 50% of the States, Constitution (122ndAmendment) Bill, 2014 received the assent of the President on 8th September, 2016 and became Constitution (101stAmendment) Act, 2016, which paved the way for introduction of GST in India.
• In the following year, on 27thMarch, 2017, the Central GST legislations - Central Goods and Services Tax Bill, 2017,  Integrated Goods and Services Tax Bill, 2017, Union Territory Goods and Services Tax Bill, 2017 and Goods and Services Tax (Compensation to States)Bill, 2017 were introduced in Lok Sabha. Lok Sabha passed these bills 29thMarch, 2017 and with the receipt of the President’s assent on 12thApril, 2017, the Bills were enacted. The enactment of the Central Acts was followed by the enactment of the State GST laws by various State Legislatures. Telangana, Rajasthan, Chhattisgarh, Punjab, Goa and Bihar were among the first ones to pass their respective State GST laws. By 30th June, 2017, all States and Union Territories had passed their respective SGST and UTGST Acts except Jammu and Kashmir. With effect from 1st July, 2017, the historic indirect tax reform - GST was introduced. GST law  was  extended  to  Jammu  and  Kashmir  on 8th July,2017.
• GST has subsumed multiple indirect taxes like excise duty, service tax, VAT, CST, luxury tax,  entertainment tax, entry tax, etc.

POWER TO TAX GST (CONSTITUTIONAL PROVISIONS)

India has a three-tier federal structure, comprising the Union Government, the State Governments and the Local Government.

The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution.

The Constitution of India is the supreme law of India. It consists of a Preamble, 25 parts containing 448 Articles and 12Schedules.

Power to levy and collect taxes whether, direct or indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order is not in conformity with the Constitution, it is called ultra vires the Constitution and is illegal and void.

Thus, a study of the basic provisions of the Constitution is essential for understanding the genesis of the various taxes being imposed in India.

The significant provisions of the Constitution relating to taxation are:

1. Article 265: Article 265 of the Constitution of India prohibits arbitrary collection of tax. It states that “no tax shall be levied or collected except by authority of law”. The term “authority of law” means that tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax.
2. Article 245: Part XI of the Constitution deals with relationship between the Union and States. The power for enacting the laws is conferred on the Parliament and on the Legislature of a State by Article 245 of the Constitution. The said Article provides asunder:

      Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State.

      No law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

III.            Article 246:It gives the respective authority to Union and State Governments for levying tax. Whereas Parliament may make laws for the whole of India or any part of the territory of India, the State Legislature may make laws for whole or part of the State.

IV.            Seventh Schedule to Article 246: It contains three lists which enumerate the matters under which the Union and the State Governments have the authority to make laws.

V.            Article 246A: Power to make laws with respect to Goods and Services Tax

      This article grants power to Centre and State Governments to make laws with respect to GST imposed by Centre or such State.

      Centre has the exclusive power to make laws with respect to GST in case of inter-State supply of goods and/or services.

      However, in respect to the following goods, the aforesaid provisions shall apply from the date recommended by the GST Council:

      The provisions of Article 246A are notwithstanding anything contained in Articles 246 and 254. Article 254 deals with the supremacy of the laws made by Parliament.

VI.            Article269A: Levy and collection of GST on inter-State supply

     Article 269A stipulates that GST on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

     In addition to above, import of goods or services or both into India will also be deemed to be supply of goods and/ or services in the course of Inter-State trade or Commerce.

     This will give power to Central Government to levy IGST on the import transactions which were earlier subject to Counter availing duty under the Customs Tariff Act, 1975.

     Where an amount collected as IGST has been used for payment of SGST or vice versa, such amount shall not form part of the Consolidated Fund of India. This is to facilitate transfer of funds between the Centre and the States.

     Parliament is empowered to formulate the principles regarding place   of supply and when supply of goods, or of services or both occurs in inter-State trade or commerce.

EXTENT AND COMMENCEMENT OF GST IN INDIA

Extent:

Part I of the Constitution of India states: “India, that is Bharat, shall be a Union of States”. It provides that territory of India shall comprise the States and the Union Territories specified in the First Schedule of the Constitution of India. The First Schedule provides for twenty-nine (29) States and seven (7) Union Territories.

