Disclaimer: The following reports have been referred as on their release date for sourcing data and content for creating the report.

73rd Report, The Constitution (115th Amendment) Bill, 2011, Standing Committee on Finance, 2013; An Insight of GST in India, The Institute of Cost Accountants of India; First Discussion Paper on Goods and Services Tax in India, The Empowered Committee of State Finance Ministers; Fourth All India Census of Micro, Small and Medium Enterprises 2006-07: Registered Sector; Fourth All India Census of Micro, Small and Medium Enterprises 2006-07: Unregistered Sector; Frequently Asked Questions (FAQ) on GST, Central Board of Excise & Customs; Goods and Services Tax (GST): An Overview, Ministry of Finance; Goods and Services Tax One Country One Tax One Market, FAQs on Goods and Services Tax (GST), Ministry of Finance; Goods and Services Tax: Next Steps, Ministry of Finance; Measuring tax gaps 2015 edition, HM Revenue & Customs; Model GST Law, The Empowered Committee of State Finance Ministers; Moving to Goods and Services Tax in India: Impact on India’s Growth and International Trade, NCAER; Options for strengthening GST neutrality in business-to-business transactions, Policy Advice Division, Inland Revenue and New Zealand Treasury; PRS Legislative Research; Report of the Committee on Roadmap for Fiscal Consolidation; Report of the Fourteenth Finance Commission, Chapter 13, “Goods and Services Tax”; Report of the Task force on Goods & Services Tax, 13th Finance Commission; Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST); Report on the SME Taxation Survey 2016, The Associated Chinese; Chambers of Commerce and Industry of Malaysia (ACCCIM); State Finances A Study of Budgets of 2015-16, RBI; The Constitution (115th Amendment) Bill, 2011; The Constitution (122nd Amendment) Bill, 2014

I

Contents

Chapter 1 - Introduction to GST ............................................................................. 1

Chapter 2 - India’s Current Tax System ................................................................ 12

Chapter 3 - International Experiences ................................................................. 17

Chapter 4 - GST: Impact on Economy ................................................................. 21

Chapter 5 - GST: Impact on Industry including MSMEs ..................................... 29

Chapter 6 - Issues and Challenges ...................................................................... 35

Appendix ................................................................................................................ 37

III

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Impact of GST on Industry

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Tax policy considerations that have traditionally guided the development of taxation systems in the country includes the principles of neutrality, efficiency, certainty and simplicity, effectiveness and fairness, as well as flexibility. India’s taxation structure has been criticised for being complicated, biased in some arenas, uncertain and inefficient, which had led to distortions and tax evasion. Certainty and consistency in tax treatment has been considered to be more beneficial than low rates of taxation if it turns out to be complicated, multiple and cascading.

The passage of the Goods and Services Tax (GST) bill in 2016, exactly after 10 years since it was introduced in the February 2006 Union Budget, and 13 years since it was first discussed in the Report of the Committee on Roadmap for Fiscal Consolidation chaired by Vijay Kelkar, marks a significant milestone in India’s history of taxation reforms. Aimed to remove the cascading effect of India’s multifarious regime of taxes, it envisages a transformational shift from a complex multi-layered indirect taxation system to a uniform indirect system of destination based taxation system. The implementation of GST, which will help in creating a common market is expected to have far-reaching impact on the entire indirect tax system, the tax base, production of goods and services, supply chain and the pricing of goods and services.

The government has indicated its commitment for smooth implementation of GST w.e.f. Apr 1, 2017. This is evident from immediate release of road map for GST implementation, its investment in the technology platform, operationalisation of GST council, and training initiatives etc. However, overhauling the entire regime of the current indirect taxation system in a populous country like India,

which has one of the largest segment of MSMEs contributing to both the industrial and services sector would be quite a difficult road to traverse in the short to medium term. Nonetheless, once implemented, GST would be a game changer for the economy’s long-term growth and fiscal consolidation.

In the sections below, we have tried to cover the current tax structure, the Goods and Services Tax as proposed to be implemented, it’s likely impact on the overall economy, international experience, and impact on the industrial and services sector including the MSME segment. It also discusses the issues and challenges that might arise during the implementation of GST.

Goods and Services Tax (GST)• GST will be a single tax on the supply of goods

and services, right from the manufacturer to the consumer.

• In this system, credit of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.

• The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

India would implement a dual GST with the centre and states simultaneously levying it on a common tax base. A dual GST will, therefore, be in keeping with the constitutional requirement of fiscal federalism. Introduction of the GST required amendments in the Constitution so as to simultaneously empower the centre and the states to levy and collect the tax.

Chapter 1

Introduction to GST

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Why do we need Goods and Services Tax in India?

Need for GST

• To create common market across states

• Uniformity of tax rates and structures

• To abolish cascading effect on tax

• To create simplified and cost saving system

• To raise revenue in transparent and neutral manner

• To increase the tax base

• Better controls on leakage

• To facilitate administration and compliance

• Achieve neutrality between domestic production and imports by eliminating CVD/SAD exemptions

• To facilitate inter-state trade

• To reduce logistics cost

• To support Government initiative of ‘Make in India’

• Incentive to manufacturers and exporters

• Single and transparent tax for the consumer proportionate to the value of goods and services

• Relief in overall tax burden for the consumer

• Improve competitiveness

Features and impact of current system with an ideal GST regime

Current regime of indirect taxes An ideal GST structure

Features Goods and services taxed separately* No differentiation between a good and a service; both subject to one tax

VAT applies at manufacturing stage (CENVAT i.e. excise duty) as well as at sales stage (state VAT i.e. sales tax)

VAT applies at point of consumption. Set-off on the inputs gets credit through the production and distribution stages

Input credit set-off not available across different taxes. For example, set off not available for CENVAT against state VAT

Input tax credit available across state and central tax jurisdictions

State VAT levied on the value of goods inclusive of CENVAT

Would be levied on the same price or value

Some taxes (CENVAT, service tax) levied at the stage of production, while some (state VAT) levied on sale

Follows a destination-based principle where tax is collected on final consumption.

Many indirect taxes not included in central and state VAT**

Subsumes all indirect taxes under one tax

Different tax rates levied across products and across states

Single tax rate to apply on all goods and services

Certain sectors exempt from VAT*** Only 3 commodities are exempt from GST

Intra-state transactions get input credit set off but not inter-state transactions

Input credit set off to be available across intra-state and inter-state transactions

Impact Cascading of taxes across manufacturing and distribution chain increases cost of products, making them uncompetitive.

Eliminates cascading by providing for input credit set off at all stages of production

Limited incentive for tax compliance Encourages voluntary compliance. A person in the supply chain gets credit only when tax is paid by the previous person.

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Structure of GST

The GST to be levied by the centre on intra-state supply of goods and / or services would be called the Central GST (CGST) and that to be levied by the states would be called the State GST (SGST). Similarly, Integrated GST (IGST) will be levied and administered by the centre on every inter-state supply of goods and services.

CGST

• To be levied by the Central Government

• The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage

• Cross utilisation of credit of CGST between goods and services would be allowed

• As per the GST Bill, the Parliament will have the power to make laws with respect to CGST

SGST

• SGST will be levied by the state government

• The input tax credit of SGST would be available for discharging the SGST liability on the output at each stage

• Alike CGST, the cross utilisation of credit between goods and services will be available for SGST as well

• However, the cross utilisation of CGST and SGST credits would not be allowed except in the case of inter-state supply of goods and services under the Integrated GST (IGST) model

• In case of SGST, state legislatures will have the power to make laws

• While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the state

Integrated Goods and Services Tax (IGST)

• Designed to ensure seamless flow of input tax credit from one state to another

• In case of inter-state transactions, the centre would levy and collect the IGST on all inter-state supplies of goods and services

• The IGST would be approximately equal to CGST plus SGST

• Under the IGST mechanism, inter-state seller would pay IGST on the sale of goods to the Central Government after adjusting input credits of IGST, CGST and SGST (in that order)

• The state from where the goods are sold (exporting state) will transfer to the centre the credit of SGST used in payment of IGST

Impact Distinguishing between goods and services complicates the taxation of certain products e.g. computer software

Single tax to apply to both goods and services, hence distinguishing between the two is not necessary

VAT does not apply uniformly across sectors and goods. Sectors such as oil and gas production, real estate exempt.

No exemptions. All sectors, goods and services subject to GST that broadens tax base.

States’ levy of entry tax/octroi when goods pass through states result in bottlenecks at borders, raising inventory costs

Facilitates inter-state trade as transactions across state and municipal jurisdictions are free from tax

Different tax rates across states leads to economic distortions

Single national tax rate reduces distortions

Complex tax structure leads to higher administrative costs

Single tax reporting structure as all indirect taxes subsumed

Source: Adopted from PRS Legislative Research, original article published on 21st July 2015

Notes: * Service tax cannot be levied by states. It is levied by the centre.

**CENVAT does not include additional excise duty, additional customs duty, central surcharges and cesses. State VAT does not include luxury tax, entertainment tax, taxes on lottery, advertisements, entry tax etc. CENVAT applies only at the manufacturing stage, and does not extend down to the distribution stage till the retail sale of goods. ***Exemptions under CENVAT and service tax include: oil and gas production, mining, agriculture, wholesale and retail trade, real estate construction, and other services. Under state VAT, all services, real property, agriculture, oil and gas production, and mining are exempt.

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• The consumer from other state (importing state) will set off his output tax liability (both CGST and SGST) against credit of IGST

• The centre will transfer the credit of IGST used in payment of SGST to the importing state. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming state

• The tax proceeds shall be shared between the centre and states on the recommendation of the GST Council

• In case of inter-state supply of goods and services, the parliament will have exclusive power to make laws with respect to GST (IGST)

The CGST and SGST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, i.e. goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

GST on exports & imports

Exports are zero-rated; imports subjected to IGST

Exports: Under the GST regime, exports will be treated as zero-rated supply and no tax will be payable on export of goods and services. However, input tax credit related to exports can be claimed as a refund by exporters.

Imports: Imports of goods and services on the other hand would be treated as inter-state supplies and would be subject to IGST in addition to the applicable customs duty. The IGST paid on imports will be available as input tax credit for payment of taxes on further supplies. Since GST is a destination based tax regime, the states where imported goods are consumed will gain their share from IGST paid on imported goods.

