GST and Concept of Supply of Goods
Under GST, the definition of goods has been replaced with the “supply of goods”. Under the present indirect tax regime in India various central and state levies are triggered by distinct taxes like service tax provision of services, VAT on sale of goods and excise duty on manufacture of goods. The GST proposes to subsume all these taxes into a single tax trigger – “supply”.
Taxable event
GST is a tax on the supply of goods and services. Though ‘supply’ has not been defined, it is not restricted by the traditional terms such as ‘sale’ and ‘manufacture’. Under GST, all goods and services transactions will be taxed, unless they are specifically excluded. Therefore, we can expect a wide range of activities (which are not taxable under present regime) to become liable to GST, given that a supply will subsume multiple taxable events. For example, the manufacture and sale of goods currently attracts two separate levies (excise duty and VAT), will attract a single levy as a supply under the GST regime (central GST and state GST).
The important outcome of ‘supply’ being the tax trigger is the elimination of the potential for dual taxes. GST will likely be levied on supplies of both goods and services at same rate. Under the GST bill, the term ‘services’ has been defined as “anything other than goods”. This mutual exclusivity will be followed in various GST laws enacted by the states and central government. This will solve various longstanding disputes in relation to the duality of taxes.
With the introduction of the concept of ‘supply’- even supplies of personal goods or supplies of goods to agents could attract GST. This would ensure the continuity of the tax chain, allowing credit to flow freely.
Place of supply
The rules governing the place of supply are closely linked to the taxable event. The rules of place of supply will determine not only whether a given transaction is subject to GST, but also determine which state can claim to the state GST component built into central GST. As GST is a destination-based consumption tax, the rules for the place of supply should be aligned with this principle. As per the destination-based principle, the default rule for determining place of supply is the location of the recipient. The supply rules for the services will be more complex as the place of supply cannot be determined in some cases like telecom services and supply of fuels through dedicated pipelines. The place of supply rules must be simple and clear to address the issues related to place of supply of services– particularly given the growth in e-commerce and electronic delivery of services. Any ambiguity in rules may result in endless disputes not only between taxpayers and the revenue authorities, but also between states that assert jurisdiction over the supply of goods and services.
Issue of Proposed 1% levy on Supply of Goods
The proposed GST is a destination-based consumption tax. The taxes will accrue to the state where consumption of goods happens. This is opposed by the producer states as they have spent on infrastructure and now they won’t get any benefit under the GST model.
To allay the problems of those manufacturing states, the NDA government has provided for an additional levy of 1% over the GST for supply of goods for a two year time period. However it is criticised on the grounds that it could make the intra-sate movement of goods more expensive and it will hurt the Make in India campaign. For example, if a good is going form Gujarat to Tamil Nadu, crossing four states, the good would embody an additional tax of about four-five percent, because it is 1% for each state. This makes it easier to import the good from Thailand to Tamil Nadu. The 1% levy will burden the individuals in the consumption state and so is opposed by the northern and eastern states.
Many economists are also argued that there is no point implementing the GST in this manner and it should be delayed till it can be launched as a single tier levy. The 1% additional levy also creates the distinction between the manufacture of goods and provision of services. The GST Council has the power to extend the levy beyond the proposed interim period of 2 years. This presents a major concern of the additional levy remaining over a long period of time. The proposed levy also violates the principle of “Supply of goods”. The solution to the issue is the centre should drop the 1% additional levy and compensate the states directly for a two year time period.