Part VI of the Constitution of India provides that for every State, there shall be a Legislature, while Part VIII provides that every Union Territory shall be administered by the President through an ‘Administrator’ appointed by him. However, the Union Territories of Delhi and Pondicherry have been provided with Legislatures with powers and functions as required for their administration.

India is a summation of three categories of territories namely – (i) States (29); (ii) Union Territories with Legislature (2); and (iii) Union Territories without Legislature (5).

The State of Jammu and Kashmir enjoys a special status in the Indian Constitution in terms of Article 370 of the Indian Constitution. The Parliament has power to make laws only on Defence, External Affairs and Communication related matters of Jammu and Kashmir. As regards the laws related on any other matter, subsequent ratification by the Government of Jammu and Kashmir is necessary to make it applicable to that State.

Therefore, the State of Jammu & Kashmir were required to pass special laws to be able to implement the Goods and Services Tax Acts. Accordingly, the assembly of J&K passed the GST bill in the first week of July. Subsequently, Honourable President of India had promulgated two ordinances, namely, the CGST (Extension to Jammu and Kashmir) Ordinance, 2017 and the IGST (Extension to Jammu and Kashmir) Ordinance, 2017 making the CGST/ IGST applicable to the State of Jammu and Kashmir, w.e.f. 8th July, 2017. Once the laws are passed by the State of Jammu & Kashmir, the Union Government will have to amend the Central Goods and Services Act, 2017 to delete the phrase that such provisions do not apply to the State of Jammu & Kashmir. After the promulgation of ordinance, India has adopted GST in its form across the country.

Commencement:

The CGST Act came into operation on 01.07.2017, the date appointed by the Central Government. However, certain provisions i.e. Sections 1,2,3,4,5,10,22,23,24,25,26,27,28,29, 30,139, 146,164 were made effective form 22.6.2017.

MEANING AND DEFINITION OF GST

The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.

GST, or Goods and Services Tax, is a tax that customers have to bear when they buy any goods or services, such as food, clothes, electronics, items of daily needs, transportation, travel, etc. The concept of GST is that it is an “Indirect Tax”, i.e., this tax is not directly paid by customers to the government, but is rather levied on the manufacturer or seller goods and the providers of services. The sellers usually add the tax expense into their costs, and the price the customers pay is inclusive of GST. Thus, in most cases, you end up paying a tax even if you are not an income taxpayer.

BENEFITS OF GST

The following are the benefits of the GST:

• Elimination of the cascading tax effect

With the introduction of GST i.e., Goods and Services Tax, all the taxes have been brought under a single sunshade. This means the cascading tax effect has been eliminated. The GST rate applicable to the service would be 18%.

• Higher threshold

In the VAT charging system, the business having the turnover above Rs.5 lakhs are accountable to pay VAT. Even the service providers who get a turnover of Rs.10 lakhs were free from service tax. Though, the beginning of the registration under GST is Rs.20 lakhs.

• Manageable procedure

The whole GST process, beginning from registration and ending with filing returns, is done online. It is a manageable procedure that can be matched even by individuals with minimum technical know-how. Registering under GST is especially easy because there is no requirement to run around for multiple registrations like Service Tax, Excise Duty, VAT, etc. 

• Composition scheme

Small businesses that get turnovers between Rs.20 lakh and Rs.75 lakh can benefit under the new tax regime as the Composition Scheme can help in reducing their taxes. The compliance and tax burden on small businesses has significantly decreased thanks to the implementation of GST. 

• Simplified compliances

The earlier tax regime had Service Tax and Value Added Tax, and each of these taxes had their compliances and returns. For instance, Excise Duty return filing had to be made every month, while Service Tax return filing had to be made every month for companies and LLPs, and all quarter for partnerships and proprietorships. Value Added Tax was different in different states, which appeared in inconsistencies over the country. The execution of GST has ensured all businesses pay a uniform tax for the supply of goods and services.

• E-Commerce operators no longer undergo from differential processing 

Before the execution of the Goods and Services Tax, there was no proper definition for the supply of goods by an e-commerce portal. There were many VAT laws. GST has completely done away with such confusing compliances and differential treatments. The e-commerce sector now has simply set provisions that make it easier to engage in the supply of products over states. 