Working of CGST and SGST – An example

Source: Adopted from ‘FAQs on GST’ of the Ministry of Finance

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Source: Adopted from ‘FAQs on GST’ of the Ministry of Finance

The indirect taxes at the centre and state level that are being subsumed into GST

Source: NACEN

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Commodities that are exempt from GST

• Alcohol for human consumption

• Initially, GST will not apply to: (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d) natural gas, and (e) aviation turbine fuel. The GST Council will decide when GST will be levied on them. The existing taxation system (i.e. VAT + Central Excise) will continue in respect of these commodities.

• Tobacco and tobacco products would be subject to GST. In addition, the centre would have the power to levy Central Excise duty on these products.

• GST would also apply to all services barring a few to be specified. The list of exempted goods and services would be common for the centre and the states.

Petroleum products are inputs for several other goods and exempting them from the purview of GST could lead to cascading of taxes. This is because the input tax credit would no longer be available on such products. This disruption in the tax credit chain would distort the GST structure and could also lead to leakages of revenues.

The 13th Finance Commission and the Department of Revenue had recommended that all petroleum products and alcohol be brought under GST. The Commission had suggested that states could impose an additional levy on petroleum products and alcohol, in addition to GST.

Brief chronology of events that led to approval of GST

2003 The Kelkar Task Force on indirect tax suggested a comprehensive Goods and Services Tax based on VAT principle

Feb-2006 A proposal to introduce a national level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Union Budget speech for FY07

Apr-2008 Empowered Committee of State Finance Ministers (EC) was engaged to prepare a design and roadmap for the implementation of GST

Nov-2009 EC released its first discussion paper on GST

May-2011 • The Constitution (115th Amendment) Bill on GST was introduced in Lok Sabha

• The Bill was referred to the Parliamentary Standing Committee on Finance for examination and report

Nov-2012 A committee on GST design, consisting of the officials of the Government of India (GoI), State Governments and EC was constituted

Aug-2013 • The Parliamentary Standing Committee submitted its report to the Lok Sabha

• Most of the recommendations of the Parliamentary Standing Committee and EC were incorporated in the Bill

Sep-2013 The revised Bill was sent to EC for consideration

Mar-2014 Incorporating recommendations of EC another revised Bill was sent to EC

Mar-2014 The 115th Constitutional (Amendment) GST Bill, 2011 was introduced in the Lok Sabha but lapsed with the dissolution of the 15th Lok Sabha

Jun-2014 The draft Constitutional Amendment Bill was set to EC after approval of the new government

Dec-2014 • The Cabinet approved the proposal for introduction of GST bill in the parliament on December 17, 2014

• The GST Bill was introduced in the Lok Sabha on December 19, 2014

May-2015 The GST Bill was passed by Lok Sabha on May 6, 2015. The Bill was then referred to the Select Committee of Rajya Sabha

Jul-2015 The Select Committee of Rajya Sabha submitted its report on the Bill

Aug-2016 • The Rajya Sabha passed the Constitution (122nd Amendment) (GST) Bill, 2014 on August 3, 2016

• The Lok Sabha approved the changes made in the Bill by Rajya Sabha and again passed the Bill on August 8, 2016

Apr-2017 Expected date of GST ImplementationSource: Ministry of Finance and Various Newspaper Articles

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Comparison of the 2014 Bill, 2011 Bill and the recommendations of the Standing Committee

Constitution (115th Amendment ) Bill, 2011

Standing Committee recommendations on 2011 Bill

Constitution (122nd Amendment) Bill, 2014

Coverage of GST All goods or services except:

• Alcoholic liquor for human consumption.

• Petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel.

• Centre to impose additional levy on tobacco.

No recommendation on goods to be exempt.

Goods exempted from GST should not be specified in the Constitution Amendment Bill as this would make the GST regime rigid.

All goods and services, except:

• Alcoholic liquor for human consumption.

• GST to be levied on Petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel at a later date.

• Centre to impose additional levy on tobacco.

Integrated GST Only centre to levy and collect tax.

Tax collected to be divided between the centre and the states.

Instead, the Modified Bank Model recommended by 13th Finance Commission to be considered.

Same as 2011 Bill.

Additional Tax (in inter-state trade)

No provision. Not addressed. Tax (up to 1%) on the supply of goods in inter-state trade will be given to supply states, for two years or more.

Compensation to states

No provision. An automatic and permanent GST Compensation Fund under the GST Council could be created.

Parliament may provide for compensation to states for a maximum of five years.

GST Council Functions: Recommendations on taxes to be subsumed, exempted goods, threshold limits, rates.

Functions: Should include floor rates, special provisions for some states.

Functions: Also includes model GST laws, principles of levy and place of supply, apportionment of IGST.

Decisions: By consensus. Decisions: 3/4th weighted votes; 1/3rd weightage to centre, 2/3rd to states.

Decisions: Standing Committee recommendations incorporated.

Dispute Resolution GST Dispute Settlement Authority to determine disputes between centre and states.

Parliament may restrict jurisdiction of all courts other than Supreme Court.

Omit GST Dispute Settlement Authority.

GST Council to decide upon the modalities to resolve disputes.

Standing Committee recommendations incorporated.

Source: Adopted from PRS Legislative Research

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Other changes made by 2016 amendments

Integrated GST

• Replacement of the term IGST (Clause 12): Under the 2014 Bill, the GST Council would make recommendations on the apportionment of the Integrated Goods and Services Tax (IGST). However, the term IGST was not defined. The 2016 amendments replace this term with ‘goods and services tax levied on supplies in the course of inter-state trade or commerce’.

• Apportionment of Integrated GST (Clause 9): This is a technical change in relation to the apportionment of the IGST. It clarifies that the states’ share of the IGST shall not form a part of the Consolidated Fund of India.

Implementation of GST

GST Council

GST Council comprises of the Union Finance Minister (as the Chairperson of the Council), the Union Minister of State (Revenue) and the State

Goods and Services Tax (GST): Key changes made by the 2016 amendments to the Constitution (122nd Amendment) Bill, 2014

Changes 2014 Bill 2016 Amendments Select Committee, 2015

Additional tax up to 1% on inter-state trade

An additional tax of up to 1% on the supply of goods will be levied by centre in the course of inter-state trade or commerce. The tax will be directly assigned to the states from where the supply originates. This will be for two years or more, as recommended by the GST Council.

Deletes the provision. The Committee had noted that the provision for the 1% additional tax is likely to lead to cascading of taxes.

Compensation to states

Parliament may, by law, provide for compensation to states for any loss of revenues, for a period which may extend to five years. This would be based on the recommendations of the GST Council. This implies that Parliament may decide (i) whether it wants to provide compensation; (ii) the time period for which it can provide such compensation, up to five years.

Parliament shall, by law, provide for compensation to states for any loss of revenues, for a period of five years. This would be based on the recommendations of the GST Council. This implies that compensation must be provided for a full five-year period.

Amendments are in line with the recommendations of the Select Committee.

Dispute resolution

The GST Council may decide upon the modalities to resolve disputes arising out of its recommendations.

The GST Council shall establish a mechanism to adjudicate any dispute arising out of its recommendations. Disputes can be between: (a) the centre vs. one or more states; (b) the centre and states vs. one or more states; (c) state vs. state. This implies there will be a standing mechanism to resolve disputes.

No recommendation.

Inclusion of CGST and IGST in tax devolution to states

The GST collected and levied by the centre, other than states’ share of IGST, (CGST and centre’s share of IGST) shall also be distributed between the centre and states.

The amendments state that the CGST and the centre’s share of IGST will be distributed between the centre and states. This is just a restatement of the provisions in the 2014 Bill in clearer terms.

Not discussed.

Source: Adopted from PRS Legislative Research, original article published on 7th August 2016

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Finance/Taxation Ministers as the members. The GST Council will promote cooperative federalism as it endows the states with power to have an equal say in the way tax will be administered. The Council will also have the final say on the mechanism to resolve disputes that may arise between the centre and the states or between states. This would also help the corporate sector to resolve issues which arise owing to operation in multiple states.

As per the GST Bill, every decision of the GST Council shall be taken by a majority of not less than 3/4th of the weighted votes of the members present and voting. The vote of the Central Government shall have a weightage of 1/3rd of the votes cast and the votes of all the state governments taken together shall have a weightage of 2/3rd of the total votes cast in the meeting. One half of the total number of members of the GST Council shall constitute the quorum at its meetings.

GST Council is already operational and meetings of GST Council are being held at regular intervals since Sep 2016.

In the GST Council meetings held so far (upto November 04, 2016), various decisions were taken which include:

First Meeting (22nd-23rd Sep, 2016)

» Threshold limit of GST set at ` 1 mn for north eastern states and ` 2 mn for rest of India

» States will get exclusive control over all dealers up to a revenue threshold of ` 15 mn. For traders with revenue above ` 15 mn, both the center and state will have the taxation control

Second Meeting (30th Sep, 2016)

» Five subordinate legislations dealing with issues like rules for registration, rules for payments, returns, refunds and invoices

» Area based exemption under GST to 11 north-eastern and hill states

» GST tax to be paid by all entities and exemptions to be phased out

Third Meeting (17th-19th Oct, 2016)

» Consensus could not be reached on the GST rate structure. The council could not arrive at a final decision on imposing a cess on demerit and luxury goods to fund compensation to states for loss on shift to GST regime. States on the other hand proposed the centre to pay compensation out of the Consolidated Fund. The GST Council is expected to take up the issue of GST rate in its Nov 2016 meeting.

Fourth Meeting (3rd-4th Nov, 2016)

» The four-tier tax structure ranging from 5% to 28% has been decided for GST by the GST Council.

» The four GST slabs are 5%, 12%, 18% and 28%.

» While food grains will attract 0% GST rate, the slab of 5% will be for items of common consumption.

» There would be two standard rates of 12% and 18%, which would fall on the bulk of the goods and services which mainly include fast moving consumer goods.

» The highest slab of 28% will include white goods and all those items on which the current rate of incidence varies from 30-31%.

» Apart from this, ultra-luxuries, demerit and sin goods (like luxury cars, tobacco and tobacco products, aerated drinks, etc) will attract a cess for a period of five years on top of 28% GST rate.

» A final decision could not be reached on levy of 4% GST on gold.

GST Network

The central and state governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-government company. The key objective of GSTN is to provide a standard and uniform interface to the taxpayers and offer a shared infrastructure and services to central and state/UT governments. GSTN is working on developing a state-of-the-art comprehensive IT

10

infrastructure including the common GST portal providing front-end as well as back-end IT modules. The tax base under various indirect tax laws administered by CBEC is likely to go up to over 6.5 mn from the current tax base of about 3.6 mn, after the introduction of GST. The Government of India has 24.5% stake in GSTN while state governments together hold another 24.5% and the balance 51% equity is with five non-government financial institutions - LIC Housing Finance Ltd, HDFC Ltd, HDFC Bank Ltd, ICICI Bank Ltd and NSE Strategic Investment Co. Ltd.

