What is GST
Unlike the existing sales tax and service tax, Goods and Services Tax (GST) is generally charged on the consumption of goods and services at every stage of the supply chain.
The multiple tax levels feature of GST is the fundamental change from the present single-stage sales tax and service tax levied at only one stage of the supply chain.
Although the operation of GST seems fundamentally straightforward, there is a whole host of issues that must be considered by businesses in developing an optimal implementation strategy.
What GST is and how it is different from the existing sales tax and service tax.
1. Single versus multiple stage
Unlike the existing sales tax and service tax, GST is generally charged on the consumption of goods and services at every stage of the supply chain, with the tax burden ultimately borne by the end consumer. This multiple tax levels feature of GST is the fundamental change from the present single-stage sales tax and service tax levied at only one stage of the supply chain.
2. Goods and services subject to tax
GST operates on a negative concept – all goods and services are subject to GST unless specifically exempted. For sales tax, the same concept applies where all goods are taxable unless specifically exempted. It is anticipated that the number of exemptions under the present sales tax regime would be significantly reduced.
Service tax, on the other hand, operates on a positive concept where only services that are specifically prescribed are taxable. Under a GST regime, the opposite will apply and a much wider range of services will fall within the GST net than before. The potential of a wider tax base under a GST regime is attractive to governments, as it offers greater flexibility as a revenue measure and promises simplicity compared to the task of administering exemptions and identifying taxable services under the current sales tax and service tax respectively.
3. Tax payment and accounting periods
Time of supply is an important feature under the GST regime as it determines when one should account for GST in the GST returns. The approach used by many countries when adopting GST is that a supply is considered to have taken place at the earliest of the following three events:
- the time an invoice is issued; or
- the time any payment is received by the supplier; or
- the time a taxable supply is made.
The tax payment by GST registrants is worked out by deducting GST credits (input tax) from GST due (output tax) in the GST return.
The GST rules differ from the existing sales tax structure where sales tax becomes due and payable when there is a sale or disposal otherwise than by sale. On the other hand, service tax is only due when payment is received, and where payment is not received, the tax is accounted for at the end of the 12-month period from the date of invoice issued. The GST concept of time of supply is therefore generally wider than the provisions in the existing sales tax and service tax and it will be important for businesses to learn to cope with the change, as there will potentially be changes to the enterprise’s cash flows under the new tax.
4. Imported services and intangibles
Presently, imported services are not subject to service tax as the scope of the existing service tax rules do not deal with imported services or intangibles. In many GST regimes, imported services are subject to GST through the concept of a “reverse charge”. The reverse charge operates by treating a supply received from overseas as if it had been made by the recipient of the service rather than by the provider of the service overseas. The recipient of the supply is requested to account for the output GST on the imported services and report the amount in the GST return submitted to the Customs.
5. Group registration
Under most GST regimes, group registration is included as a facility that allows companies to file consolidated GST returns. The objective is to reduce their GST administration costs where supplies made within a group would be disregarded for GST purposes. The facility could potentially result in better cash flow management for the group if goods and services are regularly supplied between group companies.
The existing sales tax and service tax structures do not allow consolidated tax filings. In service tax, ‘group relief’ is available for certain professional services when provided to companies within the same group and subject to certain limitations.