• Regulation of the unorganized sector

Before the introduction of GST and its execution, many industries like constructions and textiles were considered unorganized. The execution of GST has added provisions for online compliance and payments. Even the availing of input credit has been clearly explained to avoid confusion, thus bringing in regulation and accountability to these sectors.

CONCEPTUAL FRAMEWORK OF GST

These are basically the taxes applicable now in the current regime under the GST system:

• Central Goods and Services Tax (CGST)

CGST is imposed on the intra-state supply of products and services. The Central Government levies CGST and it is supervised by the Central Goods and Services Tax Act. CGST has completely replaced all the past Central taxes such as Central Excise Duty, Customs Duty, Service Tax, SAD, CST, etc. It is charged to taxpayers with SGST. The rate at which CGST is charged is usually the same as the SGST rate, and the revenue collected under CGST is sent to the Central Government. 

• State Goods and Services Tax (SGST)

SGST the same CGST discussed above. It is charged on the sale of products or services within a state. The State Government is liable for the levy of SGST. This tax replaces all the earlier taxes such as Entry Tax, Value Added Tax, Entertainment Tax, State Sales Tax, cesses, and surcharges. The revenue collected under SGST is sent to the State Government. 

• Integrated Goods and Services Tax (IGST)

IGST is imposed on inter-state transactions of products and services. It is also levied on imports. The shifted from one state to another. The tax was executed so that states would only have to deal with the Union Government rather than dealing with all states. 

• Union Territory Goods and Services Tax (UTGST)

UTGST is levied on the supply of products and services in any of the Union Territories in the country, like Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied along with CGST.

IMPORT OF GOODS OR SERVICES OR BOTH

The IGST (Integrated Goods and Services) Act, 2017, defines the import of goods as bringing commodities from overseas into India. As such, all imports are considered as inter-state supplies. IGST will be applicable to all imported goods along with custom duties as applicable.

As for the import of services, the IGST Act, 2017, defines it as the supply of a service by a supplier who is based outside the company, but the recipient of the services is based in India, and the place at which the service is supplied is also within the geographical boundaries of the country. In this article, we will discuss in depth the import of goods and services under GST.

Import of Goods

Following the implementation of GST, the import of commodities will not be impacted by charges such as safeguard duty, education cess, basic customs duty, anti-dumping duty, etc. All these additional custom duties will be subsumed by GST.

Article 269A of the GST regime states that the supply of commodities or services or both, if imported into India, will be considered as supply under inter-state commerce or trade and will attract integrated tax. For instance, if the assessable value of a commodity imported into the country is Rs.500, basic customs duty is 10%, and the integrated tax rate levied is 18%, the taxes shall be computed in the following manner:

Assessable Value = Rs.500

Basic Customs Duty = Rs.50

Value for the levy of integrated tax = Rs.500 + Rs.50 = Rs.550

Integrated Tax = 18% of Rs.550 = Rs.99

Overall Taxes = Rs.50 + Rs.99 = Rs.149

Over and above these taxes, commodities may also attract an additional cess under the GST regime. This cess shall be collected on the value chosen for the levy of integrated tax. In the aforementioned example, the cess will be levied on Rs.550.

Import of Services

The import of services is defined as the supply of a service by a supplier who is based outside the company, but the recipient of the services is based in India, and the place at which the service is supplied is also within the geographical boundaries of the country.

The provisions present in Section 7(1)(b) of the Central Goods and Services Tax Act, 2017, mentions that when services are imported with consideration, it will be deemed as a supply, regardless of whether it is utilised in the continuance or course of business. When services are imported without consideration, they will not be deemed as supply. Businesses, however, are not mandated to undertake any tests for service imports to be deemed as a supply.

Moreover, the provisions present in Schedule I of the Central Goods and Services Tax Act, 2017, services imported by registered taxable individuals from relatives or distinct individuals as stated in Section 25 of the Central Goods and Services Tax Act, 2017, in the continuance or course of a business will be considered as supply regardless of whether or not it has been made without consideration.

Input Tax Credit

Under the GST regime, an importer who is registered can use the IGST levied to them when importing goods as input tax credit. During the outward supply of goods by the importer, the input tax credit could be used to pay taxes such as CGST / SGST / IGST. The importer can also avail GST Compensation Cess along with the input tax credit of IGST before transferring it to the ones in the supply chain. The importer, however, will not be able to avail the credit of basic customs duty. In any case, if the importer wishes to avail input tax credit of GST Compensation Cess and IGST, he/she will have to compulsorily declare GSTIN (GST Registration Number) in the Bill of Entry.