The key functions of GSTN would include:

• Facilitating registration

• Facilitating filing of returns by taxpayers and forwarding the returns to central and state authorities

• Computation and settlement of IGST

• Matching of tax payment details with banking network

• Providing various MIS reports to the central and the state governments based on the tax payers’ return information

• Providing analysis of tax payers’ profile

• Running the matching engine for matching, reversal and reclaim of input tax credit

Roadmap for preparation of IT Infrastructure

• End Nov-16: Backend systems of The Principal Chief Controller of Accounts, Banks, RBI & state accounting authorities

• Dec-16: Development of GST front-end and back-end modules for states

• Jan-Mar 2017: Testing and integration of GST front-end and back-end of all stakeholders

Registration

Existing dealers:

• No fresh registration needed for existing dealers. Existing VAT/Service tax/Central Excise dealer data to be migrated to GST system

New dealers:

• Single application to be filed online for registration under Goods & Services Tax (GST). The registration number will be PAN based and will serve the purpose for centre and state

• Each dealer to be given unique ‘GSTIN’ ID

• Registration to be granted within 3 days

• Post registration verification in risk based cases only

Returns

• Common return would serve the purpose of both centre and state government

• Most average tax payers would be using only four forms for filing their returns. These are return for supplies, return for purchases, monthly returns and annual return

• Small taxpayers who have opted composition scheme shall have to file return on quarterly basis

• Filing of returns shall be completely online

• All taxes can also be paid online

Current status of GSTN

• Developed a common GST portal

• Developing back-end modules like assessment, audit, refund, appeal, etc. for 21 states and union territories. Large states like Karnataka, Tamil Nadu and Maharashtra, etc which have advanced systems for the existing tax regime are building their own technology back-end

• Released the application programming interface (API) to Business Process Management (BPM) software firms to develop the enterprise resource planning (ERP) software, which will act as an interface between their clients and GSTN. All GST functionalities like registration of entities, uploading of invoices, and filing of returns will be available through these APIs.

• Launch of ‘GST Suvidha Provider’ or GSP - envisaged to provide innovative and convenient methods to taxpayers and other stakeholders in interacting with the GST systems like

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registration of entity, uploading of invoice details, filing of returns, creation of challans, and ledger maintenance, etc.

Project SAKSHAM:

• A New Indirect Tax Network (Systems Integration) of the Central Board of Excise and Customs (CBEC) approved by CCEA.

• A total cost of ` 22.56 bn to be incurred over a period of seven years.

• CBEC’s IT systems need to integrate with the GSTN for processing of registration, payment and returns data sent by GSTN systems to CBEC, as well as act as a front-end for other modules like Audit, Appeal, Investigation. This IT infrastructure is also urgently required for continuation of CBEC’s e-Services in Customs, Central Excise & Service Tax, and integration with government initiatives such as e-Nivesh, e-Taal, e-Sign etc. There is no overlap in the GST-related systems of CBEC and GSTN.

Training

National Academy of Customs, Excise & Narcotics (NACEN) has been mandated to impart training on GST to central and state government officers. Key training initiatives from NACEN include:

• Use of e-learning modules and virtual classrooms in addition to class room training

• Launch of ‘GST Training Accreditation Programme’

• Training on GST IT systems: To be held between Dec 2016 and Mar 2017

GST training update from NACEN

Level No. Level Status Target (Officers)

Achieved

1 Source Trainers

Completed 25 25

2 Master Trainers

Completed 300 310

3 Trainers Completed 1,600 2,060*4 Field

OfficersOngoing 60,000 27,263 (as on

18-Nov-16)* Includes 36 from CAG Source: National Academy of Customs, Excise and Narcotics

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The power to levy indirect taxes in India is distributed between central, state and local governments, in accordance with the provisions in the tax laws. Since 1990s, Indian taxation system has witnessed various reforms that mainly included reduction in exemption list, broadening of tax base and reduction in tax rate.

While these reforms were initiated, India still had an indirect tax system of single-point tax collection where tax was collected at one point of the entire value chain. That implies that tax was collected either at first stage (manufacture) or the last stage (sale). This system had various disadvantages like higher tax rates which encouraged tax evasion, multiplicity of taxation, difficulty in tracking goods, lack of transparency which led to evading taxes, cascading effects of taxes, under-invoicing which further involved generation of black money, etc.

In order to eradicate these issues, VAT was introduced in 2005. The new VAT had various advantages like taxation at multiple stages, availability of input tax credit i.e. tax only on value addition, transparent and easier system, simplification of process, etc.

Although VAT was introduced, it was just a replacement of state level sales tax and not the entire indirect tax structure. Further, not all states joined VAT system at one go. Such a fractured implementation of VAT thus led to many issues. For instance, when VAT was introduced it was expected that it would phase out Central Sales Tax (CST). However, CST still continues and CST paid cannot be claimed for credit under VAT. Further, VAT system allowed the states to decide ten items that could be exempted from state level VAT. This took away uniformity in implementation of VAT among the states.

Also, there is lack of uniformity of VAT rates among states which resulted in a wide disparity in VAT rates across neighboring states. Further, since VAT depends on self-assessment of tax payers, it is often susceptible to tax evasion through inflated refund claims, under-reporting of sales, sales to fictitious dealers, domestic sales disguised as exports, etc.

Further, it is found that procedures under VAT are complicated and need to be simplified mainly for small traders. Moreover, especially with the growth of IT industry, the distinction between goods and services is getting reduced and goods are often sold with services and vice versa. In the present VAT system, a trader is not allowed to deduct his service tax paid on the input services from the output VAT payable by him on the final goods sold. These shortcomings of the present VAT system called for a comprehensive tax based on VAT principle. The new GST is expected to eliminate all these shortcomings and hence will bring in major reform in the current tax system.

Chapter 2

India’s Current Tax System

Share of indirect taxes in total revenue receipts (figures are based on revised estimates for FY16)

Source: Ministry of Finance

13

India - Current indirect tax structure

Tax Duties levied under Act

Tax rate Tax revenue in FY16 (` bn)

Payable to Authorities

Centre

Central Excise Central Excise Act, 1944, Central Excise Tariff Act, 1985

12.5%; varies between 0% to 81% for some specified products

2,841.4 Central Board of Excise and Customs

Basic & Special Excise Duties excluding Cess on Motor Spirit & High Speed Diesel Oil

12.50% 1,577.1

Additional Duty of Excise on Motor Spirit

` 8 / litre 180

Additional Duty of Excise on High Speed Diesel Oil

` 8 / litre 550

National Calamity Contingent Duty

1% standard rate; rate varies for some specified products

45

Customs Duty Customs Act 1962

0%-150%, average duty rate of 11.9%

2,095

Basic Duties 571.8

Additional Duty of Customs(CVD)

12.50% 1076

Special CV Duty 4% on all imported goods, with few exceptions to counter balance sales tax, VAT, local tax or otherwise

313.3

Additional Duty of Customs on motor spirit

0.12

Additional Duty of Customs on high speed Diesel oil

0.01

Special Additional Duty of Customs on motor spirit

0.12

Service Tax Finance Act of 1994 14% + Swachh Bharat Cess @0.5% + Krishi Kalyan Cess @0.5%

2,100

State (all states)

State Sales Tax/VAT Value Added Tax Act, 2005

VAT rates essential commodities @0%, gold ingots and expensive stones @1%, industrial inputs, capital merchandise and commodities of mass consumption @4%, and other items @12.5%, variable rates (State-dependent) for petroleum products, tobacco, liquor, etc

4,637.99 State Sales Tax Department

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Central Sales Tax Central Sales Tax (CST) Act, 1956

2% 332.8 Sales tax authorities of individual states

State excise Rates differ in individual states

941.6 State Excise Department

Tax on property and capital transactions (land revenue, stamp duty and registration fees, urban immovable property tax)

Indian Stamp Act, 1899 Rates differ in individual states

1,005.30 Department of Registration

Taxes on vehicles Individual state act Rates differ in individual states

410.3 Motor Vehicle Department of state

Taxes on duties on electricity

Individual state act Rates differ in individual states

266.1

Entertainment tax Individual state act Rates differ in individual states

21.6

Note: 1. Tax revenue for state taxes represent FY15 RE figures Source: Ministry of Finance, State Finances, A Study of Budgets of 2015-16 by RBI, MOSPI

Indirect tax system: Summary

Type Base Number of Rates*

Description of commodities Threshold** Exemptions

Exempted Lower rate Higher rate ` Number Value (`)

Goods***

Central Excise

Manufac-turing

8 Food Textiles, mo-bile phones, fertilizers, some interme-diates

Tobacco, petroleum products, automobiles, aerated water

15 mn 300 1.8 tn

State VAT Upto retail 3+ Food, goods of local importance

Intermediates, capital goods, gold & pre-cious metals

Alcohol, petroleum, tobacco

0.5-1 mn 90 1.5 tn

Services

Centre Negative list

11 Education, health, public services

Construction, work contract, restaurant, transport, life insurance

1.0 mn

*Number of ad valorem rates. There are also numerous specific rates on goods charged by the centre. For services, there is one standard rate and 10 abatements.

**Does not apply to exports and exempted goods for goods at the centre

***Other excises on goods include cesses, countervailing duties and special additional duties (at the centre) and octroi (in the states).

Source: Adopted from Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services tax (GST), Ministry of Finance

Apart from this, there are surcharges, cesses (like education cess, road cess etc) and National Calamity Contingent Duty (NCCD). NCCD is levied under section 136 of the Finance Act 2001, as a

surcharge on specified products like pan masala, branded chewing tobacco, cigarettes, domestic crude oil and mobile phones.

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Shortcomings of the current indirect tax structure

The current indirect tax structure has fragmented the Indian markets along the state borders. Multi-layered taxes create distortions by favoring imports and disfavoring domestic manufacturing, and the cost of doing business remains elevated because of the cascading effect of taxes. The resulting geographical fragmentation of manufacturing operations potentially undermines the objective of the Make in India programme.

The current tax regime is highly complex and has spawned many disputes regarding the classification of products. Input taxes are limited and most often delayed. The Report on the Revenue Neutral Rate and Structure of Rates for the GST, 2015 estimates that blocked input taxes could amount to as much as 75% of total investment in the country and the leakages in the current system is estimated to be about 2.7% of the GDP, characterised by significant differences between the centre and the states. Some of the important features in the current tax structure that result in inefficiency are listed below.

