Indian GST is significantly unique, but is it better?
June, 23rd 2017
With the deadline of July 1 approaching, the GST regulation in India has started to take shape by finalisation of law and rules. This has been a long journey of over 17 years which began with the intent of unification of indirect tax regime in the country.
Being a union of states, India intends follows to implement a dual GST structure at Federal and State level. Currently, over 150 countries have implemented GST law in various forms. Canada and Brazil are the only countries which have dual GST model like India. Most countries follow a uniform GST structure with single or multiple tax slab structure.
The GST framework in India is said to be based on the Canadian model, but at the same time is significantly unique.
Indian GST is not perfect as all taxes are not being unified. Major items like liquor, ATF, diesel, petrol and electricity have been kept outside GST currently, which shall result in cascading of corresponding taxes. Additionally, taxes applicable at municipal level have also been kept out of GST purview.
The core principle of GST levy in India shall be of a destination based consumption tax in accordance with the GST legislations applicable globally.
A major departure from European VAT in Indian GST is the introduction of input credit matching concept. This mandates that a buyer of goods or services can avail input credit of GST paid on his purchase if and only if the seller has deposited/accounted for the GST received from such buyer.
This condition of permitting availability of input credit of GST paid by buyer dependent on the seller's compliance of the law.
Under Indian GST law, place of supply rules have been prescribed separately for goods and services. Among services, different set of rules have been laid out for where either supplier or recipient is located outside. Whereas, globally the place of supply rules for services are homogeneous.
One major departure in India's GST from globally established VAT principle is as regards place of supply for intermediary services.
The fact that place of supply for sale and sourcing support services is the location of the service provider results in double taxation and makes 'Make in India' more uncompetitive, as these services are subject to VAT on a reverse charge basis in the country to which these services are provided by Indian businesses.
Again, Indian GST considers separate registrations of the same legal entity as independent tax persons, whereby supply among such registrations is subject to GST. This has a direct impact on the cash flows of an entity undertaking stock transfers. Whereas, globally there are concepts of grouping, whereby transactions among separate entities which are closely related are zero rated. This brings efficiency in cash flows and compliance.
The GST legislations globally have different provisions taxation for digital/E- commerce. However, the Indian model of tax collection at source applicability on e-commerce transactions is unique.
It was earlier anticipated that movement of goods under GST shall be paperless, however, the proposed GST law mandates requirement of e-way bill. From a compliance standpoint, this may be cumbersome in comparison to the global GST compliance practices.
Having said that GST is still a welcome change to the existing tax structure which should benefit both, business and consumer in the long run.