GSTN provides provisional IDs which can be utilised over the course of the transition period, and importers are urged to ensure that their GSTIN registration process is complete. Since the GSTIN declared in the Bill of Entry is the basis for the availability of input tax credit, registered individuals can avail input tax credit only if they furnish Form GSTR 2 which contains all applicable details as mentioned in the Invoice Rules along with relevant information as required. GSTN will be interconnected with Customs EDI (Electronic Data Interchange) system for the validation of ITC. Moreover, information relating to the Bill of Entry in non-EDI locations will take a digital format and will be utilised for validating input tax credit provided by GSTN.

EXPORT OF GOODS OR SERVICES OR BOTH

Export of goods means taking goods out of India to a place outside of India. Export of Services means when the supplier of service is located in India and the place of supply of service is outside India. Read on to know more

Export of Goods and Services

Export of goods means taking goods out of India to a place outside India.

Export of Services means when the supplier of service is located in India and the place of supply of service is outside India.

Treatment of Exports under GST

Export of goods or services are treated as Zero rated supply i.e., the goods or services exported shall be relieved upon them either at the input stage or at the final product stage.

Export of goods or services are treated as interstate supply in course of business.

Features of Export under GST scheme

The goods and services can be exported either on payment of IGST which can be claimed as refund after the goods have been exported or under Letter of Undertaking (LUT) without payment of IGST.

In case of goods and services exported under LUT, the exporter can claim refund of accumulated ITC on account of export

The shipping bill filed with the customs is treated as an application for refund of IGST and shall be deemed to have been filed after submission of export general manifest and furnishing of a valid return in Form GSTR-3 by the applicant.

Place of Supply in case of Export of Goods

The Place of supply in case of Export of goods is the place where the goods have been exported to. i.e., destination outside India

The Place of supply of Services shall be the location of recipient of the services. Unless the location of the recipient of services is not available then the place of supply shall be the location of the supplier of services.

Deemed Exports

Deemed Exports refers to those transactions in which goods supplied do not leave the country and the payment for such supplies is received whether in Indian Currency or in Free foreign exchange.

Filing of Refund Application

Any person claiming refund on export of goods or services may make an application of refund before the expiry of 2 months from the relevant date

TAXES SUBSUMED AND NOT SUBSUMED UNDER GST

PRINCIPLES OF TAX SUBSUMATION

The various Central, State and Local levies were examined to identify their possibility of being subsumed under GST. While identifying, the following principles were kept in mind:

• Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services.

• Taxes or levies to be subsumed should be part of the transaction chain which commences with import/ manufacture/ production of goods or provision of services at one end and the consumption of goods and services at the other.

• The subsumation should result in free flow of tax credit in intra and inter-State levels.

• The taxes, levies and fees that are not specifically related to supply of goods & services should not be subsumed under GST.

• Revenue fairness for both the Union and the States individually would need to be attempted.

CENTRAL TAXES TO BE SUBSUMED IN GST

On application of the above principles and various papers which have been released in this regard, it is deduced that the following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:

• Central Excise Duty (CENVAT)

• Additional Excise Duties

• The Excise Duty levied under the Medicinal and Toiletries Preparations (Excise Duties) Act 1955

• Service Tax

• Additional Customs Duty, commonly known as Countervailing Duty (CVD)

• Special Additional Duty of Customs – 4% (SAD)

• Surcharges and Cesses levied by Centre are also likely to be subsumed wherever they are in the nature of taxes on goods or services. This may include cess on rubber, tea, coffee, national calamity contingent duty etc.

• Central Sales Tax to be phased out.

STATE TAXES TO BE SUBSUMED IN GST

Following State taxes and levies would be, to begin with, subsumed under GST:

• VAT / Sales tax

• Entertainment tax (unless it is levied by the local bodies)

• Luxury tax

• Taxes on lottery, betting and gambling

• State Cesses and Surcharges in so far as they relate to supply of goods and services

• Octroi and Entry Tax

• Purchase Tax

TAXES WHICH ARE NOT TO BE SUBSUMED

GST may not subsume the following taxes within its ambit:

• Basic Customs Duty: These are protective duties levied at the time of Import of goods into India.