» In relation to goods, the centre has a very complicated tax structure characterised by:

• A multiplicity of rates, including central excise (8 ad valorem and several specific rates), cesses, countervailing and special additional duties.

• Extensive exemptions, amounting to about 300 items compared to around 90 for most of the states. These exemptions amount to about 1.5% of GDP.

• An incomplete base that stops at the manufacturing stage.

• An exemptions threshold of ` 15 mn with exports and exempted goods not counting towards the threshold.

In relation to services too, the centre has a complicated rate structure. Although there is one statutory rate, in practice, there are 10 other rates because of the “abatement” which amounts to fixing a rate different from the standard

rate and not allowing further input tax credits. Abatement is necessitated in some part because of uncertainty in the base, and specifically being unable to distinguish “goods” from “services.” The exemptions threshold is ` 1.0 mn.

» In relation to goods, the states have structures characterised by:

• A base that is complete in extending all the way to the retail stage.

• Exemptions threshold varies across the states between ` 0.5 mn and ` 1.0 mn with a provision for “compounding” that also varies across states in design.

• A multiplicity of rates, including the VAT but additional taxes on inter-state trade (octroi, entry tax)

• Fewer VAT rates (4 plus) and fewer exemptions (than at the centre), with both rates and exemptions varying across the states.

• A standard VAT rate for goods that in most of the states is typically about 12.5%-15%

Another key difference between the centre and the states is that the states have a much larger portion of the base (more than 65%) taxed at the lower rate while the comparable number for the centre is about 40%. States typically place intermediate goods in the lower rate category. The higher standard rate is therefore almost compelled by the fact of placing so much of the base at the lower rate.

» The other major shortcomings of the current indirect tax structure are:

• Difficulties in revenue generation and distribution among state and the centre: There are certain taxable items which create disputes among centre and states. For instance, Central Government is empowered to charge and collect service tax, but in case of work contracts state government also has power to levy tax.

• Taxation at manufacturing level: Indirect taxes like central excise, which is levied on goods at the manufacturing level gives rise to definitional issues as to what constitutes manufacturing

16

and valuation issues for determining the value on which the tax is to be levied. Further, in case of levy of tax on manufacturing goods, the effective burden of tax limits to the point of manufacturing as compared to the value addition.

• Complications in terms of classification of taxable items: With the distinction between goods and services getting closer due to technological improvement, their classification becomes more complicated by tax authorities.

• Prevents states from taxing services: The current indirect tax prevents states from taxing services which pose difficulties in taxation of goods supplied as part of a composite works contract involving the supply of both goods and services. This limitation has become more

apparent with the progress of the IT industry where the distinction between the supply of goods and services is blurred.

• Cascading effect of taxes: Tax cascading occurs as input tax credit is not available for various taxes imposed by central and state governments. The system also suffers from incomplete cross-crediting between goods and services.

• Complicated processes and lack of cross verification: Various tax forms and returns are required to be filed related to various duties. This has made the entire process very complex and lengthy. Besides, there is a lack of cross verification of returns filed under various state and central taxation rules.

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Chapter 3

International Experiences

The spread of GST

In an era where nations increasingly embark on the journey towards a growth-oriented tax policy reform, ‘Fairness’, ‘Simplicity’ and ‘Transparency’ have become the bywords of the GST. GST/VAT is a proven system of efficient tax collection and has been adopted in more than 160 countries over the last six decades.

Countries adopted GST/VAT for different reasons. Some being, to facilitate the development of a common market (European Union), to strengthen the nation’s fiscal position, in other words, to decrease the dependence on international funds (Malaysia), to increase revenue from general consumption so as to cut down the rate of income taxes (Australia), or to boost the nation’s international competitiveness (Singapore), among others.

GST design adopted globally

Intriguingly, GST has varied structural forms, each with distinct peculiarities. Countries such as New Zealand which has a broad-based GST tax virtually all goods and services at a single rate, while France has a narrow-based system with one standard rate, three reduced rates and eight specific regional rates. The standard rate varies from 5% (Canada, Nigeria) to 27% (Hungary). In Australia, GST is a federal tax collected by the centre and distributed to the states. Whereas in Canada, both, the centre and the states levy GST (similar to the structure proposed in India).

The common consensus is that a broad-base single-rate GST is ideal as it does not distort consumer choice and acts as an effective revenue raiser by

reducing compliance costs. A multiple-rate system with numerous exemptions from the standard rate would be relatively difficult for taxpayers to comply with and for the revenue bodies to administer. Further, rate differentiation may increase legal uncertainty in the classification of products. The usual justification for the establishment of multiple rates (reduced-rate) is on the grounds of equity and although it is well-intentioned, international experience doesn’t provide a conclusive picture regarding its distributional effects.

A sign that developing economies are showing an interest towards single-rate GST system stem from the fact that eight out of nine African nations that adopted GST between 2000 and 2010 opted for a single-rate system. Also, raising the rate has proved much less difficult than expanding the base, as evident from the fact that 21 OECD countries have raised rates between 2009 and 2014. This gives us an insight that the best way to achieve a very broad-based GST system is to introduce one from the outset.

A GST system which is simple in rate structuring and broad based is undeniably the most buoyant and efficient. Hence, the implementation of GST by itself doesn’t guarantee any efficiency gains; careful design and implementation in every step is crucial for the success of the GST system.

Cross-border B2B neutrality

One of the basic principles of GST is ‘neutrality’ and as outlined by the OECD guidelines “Business decisions should be motivated by economic rather than by tax considerations”.

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New Zealand faced a similar problem that deviated from the principle of B2B neutrality. The inland laws required that for any input tax claims to be made, a company should be carrying out taxable supplies in New Zealand. This was a disincentive to non-residential businesses. Although it could be argued that the cost of GST is not always fully borne by a non-resident business as an income tax deduction for business expenses could be claimed in their own country; it would be reasonable to assume that businesses will perceive the GST cost to be a significant factor when comparing the same with that of other jurisdictions in which they may alternatively consume services. This makes a compelling case to create a level playing field for the non-resident businesses.

The ‘Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013’ was passed in New Zealand, through which an ‘enhanced registration system’ coupled with more generous rules around claiming input tax was proposed to address these problems. Non-resident businesses could register and claim back GST for

the supplies that they have made. This was similar to the method followed in Australia, which did not require businesses to be making taxable supplies in Australia to be eligible for refunds. These lead businesses in often ending their tax period in a net refund position and letting the net GST cost not being an economic burden.

Implementation: Challenges faced and mitigation measures taken

An intrinsic design problem to be dealt with zero-rating exports between member states or countries, in the absence of border control, is the Missing Trader Intra-Community (MTIC) fraud. In essence, an individual or a company obtains VAT registration to acquire goods VAT-free from other member states. They then sell goods at VAT inclusive prices and disappear without remitting the VAT to the tax authorities paid by their customers. The introduction of zero-rating exports made the European Union susceptible to such fraudulent activities. According to the HM Revenue & Customs

VAT/GST rates and threshold limits - 2015

Notes: * Limitations for Member States of the European Union. Directive 2006/112/EC excludes from the application of the threshold the supply of new buildings or building land, certain supplies of new means of transport and disposals of the assets of the enterprise. The threshold does not apply to non-resident businesses and to supplies taxable under the EU Mini One Stop Shop (MOSS).Source: OECD

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Highlights of GST implementation in Malaysia (2015)

• Legislation on anti-profiteering was passed to protect consumers from unreasonable increase in prices.

• Swift action by the Enforcement Unit of the Ministry of Domestic Trade, Cooperative and Consumerism on defaulters.

• Over 59 industry guidance papers on tax treatment concerning each business sector were published online.

• An awareness seminar was organised by the SME Corp. to help SMEs embrace the process of GST implementation.

• Allocation of RM150 mn in financial assistance to SMEs to facilitate their purchase of the GST accounting software between 2014 and 2015.

Source: Royal Malaysian Customs Department, SME Corporation Malaysia

Countries like Singapore and New Zealand are also proactive in issuing technical guidance on the interpretation of tax legislation and open consultation of GST reforms. These initiatives facilitate smooth tax process.

(HMRC) department, UK, VAT losses due to missing trader fraud was estimated between £2.5 bn and £3.5 bn in FY06. Although the estimates have dropped to £0.5-£1 bn in FY11, it is important to take into consideration the cost imposed on the revenue authorities to curb such fraudulent activities. Between 2006 and 2011, HMRC invested in technology and retrained staff to allow it to better direct its activities towards the areas of greatest risk, based on improved data to detect non-compliance and to get a better understanding of taxpayers’ behaviour.

One of the contentious issues in the implementation of GST is the threshold limit and it holds great practical importance. Lower thresholds are usually set in anticipation of higher revenues. However, the compliance cost may well outweigh the potential benefits and could pose a risk to the sustainability of the GST system. It has been regarded, for the same reason, Ghana’s GST system failed when it was introduced in 1995 with a threshold level of US$ 20,000. The threshold level was sharply increased to US$ 75,000 on its successful reintroduction in 1999.

A plausible encounter, with the implementation of GST, is the increase in inflationary pressures in the short term, particularly if the effective tax rate is higher than what prevailed before. The CPI inflation for Japan increased to 2.3% from 0.7% on the year of GST introduction. Similarly, New Zealand witnessed a spike in its CPI inflation from 6.2% to 15.4% (one year prior to GST introduction). However, inflation abated over the medium run.

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GST Standard rate recommended

NIPFP(25-27%) CEA (17-18%) Task Force (11-12%)

Denmark (1967) Ivory Coast (1960) Honduras (1964)

Sweden (1969) Israel (1976) Ecuador (1981)

Norway (1970) Turkey (1984) Kazakhstan (1991)

Hungary (1988) Tunisia (1988) Guatemala (1992)

Iceland (1990) Russia (1991) Venezuela (1993)

Faroe Islands (1993) Benin (1991) Philippines (1998)

Croatia (1998) Mali (1991) Sri Lanka (2002)

Gambia (2013) Peru (1991) Botswana (2002)

Algeria (1992)

Azerbaijan (1992)

Cyprus (1992)

Georgia (1993)

Burkina Faso (1993)

China (1994)

Gabon (1995)

Togo (1995)

Guinea (1996)

Uganda (1996)

Barbados (1997)

Tanzania (1998)

Malta (1999)

Sudan (2000)

Macedonia (2000)

Chad (2000)

Rwanda (2001)

Senegal (2001)

Montenegro (2003)

Bosnia Herzegovina (2006)

Mozambique (2008)

Burundi (2009)

Saint Kitts and Nevis (2010)Source: Report of the Task Force on Goods & Services Tax, 13th Finance Commission; Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST); Revenue Implications of GST and Estimation of Revenue Neutral Rate: Estimates for 2011-12, NIPFP; Royal Malaysian Customs Department

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Chapter 4

GST: Impact on Economy

Implementation of the Goods and Services Tax (GST) would be one of the biggest and most ambitious tax reforms for India. Executing such a taxation structure in a federal system like India covering 29 States and 2 Union Territories (New Delhi & Puducherry, with legislatures) with the use of latest technology, on a large tax base of approximately 2-2.5 mn tax entities, will be a significant task to achieve for India. GST would be counted as perhaps the greatest initiative of the government to counteract the perceived notion of the policy paralysis which had constrained the dynamics of India’s growth potential.

