The new Goods and Services Tax (GST) is the biggest indirect tax reform in India since independence. It is often assumed to be a complete unification of all indirect taxes currently levied in India by Central and State governments, but the reality is a little different. Though it is true that most major indirect taxes will be subsumed under GST, there are still certain products on which the indirect taxes will not be covered. Typically, this is when the taxes are either outside the purview of the GST constitutional amendment, or there is an agreement between Centre and States to defer their inclusion.
For business owners to plan a roadmap for the upcoming GST marathon of changes, it’s necessary to understand what is covered under GST and what is not. In this article, Avalara will take a closer look at taxes outside the purview of GST and their expected impact on business owners.
Taxes under GST Regime
First, it’s good to have an idea of which taxes will be subsumed under the GST. The following Central Taxes will no longer be calculated separately, and will instead be computed using GST laws:
- Central Excise Duty
- Additional Excise Duties
- The Excise Duty levied under the Medicinal and Toiletries Preparation Act
- Service Tax
- Additional Customs Duty, commonly known as Countervailing Duty (CVD)
- Special Additional Duty of Customs – 4% (SAD)
- Surcharges, and
Several State taxes will also be included in GST:
- VAT / Sales tax
- Entertainment tax (unless it is levied by the local bodies).
- Luxury tax
- Taxes on lottery, betting and gambling.
- State Cesses and Surcharges in so far as they relate to supply of goods and services.
- Entry tax
Taxes on products not under GST
The following tax and product types are not covered under GST. Business owners making sales or purchases of these products should make sure they understand the specific tax requirements that will still be imposed beyond GST assessments.
- Tax on items containing alcohol
Alcoholic beverages for human consumption would be kept out of the purview of GST as an exclusion mandated by constitutional provision. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practice. VAT is levied on alcohol purchases in some states, and there will be no objection to that. Excise duty, which is presently levied by the states, may also be unaffected.
- Tax on Petroleum Products
The full range of petroleum products, including crude oil and motor spirits including Aviation Turbine Fuel (ATF) and High Speed Diesel (HSD), would be kept outside GST, as is the prevailing practice in India. Sales tax could continue to be levied by the states on these products with the prevailing floor rate. Similarly, Centre could also continue its levies. A final opinion on whether natural gas should be kept outside the GST will be issued after further deliberations.
As for petroleum products, although the GST constitutional amendment provides for levying GST on these products, it allows the timeframe for their inclusion to be decided by the GST Council. Therefore, in the initial years of GST, petroleum products will remain out of the scope of GST.
The existing taxation system under VAT and the Central Excise Act will continue for both of the commodities listed above.
Why this exclusion
VAT or sales tax on petroleum products contributes to nearly 33 percent of state revenues, and Centre also earns significant excise duty income on the generation of petroleum products from crude oil. To protect these significant revenue interests, both the Governments want GST to first stabilize before they allow the GST Council to consider their inclusion.
Similarly, for alcohol, states don’t want to lose the significant revenue currently earned from state excise duty. In many states, the revenue from state excise taxes imposed on alcohol brings in 25 percent of total revenue. For this reason, the state excise tax on alcohol has been kept out of the constitutional mandate for levying GST.
This decision was made to provide fiscal security to states and ensure that there is a minimum guaranteed income under the proposed GST regime.
Impact of such exclusions
Any planning for GST has to take into consideration the non-availability of credits for taxes paid on petroleum products, though these products are inputs for most business activities. Major taxes paid on inputs won’t be eligible for ITC, so they will remain part of the cost of production and sales, as they are now.
Such exclusions negate, to some extent, the pros of unification, giving rise to one more layer of complexity when it comes to tax compliance for business organizations. Manual handling of these transactions can lead to wasted time and manpower, and these calculations are prone to errors. Using automated solutions for indirect tax compliance — including GST and all other products outside GST — is the fastest and most cost-effective way to solve this problem.
To learn more about how Avalara can help you with GST and other indirect tax automation, contact us through https://www.avalara.com/in/contact-us/ .
This blog is contributed by CA Mukund Abhyankar.