• Exports Duty: This duty is imposed at the time of export of certain goods which are not available in India in abundance.

• Road & Passenger Tax: These are in the nature of fees and not in the nature of taxes on goods and services.

• Toll Tax: These are in the nature of user fees and not in the nature of taxes on goods and services.

• Property Tax

• Stamp Duty

• Electricity Duty

Key Takeaways:

1. With effect from 1st July, 2017, the historic indirect tax reform - GST was introduced. GST law  was  extended  to  Jammu  and  Kashmir  on 8th July,2017.
2. The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption.
3. Deemed Exports refers to those transactions in which goods supplied do not leave the country and the payment for such supplies is received whether in Indian Currency or in Free foreign exchange.

1.3 Definitions

Goods u/s 2(52) of CGST Act : “Goods’’ means every kind of movable property other than money and securities but includes actionable claims ,growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

The above is summarized as under:

Goods include:

• Every kind of movable property
• Actionable claims
• Growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Goods do not include:

• Money  and
• Securities

Services u/s 2(102) of CGST Act: Section 2(102) of the Central Goods & Service Tax Act, 2017 (‘CGST Act’) defines “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Money u/s 2(75) of CGST Act: It means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

Securities u/s 2(101) of SCRA Act: "securities" include--

(i) shares, scrips stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

[(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

[(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);]

[(id) units or any other such instrument issued to the investors under any mutual fund scheme

India u/s 2(56) of CGST Act: “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the air space above its territory and territorial waters.

Person u/s 2(84) of CGST Act: “person” includes—

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;

(h) anybody corporate incorporated by or under the laws of a country outside India;

(i) a co-operative society registered under any law relating to co-operative societies;

(j) a local authority;

(k) Central Government or a State Government;

(l) society as defined under the Societies Registration Act, 1860;

(m) trust; and

(n) every artificial juridical person, not falling within any of the above

Taxable Person u/s 2(73) of CGST Act:  “taxable person” means a person who is registered or liable to be registered under section 22 or section 24.

Business u/s 2(17) of CGST Act “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) services provided by a race club by way of total is a or a licence to book maker in such club ; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

Consideration u/s 2(31) of CGST Act: “consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

E-Commerce operator u/s 2(45) of CGST Act: “electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce

Supplier u/s 2(105) of CGST Act:  “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied.

Recipient u/s 2(93) of CGST Act:  “recipient” of supply of goods or services or both, means—

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied.

1.4 Levy and Collection of GST

Levy and Collection of CGST, SGST, IGST, UTGST (Section 9 of CGST Act)

Section 9 of CGST Act/SGST Act and Section 5 of IGST Act are the Charging Sections for the purposes of levy of GST. 

CGST and SGST shall be levied on all intra-state supplies of goods and/or services and IGST shall be levied on all inter-state supplies of goods and/or services respectively.

A. Levy and Collection of GST under CGST Act. (Section 9)

1. Levy of central goods and service tax [Section 9(1)]:

Under CGST Act, central tax called as the central goods and services tax (CGST) shall be levied on all intra-State supplies of goods or  services or both, except on the supply of alcoholic liquor for  human consumption.

It shall be levied on the value determined under section 15 and at such rates, not exceeding 20%, as may be notified by the  Government on the recommendations of the Council and collected  in such manner as may be prescribed and shall be paid by the  taxable person. [Similar rates have been prescribed under SGST/UTGST] 

2. Central tax on petroleum products to be levied from the date to be notified [Section 9(2)]:

The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the  recommendations of the Council. 

3. Tax payable on reverse charge basis [Section 9(3)]:

The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both. 

Further, all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both. 

4. Tax payable on reverse charge if the supplies are made to a registered person by unregistered person [Section 9(4)]:

The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person  shall be paid by such person on reverse charge basis as the recipient  and all the provisions of this Act shall apply to such recipient as if  he is the person liable for paying the tax in relation to the supply of  such goods or services or both. [Section 9(4) has been deferred till 30.6.2018]

5. Tax payable on intra-State supplies by the electronic commerce operator on notified services [Section 9(5)] 

As per section 2(45) of the CGST Act, 2017, “electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. 