The taxation reforms which was an integral part of the ‘Make in India’ initiative of the government would support the growth of overall economy and the manufacturing sector in particular. This is perceived to be achieved through reducing existing distortion, improving ease of doing business, bringing about efficient allocation of resources and thereby improving overall competitiveness of the economy. The increase in efficiency in governance, equality in tax incidence, streamlining tax structure, better tax compliance, buoyancy of the tax base and improving fiscal balance would have profound impact on growth through various channels.

One of the greatest advantages of the GST structure introduced in India is that it is expected to create dual GST regime which would minimise the disadvantages of completely independent and completely centralised systems implemented by various other countries adopting GST/VAT.

The impact of the taxation reform on India’s growth • Impact on governance and the fiscal balance

• Gain or Loss for states/centre

• Support to manufacturing sector and overall growth

• Impact on inflation

Impact on governance and the fiscal balance

GST is touted to improve the tax administration system in a major way. The regime of multiple taxation authority which made revenue collection tedious and complex and incentivised tax evasion would be eliminated with the implementation of GST. This will create an enabling environment to set up a conducive environment for tax incidence and administration.

The dual GST, with similar structure and rates for both centre and states which will remove the definitional differences between goods and services and that of manufacturing and distribution of goods backed by a robust IT system would make governance by the taxation authority easier. The sharing of tax buoyancy of indirect taxes by the Central Government with states would be a win-win situation for both.

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The GST mechanism which compels businesses to avail input tax credit across the value chain would oblige every value addition to be recorded in the IT framework created. The simplified tax structure and use of information technology system to match supply and purchase invoices would improve tax compliance and therefore impose better control on leakages. The dual monitoring structure - one by the states and one by the centre will also ensure greater probability of detecting tax evasion.

The new system under GST would facilitate in raising revenue in a transparent and neutral manner and would create a simplified and cost saving system. Increase in tax base, improved compliance and better control over leakages would ensure that the revenue collections of the government would improve. Added to that higher revenue efficiency will be achieved due to gains from simplification of the documentation requirements under the GST and decrease in cost of tax collection. This in turn will improve fiscal management and reduce the ‘crowding-out’ effect. The dual GST envisages a uniform structure, design and compliance system at all levels of government and across states thereby decreasing the cost of doing business. The GST is expected to thus boost the tax to GDP ratio after its successful implementation.

Tax base to increase

Services which constitute 54% of the GDP are not taxed appropriately. The number of assesses who filed Service Tax returns in FY15 was 1.5 mn out of the 2.5 mn assesses (2 mn service tax payers under the CBEC taxpayer base while the states had 0.5-0.7 mn). Under the GST it is assumed that there will be around 10 mn taxpayers.

It will be perhaps the most complex tax systems that the world has seen. One of the largest tax systems that the world has seen - According to Navin Kumar, Chairman, GSTN

Taxbase - Indirect tax system

Major heads - Taxes under GST

Central Excise Duty Service Tax Additional Customs Duty

VAT Central Sales Tax

No. of existing Registrations (no. in mn)

0.3 to 0.4 2.5 N.A 6.5 N.A

Source: Bloomberg, Department of Revenue

Removing the long list of exemptions and proper documentation in the IT system would help in keeping a trail of exchange of goods and services and money in the system. Thus the initiative of the government to curb black money would be complemented by the GST system.

As per the report of the Task Force on GST, the changeover to the GST would be revenue neutral, i.e. both the stakeholders - the Central and the state governments would not lose out on revenue at existing levels of compliance. Given the design of the GST, the producers and distributors will only be passing through for the GST. Moreover, the revenue is likely to increase over the medium term. The near term is likely to be challenging with adjustment costs for the private sector (coping with inter-sector implications of new tax rates), and Central Government (trying to compensate states for revenue loss).

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Rates of GST recommended by different Expert Committees

Standard Rate

RNR Rate

Lower Rate

Demerit Rate

Thirteenth Finance Commission, 2009

11-12% 11%

Revenue Implication of GST and estimation of Revenue Neutral Rate, 2014

25-27% 18.86%

Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax, 2015

17-18% 15% 12% 40%

Source: Report of the Task Force on Goods & Services Tax, 13th Finance Commission; Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST); Revenue Implications of GST and Estimation of Revenue Neutral Rate: Estimates for 2011-12, NIPFP

Gain or loss for states/centre

The movement from sales tax to GST at the state level entailed the adoption of uniform Revenue Neutral Rate (RNR) rate by all states. According to the 13th Finance Commision, the RNR rate would be the weighted average of rates across states. This implies that states with an average weighted rate higher than the RNR would lose revenue while those below it would gain revenue. The GST Council which has been given the authority to decide the rates for GST had not stated the RNR rate at their 4th meeting held on Nov 3 and Nov 4, 2016. It is expected that the RNR rate would be decided over a period of time after GST implementation.

Revenue neutral rate (RNR), is the rate that allows the centre and the states to sustain the current revenues from tax collection and, therefore, takes within range, amongst others, any tax losses because of tax subsumed, grant of input tax credits as well as sharing of tax base i.e. taxation of goods and services.

Under the 2016 amendments to the Constitution Bill, 2014, the centre will compensate the states

for any shortfall in their indirect tax collections in the transition from the current state VAT and other taxes to the unified GST. This compensation will be provided for 5 years.

The tax base of the state governments will significantly increase with the inclusion of the tax on services as well as the tax on the manufactured goods. The states will also benefit from the abolition of the cesses and surcharges presently being levied by the centre, as the size of the divisible pool will rise. The GST excludes alcohol from its purview, wherein states would continue to levy taxes on it. This implies that a large revenue source still rests with the state government to generate cash flows from them. The tax base of the centre, on the other hand, will increase only to the extent of tax on sales.

However, under two scenarios the states might suffer from short falls;

• The potential disputes that could arise on account of the classification of commodities in the various slabs that if the foodgrains are to be zero-rated. The states like Punjab and Haryana whose revenue sources are dependent on it, would be impacted. Also, the tax structure applicable to services remains unclear.

• Now, by definition, the move from the status quo to the GST will involve a shift in revenues from producing states to consuming states, from manufacturing to services, and within manufacturing from intermediate and capital goods toward final goods. This distributional shift is unavoidable because it is in some ways intrinsic to the move towards GST.

The Central Government has agreed to compensate states for the first five years for a loss in revenue arising out of phasing out of the earlier tax regime and implementation of GST. During the initial period, it is expected that states with greater share of manufacturing will lose out on revenue while states with higher share of the services sector to GDP will stand to gain more from the revenue collection.

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State-wise - % share of manufacturing in GSDP (constant) in FY15

State-wise - % share of services in GSDP (constant) in FY15

Consuming states to gain more from destination based taxation: GST is a destination-based taxation as opposed to the current origin based indirect taxation. With tax revenue moving to the consuming states, the states which have a larger consumer base share stand to gain initially, as the

SGST on the final product will ordinarily accrue to the consuming state. Moreover, IGST will be levied on all imports into the territory of India, thus the states where imported goods are consumed will now gain their share from the IGST paid on imported goods.

Source: MOSPI Source: MOSPI

25

State-wise average monthly per capita expenditure and population

Source: NSS 68th Round, NSSO

Incentive or disincentive for manufacturing based states?

States like Gujarat and Madhya Pradesh have raised apprehensions that with tax revenues accruing to the consuming states, states with a large manufacturing base will lose their tax revenues to the net consuming states, as GST is destination based. Importing states shall stand to gain more. Even if the centre compensates for the loss in revenue to the states, this might act as a disincentive to the states which have made heavy investments in infrastructure and industrial promotion measures to invest further in industrial infrastructure. States that have already invested heavily in industrial infrastructure would be constrained to recover the investment from tax revenues.

Creation of a uniform market will seek to eliminate the various distortions which exist in the system. GST envisions to reduce the distortionary effects of the current taxation structure.

Reducing the existing distortions in the system and enabling voluntary compliance will result into widening of tax base. High import tariffs, excise duties and turnover tax on domestic goods and services, i.e. multiplicity of taxes along with exemptions have cascading effects which lead to a distorted structure of production, consumption and also exports. The distortionary impact leads to inefficient allocation of resources and therefore leads to lower contribution to growth. The agriculture sector which suffers from multiple distortions would stand to gain immensely from the GST.

By taxing goods and services on a similar rate it will not mislead consumption decisions and enable effective signaling of relative prices. Similarly, tax incentive will not play an integral role in choice of production methods, choice of inputs or final goods to be produced, since the GST will be on consumption. GST will thus remove the distortionary impact it had on the vertical and horizontal integration of the business.

Support to manufacturing sector and overall growth

The current indirect taxation structure which has evolved into a highly differentiated regime over the years has resulted into being regressive and sub-optimal in terms of tax incidence and tax collection.

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GST would also enable efficient allocation of resources and remove distortion arising out of differences in tax structure across states. The creation of a uniform market would ensure that comparative advantage of location forms the decisive factor behind setting-up of industries rather than tax considerations. States which enjoy a comparative advantage in terms of factors of production, will emerge as production hubs. Location of production units and its supply chain will thus not be determined from the taxation viewpoint.

Taxation of capital goods has discouraged investment. In India, input tax credits are generally limited to manufacturing plant and equipment. No input tax credits were allowed for the Union excise duties on capital equipment acquired for use in sectors other than manufacturing. These generally included capital goods used for sectors such as transportation, infrastructure, distribution or construction. Moreover, no credit was allowed for the state VAT on capital goods acquired by the

service sector transportation, telecommunications and IT services, finance and insurance, etc. If the GST allows for efficient crediting of taxes paid on capital goods, capital goods would become cheaper, hence capital productivity and investment would increase.

Indirect tax collection data for FY15 indicate that the total amount of capital goods purchases for which CENVAT credit was claimed was ` 1.6 tn. National income accounts data suggests that investment in plant and equipment for the same year by the non-government, non-household sector was about ` 7.4 tn.

The current tax structure leads to fragmentation of the Indian markets along the state owing to numerous inter-state taxes. The multiplicity of taxes and numerous exemptions have cascading effects that lead to a distorted structure of production and consumption and favours imports against domestic production.

Since GST is destination based and will be imposed on consumption, imported goods and services will

27

be taxed at par with the domestically produced goods and services. Since the domestic goods are exempted from excise duties, producers are not able to claim input tax credit. This puts domestically produced goods at a disadvantage as compared with the imported goods as they are zero-rated in the source country i.e. not burdened by input taxes.

The Countervailing Duty (CVD)/ Special Additional Duty (SAD), which is levied to offset the excise duty imposed on domestic producers, is not applied on a whole range of imports. According to the Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax, the effective rate of excise on domestically-produced non-oil goods is about 9%. The effective collection rate of CVDs should theoretically be the same but in actual is only about 6%. The difference represents fiscal cost to the tune of about ` 400 bn to the government.

Besides, India’s free trade agreements with other countries also restrict it to levy customs duty as a means to providing protection/level playing field to the domestic industries. GST will help in achieving neutrality of incentives between domestic production and imports by subjecting the imports to both CGST and SGST.

The overall macroeconomic effect of reduction in economic distortions due to GST would provide an impetus to economic growth. The efficiency gains, reduction of logistic cost, rise in competitiveness and ease of doing business would boost India’s exports. Exporters of goods and services shall

continue to be zero rated and will be eligible to claim refund of input tax credit. Export oriented industries would thus become globally more competitive. While importers would be taxed at the same rate as products produced and consumed within the jurisdiction.

Impact on inflation

International experiences suggest that countries which adopted GST experienced high inflation and slowdown in consumption initially. While some countries like Australia, New Zealand and Canada witnessed increase in prices in the short term which then stabilised in the mid to long term. In countries such as Japan and Denmark, the GST resulted in once-and-for-all increase in the general price level.

Current taxes on the consumption basket

Source: Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services tax (GST) * The pie chart represents the CPI consumption basket

GST rate decided in 4th GST Council meeting

GST rate Current tax rate*

Exempt 0% 50% of CPI Basket

Lower 5% Goods in 3% - 9% range

Standard 1 12% Goods in 9%-15% range

Standard 2 18% Goods in 15% - 21% range

Higher 28% Goods taxed over 21%

High+Cess 28% + Cess Luxury Goods*Current tax rate applicable to goods Source: Various newspaper articles

Source: IMF

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India too could face inflationary pressures as the services sectors which are taxed at an average rate of 15% could face a higher tax incidence. The GST Council in its fourth meeting held on 3rd - 4th Nov 2016, has announced that there will be two standard rates of 12% and 18%, which would fall on the bulk of goods and services. However, the details are still awaited. If majority of the services fall within the range of 15% and 18%, then services would become costlier. Moreover, the services which will now fall under the category of ultra-luxuries or de-merit goods will also become more expensive. While the lower incidence of tax on the manufacturing sector will offset some of the impact, the extent of the pass through from the services to the manufacturing sector should not be undermined. While services have around 28% of weightage in the CPI index, the services sector accounts for 54% of the GDP.

However, the impact on inflation will depend on the rate adopted, which has not been finalised. The reduction in the cascading effect of taxation, lower cost of production, and efficiency gains in supply chain will help core inflation to come down in the mid term to long term.

According to the Report of the Committee on Roadmap for Fiscal Consolidation chaired by Vijay Kelkar, which recommended GST, assumes that the GST would positively impact the common man in many ways.

• It will add to the overall economic growth by removing economic distortions. It will create new employment opportunities thereby increasing the levels of income across a large section of the society.

• It will reduce inflation in the longer term.

• It will decentralise production to areas enjoying a comparative advantage; so more jobs can be expected to be created in rural areas.

• It will improve governance since the introduction of a comprehensive GST will bring

about more transparency and an end to crony capitalism.

• It can create further opportunities for relief under direct taxes over time.

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Chapter 5

GST: Impact on Industry including MSMEsIt is evident that with the onset of the GST, there will be a considerable impact on the manufacturing sector. Complexity and the cascading effect of the indirect taxes have made it costly to comply with and put India’s manufacturing sector at a competitive disadvantage in the global market. The major central and state levies constitute 25% to 40% of the price of products, with the exemption of certain categories being taxed at lower rates.

The existing tax structure had in many cases led to substantial distortions. Disproportionate tax revenues from a few sectors and selection of inputs, production technologies and supply chains based on tax optimisation have distorted the very nature of choice of the same. This in turn had an impact on the growth of the manufacturing sector.

GST - A win-win situation for the industrial sector

GST would make taxation in manufacturing less fragmented: The incidence of taxation is more complex in the manufacturing sector than in the services sector as there are prevalence of more number of transaction and inputs in the production process in the manufacturing sector. It is expected that GST would make taxation in manufacturing less fragmented and enable huge savings in logistics costs across all sectors.

Correct the inverted duty structure that exists: One of the important implications of adopting GST is that it would correct the inverted duty structure that exists in the current framework of the manufacturing sector. The inverted duty structure arises primarily due to

• Output excise duty on finished goods being lower than the excise duty on inputs and input services.

• Inability to fully utilise credit of AD (Additional Customs Duty commonly known as Countervailing Duty) and Special Additional Duty of Customs (SAD) against output excise duty.

Remove complexities in inter-state trade: The inter-state trade is burdened by taxes on inter-state movement of goods (central sales tax, octroi etc). Further, the local body taxes differ widely amongst states. This creates complexities for global investors in the manufacturing space who have to comply with the variation in the tax structures across states as procurement and distribution generally involves complying with norms levied by various states.

Make price determination more transparent: It is expected that GST would help in making price determination more transparent and less ambiguous owing to the simple tax structure. Ease of inter-state transfer and reduction in cascading effect of tax is expected to lower cost of production, though not in the initial phase of implementation.

Impact on supply chain dynamics

While several factors have been instrumental in shaping the supply chain framework and distribution networks in India, fiscal considerations, i.e. availability of tax exemptions/ benefits and the prevalence of differential taxes based on geographical locations have been the most important decisive factors.

The taxable supplies under the GST has major implications for supply chains, particularly on classic hub and spoke arrangements of centralised manufacturing and disaggregated distribution. The dual GST in a broader framework would impact the supply chain right from sourcing through manufacturing to distribution. Unlike the earlier

30

system, wherein irrecoverable taxes such as the Central Sales Tax (CST), complex documentation of inter-state movement of goods, and entry barriers at state borders added to the cost of doing business, uniform application of the CGST and the SGST on all taxable supplies throughout the supply chain would ease some of the pain.

The implementation of GST would nonetheless lead to re-alignment of the supply chain framework based on operational efficiencies of scale, location, better control and inventory optimisation and allow organisations to explore different distribution models such as setting up central warehouse and regional distribution hubs and possibly step away from traditional carrying and forwarding (C&F) distributor-based models.

In the long run, it would eventually lead to consolidation of warehouses at strategic locations, consolidation of vendors and suppliers, reduce working capital requirement and enable large warehouses to deploy state-of-the-art technology which are not feasible in smaller, scattered warehouses. This in turn would drive logistics and distribution segment among the various manufacturing sectors to evolve more strongly and add to the competitive advantage.

Ease of doing business

Reforms in taxation were inevitable to improve ease of doing business for India and resonated with the aim to make India a global manufacturing hub under the ‘Make in India’ initiative of the government. Introduction of GST will provide further thrust to the Indian manufacturers enabling seamless movement of goods across the country; make it less cumbersome for the global investors to set up production units in India and to conduct business in a less complex multifaceted tax regime. The complexity and uncertainty surrounding the tax system have discouraged investment to some extent, with instances of corporate sector being

entangled with the taxation authority over tax disputes.

The fact that GST will subsume some major central and state taxes and allow complete and comprehensive set-off of input goods and services primarily paves the way for ease of doing business. One of the major reasons for the adoption of GST was to reduce the transaction cost of doing business and thereby help companies being competitive. This will eventually help India to move up the rankings in the ease of doing business index. The key elements that are likely to facilitate ease of doing business are:

Uniformity of tax rates and structures: Ease of doing business will be facilitated by ensuring indirect tax rates and structure are common across states. This would bring about certainty, clarity and reduce ambiguity amongst investors, especially amongst foreign investors. A seamless tax-credit throughout the value chain and across boundaries of states would reduce the hidden costs of doing business.

Return filings made easier and online: There would be a common return filing to be done online which would serve the purpose of both the centre and the state. As per the current available information, only eight forms are provided for in the GST business processes for filing of returns and with most of the average tax payers would only have to fill four forms (return for supplies, return for purchases, monthly returns and annual return) for filing their returns. Manual filing of returns to be done away with and all taxes will have to be paid online. All mis-matched returns would be auto-generated, and there would be no need for manual interventions. Most returns would be self-assessed. However, under the current provisions of GST, the compliance burden would increase since assesses are required to file returns separately for outward supplies, inward supplies, regular return and TDS for each month. It also requires an annual return to be filed.

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Ease in payment procedures: The proposed payment procedures which entails electronic payment process, single point interface for challan generation (GSTN), use of single challan and single payment instrument, common set of authorised banks and common accounting codes would facilitate the corporate sector both in the industrial and services sectors.

Shared IT infrastructure & services and uniform interface to the taxpayers: The Central and state governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-government company. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers and offer a shared infrastructure and services to Central and state/UT governments. GSTN is working on developing a state-of-the-art comprehensive IT infrastructure including the common GST portal providing front-end services of registration, returns and payments to all taxpayers, as well as the backend IT modules for certain states that include processing of returns, registrations, audits, assessments, appeals, etc.

Compliance cost - Will cost and ease of compliance vary between different manufacturing segments?

The uniformity in tax rates and procedures across the country will help in establishing uniform compliance standard and go a long way in reducing compliance cost. The GSTN framework established will make adherence to compliance easy and transparent for corporates in general as registrations, returns, payments, etc. would be available online.

However, the manufacturing sector in India mostly comprises of unorganised sector. It would not be easy for the MSME segment to adopt the compliance process in the near term especially as penetration of Internet is low in various parts of the country so far. The compliance cost for the MSMEs could increase as the dual GST system being

proposed for implementation would entail multiple compliances. Each person/company needs to enter details of invoices issued for the next to receive credit. In case where the vendors do not upload invoice details, it could lead to credit blockages.