Further, “electronic commerce” means the supply of goods or services or both, including digital products over digital or electronic network.

Thus, Electronic Commerce Operators (ECO), like flipkart, uber, makemy-trip, display products as well as services which are actually supplied by some other person to the consumer, on their electronic portal. The consumers buy such goods/services through these portals. On placing the order for a particular product/service, the actual supplier supplies the selected product/service to the consumer. The price/consideration for the product/service is collected by the ECO from the consumer and passed on to the actual supplier after the  deduction of commission by the ECO. 

The Government may, on the recommendations of the Council, by notification, specify categories of services  the tax on intra-State supplies of which shall be paid by the electronic commerce operator (ECO), if such services  are supplied through it. 

Further, all the provisions of this Act shall apply to such electronic commerce operator (ECO) as if he is the  supplier liable for paying the tax in relation to the supply of such services. 

However, where an electronic commerce operator (ECO) does not have a physical presence in the taxable  territory, any person representing such electronic commerce operator (ECO) for any purpose in the taxable  territory shall be liable to pay tax. 

Where an electronic commerce operator (ECO) does not have a physical presence in the taxable territory and  also he does not have a representative in the said territory, such electronic commerce operator shall appoint a  person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax. 

The Government  vide Notification No. 17/2017 CT (R) dated 28.06.2017 has notified the following categories of services supplied through ECO for this purpose—

services by way of transportation of passengers by a radio-taxi, motorcab, maxicab and motor cycle;

services by way of providing accommodation in hotels, inns, guest houses, clubs, campsites or other  commercial places meant for residential or lodging purposes, except where the person supplying such  service through electronic commerce operator is liable for registration under section 22(1) of the CGST  Act.

B. Levy and Collection of GST under IGST Act. (Section 5)

The provisions under section 5 of the IGST Act are similar to section 9 of CGST Act  except—  the word  CGST  has  been  substituted by  IGST under  IGST  Act, tax  called  integrated tax  is to be levied  on all inter-state  supplies and on goods  imported  into India, maximum rate under  section 5(1)  of the IGST  Act is 40%  (i.e. 20%  CGST + 20%  UTGST).

C. Levy and Collection of GST under UTGST Act. (Section 7)

The provisions under section 7 of the UTGST Act are similar to  section 9 of CGST  Act except—  the word  CGST  has been  substituted by  the word  UTGST  under  UTGST  Act, tax called UT tax is to be levied on all  intra-State  supplies,  maximum rate under section  7(1) of UTGST  Act is 20%.

Composition Scheme under GST (Section 10 of CGST Act)

Composition Scheme is a simple and easy scheme under GST for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs. 1.5 crore*

Who can opt for Composition Scheme?

A taxpayer whose turnover is below Rs 1.5 crore can opt for Composition Scheme. In case of Sikkim, Arunachal Pradesh, Manipur, Mizoram, Meghalaya, Assam, Nagaland, Tripura, Uttarakhand and Himachal Pradesh, the limit is now Rs 75 lakh.

As per the CGST (Amendment) Act, 2018, a composition dealer can also supply services to an extent of ten percent of turnover, or Rs.5 lakhs, whichever is higher.

Turnover of all businesses registered with the same PAN should be taken into consideration to calculate turnover.

Who cannot opt for Composition Scheme?

The following people cannot opt for the scheme-

      Manufacturer of ice cream, pan masala, or tobacco

      A person making inter-state supplies

      A casual taxable person or a non-resident taxable person

      Businesses which supply goods through an e-commerce operator

What are the conditions for availing Composition Scheme?

The following conditions must be satisfied in order to opt for composition scheme:

      No Input Tax Credit can be claimed by a dealer opting for composition scheme

      The dealer cannot supply GST exempted goods

      The taxpayer has to pay tax at normal rates for transactions under the Reverse Charge Mechanism

      If a taxable person has different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, they must register all such businesses under the scheme collectively or opt out of the scheme.

      The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard displayed prominently at their place of business.

      The taxpayer has to mention the words ‘composition taxable person’ on every bill of supply issued by him.

      As per the CGST (Amendment) Act, 2018, a manufacturer or trader can now also supply services to an extent of ten percent of turnover, or Rs.5 lakhs, whichever is higher.

How can a taxpayer opt for composition scheme?

To opt for composition scheme a taxpayer has to file GST CMP-02 with the government. This can be done online by logging into the GST Portal.

This intimation should be given at the beginning of every Financial Year by a dealer wanting to opt for Composition Scheme.

How Should a Composition Dealer raise bill?

A composition dealer cannot issue a tax invoice. This is because a composition dealer cannot charge tax from their customers. They need to pay tax out of their own pocket.

Hence, the dealer has to issue a Bill of Supply.

The dealer should also mention “composition taxable person, not eligible to collect tax on supplies” at the top of the Bill of Supply.

What are the GST rates for a composition dealer?

Following chart explains the rate of tax on turnover applicable for composition dealers :

Value of Supply in case of Composition Scheme

In case of Manufacturer Composition levy (i.e.: 1%) will be applicable on Total Turnover

In case of Traders  Composition levy (i.e.: 1%) will be applicable on Taxable Turnover.

How should GST payment be made by a composition dealer?

GST Payment has to be made out of pocket for the supplies made.

The GST payment to be made by a composition dealer comprises of the following:

      GST on supplies made.

      Tax on reverse charge

      Tax on purchase from an unregistered dealer*

What are the returns to be filed by a composition dealer?

A dealer is required to file a quarterly return GSTR-4 by 18th of the month after the end of the quarter. Also, an annual return GSTR-9A has to be filed by 31st December of next financial year. Also, note that a dealer registered under composition scheme is not required to maintain detailed records.

What are the advantages of Composition Scheme?

The following are the advantages of registering under composition scheme:

      Lesser compliance (returns, maintaining books of record, issuance of invoices)

      Limited tax liability

      High liquidity as taxes are at a lower rate

What are the disadvantages of Composition Scheme?

The disadvantages of registering under GST composition scheme are:

      A limited territory of business. The dealer is barred from carrying out inter-state transactions

      No Input Tax Credit available to composition dealers

      The taxpayer will not be eligible to supply exempt goods or goods through an e-commerce portal.

Power to grant Exemption (Section 11 of CGST Act)

1. The operation of the taxing statute needs flexibility along with certain power for the smooth implementation of the provisions. Sec 11 of CGST Act 2017 provides the power and flexibility to the Government to grant exemptions on the recommendation of GST Council.

2. Sec 11(1) of CGST Act – Statutory Provision :

Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification. – Sec 11(1) of CGST Act 2017

2.1 Explanation:– The relevant points under sec 11 (1) of CGST Act 2017 about Government’s power to grant exemptions are as follows:-

(a) Central/State Government has the power to reduce GST rates by issuing exemption notification.

(b) The exemption should be in the public interest.

(c) The exemption notification can be issued only based on the recommendation of GST Council.

(d) The exemption can either be absolute (unconditional) or subject to conditions

(e) The exemption can be in respect of goods or services or both of any specified description

(f) The exemption can be from the whole or any part of the tax leviable thereon

(g) The exemption notification becomes effective on the date as specified in the notification issued by the Central/State Government.

3. Sec 11(2) of CGST Act – Statutory Provision :

Where the Government is satisfied that it is necessary in the public interest to do so , it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax on any goods or services or both on which tax is leviable

3.1 Power to grant Exemption by Special Order:-

(a) The Central Government has the power to grant the exemption, in the public interest, in exceptional circumstances by special order.

(b) Such exemption can be only on the recommendation of GST Council.

(c ) It is not necessary to publish the order in Official Gazette.

(d) This is an ad hoc exemption and can be granted even retrospectively.

(e) A special exemption can be granted to a specific category of person/sector. The Government has power granting exemption to public sector undertakings giving reasons for such exemption, but not giving similar exemption to private persons It was held in Jain Exports P Ltd. v. UOI that such permission by the Government is permissible and will not be treated as discriminatory.

4. Sec 11(3) of CGST Act – Statutory Provision :

The Government may if it considers necessary or expedient so to do to clarify the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.

4.1 Insertion of clarification to Exemption notification: Exemption notification issued by the Government may have some drafting mistake or ambiguity which creates confusion in taxpayers minds. As a result taxable person gets unintended benefit while in some cases even intended benefit cannot be obtained.