GST - Impact on MSMEs

According to estimates, India has the second largest number of small and medium enterprises (SMEs) in the world, just behind China. The MSME sector consists of approximately 51 mn units (according to the MSME Annual Report 2015-16). It will therefore be very crucial to perceive the impact of the implementation of the GST on the MSME segment in India.

The current taxation regime of India, which involves various indirect taxes, puts MSMEs at a big disadvantage and is also a primary reason for tax avoidance by various small companies for whom adherence to multiple taxation is costly and time taking. The process of documentation and filling of returns under the current indirect taxation has been very cumbersome even for large multinational organisations. With the introduction of GST, the government assures that the new tax regime would be a simplified taxation process; tax payments will be easy and transparent thus, saving time, hence reducing transaction costs and making the system tax-payer friendly. This would be beneficial especially for the MSME sector leading to ease of doing business and making them more cost-efficient and competitive in the long run. Although it cannot be denied that there would be a lot of difficulties to be encountered within the short run.

Bringing the unorganised segment in the MSME segment within the orgainsed segment will not be easy: Almost 94% of all Indian MSMEs are unregistered. Compared to the manufacturing sector, a larger proportion of the enterprises in the services sector are unorganised. Wholesale and retail trade is characterised by a very large number of business entities that are proprietary

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and household enterprises. The diverse nature of service activities and the larger proportion of firms being in the unorganised sector implies that it will not be easy to bring them under the ambit of the GST.

• In the manufacturing sector, unorganised units are around 10 times than those in the organised sector

• In the services sector, unorganised units are around 18 times than those in the organised sector

Registered & unregistered MSMEs, Manufacturing & Services

Registered Sector

mn units %

Manufacturing 1.049 67

Services 0.514 33

Unregistered Sector

mn units %

Manufacturing 10.45 53

Services 9.42 47

Source: Fourth All India Census of MSME, 2006-07

Registered & unregistered MSMEs, category-wise (mn)

Category Registered sector Unregistered sector

Micro 1.485 19.839

Small 0.076 0.035

Medium 0.003 -

Source: Fourth All India Census of MSME, 2006-07

Proposed threshold for tax exemption – To increase the tax base but to end the protectionism:

At present, small scale industries are entitled to exemption from payment of CENVAT in respect of their turnover upto ` 15 mn. The proposed threshold limit of ` 2 mn under CGST by the GST

Council, would bring many of the micro and small enterprises under taxation.

Even as this would impact the micro and small enterprises to an extent, in the long run increase in tax incidence might be marginal as the GST would enable MSMEs to avail input tax credit. The GST will help MSMEs to avail the complete tax incentives paid on procurement of all input goods as well as services from various sources such as import, inter-state purchases, and local purchases and services like power, telephone etc. Moreover, this should also be considered in the backdrop that even if the MSMEs were exempt of the excise duty, there were no such threshold exemptions in respect of state level VAT. The current standard state VAT rate is 12.5% with an additional 1% for a few items which was applicable for the MSMEs too. MSMEs are subject to other taxes such as Central State tax, entry tax, local body tax etc.

One of the biggest concerns, that arises, is the fact that GST would bring about an end to the existing protectionism measure provided by the government, with the new threshold in place as far as indirect tax costs and benefits are concerned. The impact of this, however, would be most appropriately realised in the medium to long term. On the other hand, this initiative might compel the MSMEs, who in certain cases have restricted their growth driven by the exemption led benefits, to grow into a larger organisation. The latter outcome would be beneficial for the growth of the country.

Lower threshold to enhance MSME registrations and help them to avail of government schemes and initiatives:

We also expect that the implementation of GST will, in the long run, reduce the size of the informal economy as the threshold limit for exemption has been lowered. Producers who remained in the informal sector for tax evasion, incentivised by the size-based nature of indirect tax exemptions will be

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now incentivised to join the formal economy driven by the compulsion to avail the input tax credit and the lower tax incidence.

As around 93% of all Indian MSMEs are unregistered, they do not avail of the various schemes designed to help the MSMEs. They are also unable to claim tax set-offs. GST will be a self-enforcing mechanism for the small sector to register themselves which in turn will help them to avail tax refund and various schemes of the government. However, this entire process will not be so easy for implementation and will take time as the cost for the small units will increase, in terms of compliance and low level of awareness for e-filing returns. However, in the long run, GST will increase tax compliance amongst MSMEs in India and impose financial discipline among MSMEs.

GST to help MSMEs reduce cost and execute an efficient inventory led model to operate

Currently, MSMEs pay indirect taxes as the buyers of goods/services and file returns as sellers. The implementation of the GST will remove the double taxation and reduce the transaction cost.

Under the current regime, large enterprises ‘stock transfer’ goods to other states due to availability of infrastructural resources and thereby avoid the impact of central sales tax (CST) on inter-state movement. Post-stock transfer, goods are sold locally on payment of applicable value added tax (VAT) to the buyer, who is eligible to avail of credit against output VAT liability. MSMEs, owing to lack of infrastructure, carry out inter-state sales (instead of stock transfers) and bear the burden of CST on them unlike the large enterprises. The CST paid is not available as input credit to the buyer against his output VAT liability. The non-availability of input credit increases the cost of the product, thereby, rendering MSMEs uncompetitive. This also restricts the MSMEs to reach out to potential customers across India.

The proposed regime places the MSMEs on the same footing as large-scale industries by levying a tax on stock transfers and by neutralising the cascading impact of input taxes through the input credit mechanism available under the GST regime.

Under GST, in the absence of multiple-taxation and creation of a uniform market, the MSMEs can execute an efficient inventory led model to operate. The reduction in logistics costs will bring great relief to manufacturing MSME sector with improved ease of doing business.

Will it be relatively more difficult for the MSMEs for e-filing returns than envisaged?

The government is establishing a state-of-the-art comprehensive IT infrastructure through Goods and Services Tax Network (GSTN), to enable e-payment of taxes, would facilitate MSMEs and when they are able to adopt Goods and Services Tax Network. Moreover, even as the government tries to ensure an easy online process for filing returns, the low penetration of Internet and the poor connectivity along with low level of awareness would pose a lot of difficulty for the MSMEs for e-filing returns.

Resolution of the regulatory uncertainties to facilitate MSMEs:

GST, being a unified taxation system, also promises to resolve the regulatory uncertainties which is a great positive for the MSME sector, as this segment has to face a lot of difficulties to comply with norms, regulations and compliances. While the implementation of the GST is said to relieve small taxpayers from compliance cost and compliance administration, the transition to the new tax system would not be easy, especially for the MSMEs. The cost of compliance will increase in the short term, as the MSMEs would have to adopt to a new system and a new process. The lowering of the threshold for exemption would also bring a

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larger section within the ambit of taxation. They in turn will have to cope up with the impact of new tax cost, additional working capital requirements required to discharge the GST liability and meet compliance requirements in terms of registration and filing of returns.

One of the biggest difficulties that the MSMEs are likely to encounter with GST is availing the input tax credit and liability of tax remittance to the customer in the event of failure of supplier in meeting

the compliance requirement, etc. issues around payment of GST on advances, taxing free supplies, etc. While the implementation of the GST will bring in uniformity and transparency in the tax collection system and bring about buoyancy in the tax base, it is critical that the government takes enough measures to facilitate awareness among the MSMEs regarding the transition and the MSMEs also prepare themselves to adopt easily and thereby benefit from the provisions.

Increase in cost of operation owing to GST - Some global examples

Global experience shows that MSMEs in certain countries witnessed an increase in cost of operation after the adoption of GST and remained at a competitive disadvantage to their larger counterparts.

• The Report on the SME Taxation Survey 2016 conducted by The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) during the period of 29th April 2016 to 31st May 2016 shows that: for 82% respondents, GST has increased their cost of operation, while only 18% were not affected. The study also revealed that more than half of the respondents (58%) are still encountering cash flow problem due to GST.

• There is considerable evidence that the costs of compliance, relative to firm size, are greater for smaller firms. Pope and Rametse (2001), for instance, estimate the cost of complying with the Australian GST to be only about 0.04% of turnover for large businesses (turnover of around Australian $ 2 mn) but around 2% for smaller homes (at turnover of around Australian $ 100,000).

• The report on European Tax Survey (2004) by European Commission, for example, revealed that compliance costs for the VAT and corporate tax are around 0.02% of turnover for larger enterprises, but 2.6% for small business.

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Chapter 6

Issues and Challenges The implementation of the GST which will completely overhaul the existing architecture of indirect taxation is fraught with several challenges. The various issues and challenges that is anticipated to be encountered going ahead have been discussed in brief below.

• For rolling out of the required IT platform, called GST Network (GSTN), the NSDL i.e. National Securities Depository Ltd has to compile the necessary database for the registered traders and service providers in alliance with the Union and state governments, and issue each entity a GST ID number for retrieval of all relevant data similar to an income tax PAN card. While some states are in the advanced stage of using the IT infrastructure, there are others who are only midway.

• The most difficult challenge would be to complete the remaining legal processes, in particular those relating to the tasks of the GST Council. It would be unrealistic to expect a “flawless” GST. 21 out of the 34 OECD countries (U.S. not included) have raised rates between 2009 and 2014. Hence, there is no rule of the thumb in setting the ideal rates or threshold levels.

• India is one of the largest federal nations to implement GST and it aims to achieve co-operative federalism. There are 32 representatives in the negotiations (29 states, two Union Territories with legislatures and the Central Government), hence it would take considerable time to finalise the structure and operational aspects of the tax.

• GST could be inflationary even during the pre-implementation stage due to increase in prices set in anticipation of elevated input costs. Keeping a tab on the price levels is crucial to the success of the reform.

• Currently, most of the service providers operate with a centralised registration as service tax is levied only by the centre. Under the GST, companies engaged in the supply of services on a pan-India basis will have to register with all the states that they operate in. This could result in increased compliance cost. Multiple invoicing might be required for services that are delivered under a single contract from various offices of the same entity. These factors would make GST a relatively complicated regime for the service providers.

• While the 4 level rate structure has been finalised, most of the things are still pending. Thus, there is still lack of clarity amongst businesses regarding its full impact on their balance sheet and compliance framework. Re-designing of the Enterprise Resource Planning (ERP) systems is another task which requires advance planning. This would require the companies to closely monitor all the updates and factor them in their pricing model.

• The input tax credit mechanism will encourage companies to be tax compliant since otherwise the input costs will rise equal to the full amount of tax paid by its suppliers. Going by the same token, non-compliant firms will prefer non-compliant suppliers and this could give rise to a non-compliant chain.