To overcome this problem, section 11(3) of CGST Act provides that Central Government, in order to clarify the scope or applicability of exemption notification or exemption order, may insert an explanation to the exemption notification or order within one year of such notification or order.

The time limit for inserting the explanation in exemption notification is only one year of the date of issue of notification and not thereafter.

Explanation of an exemption Notification will have a retrospective effect from the date of the exemption notification.

The retrospective insertion can be made only to explain or clarify as the purpose of ‘explanation’ is to clarify the scope or applicability of an exemption notification or exemption order.

The clarification to exemption notification/order cannot be added with retrospective effect to restrict the scope of notification/order or to insert a condition that was not there.

5. Explanation to Sec 11(3) of CGST Act – Statutory Provision :

Explanation.––For this section, where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, over the effective rate, on such supply of goods or services or both.

5.1 The Government vide notifications grant absolute ( unconditional ) or conditional exemption. If a notification grants unconditional exemption from GST and specifies the rate of goods and /or services as the NIL rate, the taxable person cannot collect and pay tax on such a supply of goods and/ or services.

6. Difference between Notifications under Section 11 & Sec 9 of CGST Act 2017

Notifications under section 11 of CGST Act 2017 issued for supply of any goods or /and services which attracts nil rate of tax or which may be wholly exempt and includes Non- Taxable supply also, whilst section 9 is a charging section which Act notifies rates of goods and services

Notification No. 02/2017- Central Tax (Rate) for goods and Notification No. 12/2017- Central Tax (Rate) for services have been issued by using power given under section 11 of CGST ACT. So goods and services mentioned in these two notifications are exempted goods as per the definition of exempt supply.

Section 9 of the CGST Act notifies rates of goods and services vide Notification No. 01/2017- Central Tax (Rate) which contains six schedules specifying tax rates at 2.5%, 6%, 9%, 14%, 1.5%, and 0.125%. There is no schedule levying tax at 0% i.e. NIL rated.

In the case of services, there is only one service that is notified as Nil rated in Notification No. 11/2017- Central Tax (Rate) at S.No. 24 i.e Support services to agriculture, forestry, fishing and animal husbandry.

In India, there are 4 types of GST rates:

GST Slab of 5%

Under this slab, the goods of basic amenities are covered such as sugar, oil, spices, coffee, coal, fertilizers, tea, ayurvedic medicines, agarbatti, sliced dry mango, cashew nuts, sweets, handmade carpets, lifeboats, fish fillet, unbranded namkeen, and life-saving drugs are covered.

The services under this slab include railways, airways, takeaway food, AC and Non-AC restaurants, hotel rooms with a tariff less than Rs. 7,500, and special flights for pilgrims.

GST Slab of 12%

Under this slab, products like cell phones, sewing machine, umbrella, jewelry box, along with processed foods like frozen meat, fruit juices, butter, cheese, ghee are covered.

The services under this slab include business class flight tickets and movie tickets below Rs. 100.

GST Slab of 18%

Under this slab products like hair oil, safety glass, pasta, pastries, ice-cream, mineral water, hair shampoo, oil powder, water heaters, washing machine, detergent, scent sprays, leather clothing, cookers, oil powder, cutlery, binoculars, artificial flowers, wristwatches, suitcase, briefcase, shaving, after-shave, furniture, stationery items, mattress monitors, television screen, lithium-ion batteries, video games are covered.

The services under this slab include restaurants within hotels whose tariffs are above Rs. 7,500, actual hotel bill below Rs. 7,500, movie tickets above Rs. 100.

GST Slab of 28%

Under this slab, over 200 products are covered like cars, cigarettes, durable consumer products, high-end motorcycles, pan masala, weighing machine, cement are covered.

The services under this slab include racing, betting in casinos, the actual bill of hotel stay above Rs. 7,500.

A special rate of 0.25% is levied on semi-polished and cut stones.

Key Takeaways:

1. CGST and SGST shall be levied on all intra-state supplies of goods and/or services and IGST shall be levied on all inter-state supplies of goods and/or services respectively.
2. Composition Scheme is a simple and easy scheme under GST for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs. 1.5 crore

References:

1. www.taxguru.in
2. Taxmann’s Indirect Taxes Law and Practice, V.S. Datey