• An ideal GST is one that contains a comprehensive tax base, however, there are many difficult-to-tax sectors like financial services and e-commerce.

• Recalibration of ongoing long term contracts after taking into account the amended rates would require high preparedness given the sheer size of the costs involved.

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• The individual states need to review their human resource policies and practices for tax administration. The implementation of GST will require different and higher levels of skill-sets than what is currently presented by the states. In this area as well, the states could consider co-operating with the Union government, through its agencies, to developing requisite human resources, and skill-sets.

• The GST is absolutely different from the present system. To enable smooth functioning of the GST, special programs have to be held so that all those in the tax net are cognizant of the system and how they have to go about it.

• Once the basic features of the taxation system are implemented, it would be necessary to improve the structure and operational aspects of the tax over time. The introduction of the GST is only the next stage of reform.

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Average GDP growth and inflation before and after the implementation of GST/VAT

CountryYear of

ImplementationStandard Rate

(%)

Average GDP growth (%)Average Consumer Price

Inflation (%)

Before implementation

After implementation

Before implementation

After implementation

Albania 1995 20 -5.2 5.8 53.8 17.9

Algeria 1992 17 0.4 1.2 17.6 27.1

Antigua and Barbuda

2007 15 6.3 -2.5 1.9 2.1

Armenia 1993 20 n/a 1.6 n/a -

Australia 2000 10 4.1 3.3 1.1 4.0

Azerbaijan 1992 18 n/a -13.3 n/a -

Bangladesh 1991 15 3.6 4.5 9.6 5.0

Barbados 1997 17.5 0.6 2.2 1.8 2.7

Belarus 1991 20 n/a -10.1 n/a -

Belize 2006 12.5 5.3 2.6 3.4 4.3

Benin 1991 18 2.0 4.2 0.5 2.8

Bolivia 1986 13 -1.9 2.2 - -

Bosnia Herzegovina

2006 17 4.4 3.4 1.9 5.0

Botswana 2002 12 4.1 5.3 7.5 8.1

Bulgaria 1994 20 -8.1 -2.0 77.4 93.7

Burkina Faso 1993 18 3.3 5.6 0.3 11.0

Burundi 2009 18 4.4 4.7 16.4 8.9

Cambodia 1999 10 6.1 8.8 11.7 0.4

Cameroon 1999 19.25 3.2 4.2 4.0 2.5

Canada 1991 5 2.6 1.7 4.9 3.0

Central African Republic

2001 19 1.1 -0.2 0.9 3.5

Chad 2000 18 2.7 15.3 -2.1 7.1

China 1994 17 9.1 10.2 10.6 16.5

Colombia 1983 16 n/a 3.8 26.1 20.0

Costa Rica 1982 13 n/a 2.0 27.5 44.9

Croatia 1998 25 3.4 2.7 3.7 5.1

Cyprus 1992 18 6.3 5.5 4.8 5.4

Czech Republic 1993 21 n/a 1.8 n/a n/a

Dominican Republic

1992 16 2.4 5.5 48.8 5.9

Ecuador 1981 12 n/a 2.2 13.0 27.0

Egypt 1991 10 3.7 2.8 20.7 15.6

El Salvador 1992 13 2.8 5.8 21.4 13.4

Appendix

38

CountryYear of

ImplementationStandard Rate

(%)

Average GDP growth (%)Average Consumer Price

Inflation (%)

Before implementation

After implementation

Before implementation

After implementation

Equatorial Guinea

2004 15 44.2 15.2 7.5 4.8

Estonia 1991 20 n/a 0.3 n/a n/a

Ethiopia 2003 15 4.2 9.1 -3.3 10.9

Fiji 1992 15 2.7 4.7 7.3 3.6

Finland 1994 24 -1.2 4.7 2.5 1.0

Gabon 1995 18 3.2 1.8 18.3 4.8

Gambia 2013 40 4.0 4.8 4.7 6.1

Georgia 1993 18 n/a 7.9 n/a -

Ghana 1998 12.5 4.2 4.3 34.7 18.9

Greece 1987 23 0.6 2.2 21.3 14.5

Guatemala 1992 12 n/a 3.7 36.5 12.0

Guinea 1996 18 3.9 4.5 4.9 3.3

Guinea-Bissau 2001 15 1.0 1.8 3.3 1.0

Guyana 2007 16 1.0 4.4 6.8 7.8

Haiti 1982 10 n/a -0.6 15.0 8.0

Hungary 1988 27 1.7 -3.6 7.0 20.6

Iceland 1990 25.5 3.7 0.5 20.0 8.8

India 2005 12.5 5.7 8.1 3.8 5.2

Indonesia 1984 10 n/a 6.4 10.6 7.0

Iran 2008 5 6.4 1.4 15.6 16.2

Jamaica 1991 12.5 4.1 2.0 20.4 50.1

Japan 1989 5 5.0 3.1 0.4 2.9

Jordan 2001 16 3.2 6.4 0.6 1.7

Kazakhstan 1991 12 n/a -10.0 n/a -

Kenya 1990 16 5.5 1.4 13.0 21.7

Kosovo 2001 16 5.1 3.3 n/a 5.2

Kyrgyzstan 1999 20 -1.3 4.3 16.9 20.5

Laos 2009 10 7.6 7.9 6.1 4.5

Latvia 1995 21 -4.6 3.7 72.6 16.9

Lebanon 2002 10 3.7 2.9 -0.4 1.6

Lesotho 2003 14 2.6 3.8 10.1 4.9

Lithuania 1994 21 n/a 7.0 n/a 23.1

Macedonia 2000 18 1.8 2.0 -0.4 4.7

Madagascar 1994 20 0.8 2.3 12.3 35.9

Malawi 2002 16.5 1.6 4.2 26.1 11.9

Malaysia 2015 6 5.8 n/a 2.6 2.1

Mali 1991 18 5.7 3.3 0.7 -1.7

Malta 1999 18 n/a 2.0 3.8 2.6

Mauritania 1995 14 1.1 4.4 6.7 5.3

Mauritius 1998 15 5.0 4.3 6.7 6.0

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CountryYear of

ImplementationStandard Rate

(%)

Average GDP growth (%)Average Consumer Price

Inflation (%)

Before implementation

After implementation

Before implementation

After implementation

Mexico 1980 16 n/a 3.5 n/a 37.8

Moldova 1998 20 -7.6 1.2 17.6 26.1

Mongolia 1998 10 2.3 3.5 41.7 9.5

Montenegro 2003 17 1.5 6.1 21.7 4.7

Morocco 1986 20 n/a 4.5 10.1 4.6

Mozambique 2008 17 8.1 6.8 9.8 7.2

Namibia 2000 15 3.6 4.5 8.0 11.0

Nepal 1997 13 5.0 4.9 7.4 9.3

New Zealand 1986 15 n/a 1.5 10.8 11.8

Nicaragua 1984 15 n/a -4.0 31.1 -

Niger 1994 19 -0.6 3.1 -3.1 17.2

Nigeria 1993 5 0.8 2.1 n/a n/a

Pakistan 1990 16 6.4 4.8 8.4 8.8

Papua New Guinea

2004 10 1.2 3.8 13.3 2.1

Paraguay 1992 10 4.7 4.1 31.2 18.0

Peru 1991 18 -1.6 5.3 - -

Philippines 1998 12 4.4 2.7 7.0 7.4

Poland 1993 23 -1.0 5.9 56.7 31.8

Portugal 1986 23 1.5 6.2 24.3 10.2

Romania 1993 24 -6.7 2.1 - -

Russia 1991 18 n/a -8.5 n/a -

Rwanda 2001 18 9.3 8.1 0.7 4.3

Samoa 1994 15 0.6 4.4 5.4 4.9

Senegal 2001 18 4.1 4.7 0.8 1.8

Serbia 2004 20 2.4 6.1 2.9 12.5

Seychelles 2012 15 3.7 5.0 0.1 4.3

Sierra Leone 2009 15 5.8 10.1 13.2 15.2

Singapore 1993 7 9.0 9.1 2.8 2.4

Slovak Republic 1993 20 n/a 6.4 n/a 11.7

Slovenia 1999 20 4.3 3.8 8.1 7.8

South Africa 1991 14 1.7 0.9 14.5 13.0

Spain 1986 21 1.3 4.7 10.0 6.3

Sri Lanka 2002 12 3.6 5.8 10.2 9.2

Saint Kitts and Nevis

2010 17 3.5 1.1 3.7 3.0

Saint Vincent and the Grenadines

2007 15 3.7 -0.3 3.2 5.8

Sudan 2000 17 23.3 10.4 16.6 7.1

Switzerland 1995 8 0.8 1.6 2.1 1.0

Taiwan 1986 5 4.0 9.3 -0.1 0.8

40

CountryYear of

ImplementationStandard Rate

(%)

Average GDP growth (%)Average Consumer Price

Inflation (%)

Before implementation

After implementation

Before implementation

After implementation

Tajikistan 2007 20 8.7 6.7 8.6 13.3

Tanzania 1998 18 2.9 5.3 18.6 8.9

Thailand 1992 7 11.0 7.9 5.8 4.2

Togo 1995 18 -0.1 4.0 17.6 8.6

Tonga 2005 15 1.7 0.6 11.0 7.3

Trinidad and Tobago

1990 15 -3.3 0.9 9.6 7.1

Tunisia 1988 18 4.3 4.4 7.2 7.1

Turkey 1984 18 n/a 6.0 31.2 42.5

Turkmenistan 1993 15 n/a -10.5 n/a -

Uganda 1996 18 6.2 5.8 6.3 7.0

Ukraine 1992 20 n/a -14.9 n/a -

Uzbekistan 1992 20 n/a -1.7 n/a -

Vanuatu 1998 13 3.6 -0.2 1.9 2.7

Venezuela 1993 12 3.0 1.6 32.8 53.0

Vietnam 1999 10 8.3 6.6 5.6 0.7

Zambia 1995 16 -2.5 3.4 - 34.1

Zimbabwe 2004 15 -6.0 -7.5 -21.5 38.3

Source: Royal Malaysian Customs Department, IMF Note: 1. Standard VAT/GST rates represent data as on Jan, 2014 2. Rates have been revised for various countries post 2014 and are not captured in this table 3. Time period for average GDP growth calculation is ‘t-5’ to ‘t+4’, where ‘t’ is the year of implementation 4. Time period for average CPI calculation is ‘t-2’ to ‘t+3’, where ‘t’ is the year of implementation

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