Rishu Kawatra
The Government’s plan to roll out goods and service tax (GST) from April 01, 2017 has moved an inch closer to the reality with the President Pranab Mukherjee signing the much coveted Goods and Service Tax bill (122nd Amendment bill ) very recently. The much awaited GST now becomes a law with the President signing the bill after 16 states ratified it.
After being assented by the president, the GST law will be enacted as the constitutional amendment Act 2016 to pave the way for the much awaited rollout of the landmark act that will create a common national market of 1.25 billion people. GST is the biggest economic reform in the recent past. The introduction of GST across the nation is the most important indirect tax reform since Independence. It has taken almost 16 years from the date of inception of the idea, formation of a task force, to passage in Parliament. It represents a Herculean, nationwide, multi-party consensus-building exercise which is finally bearing fruit. It will replace a raft of different State and Local taxes with a single unified Value added tax system to turn the country in world’s biggest single market. That’s why people love to call it “Game Changer”.
GST has huge implications. It addresses the serious impediment to our competitiveness. Without the GST, there are multiple points of taxation, and multiple jurisdictions. We also have an imperfect system of offsetting credits on taxes paid on inputs, leading to higher costs. Further there is cascading of taxes – that is, tax on tax. Interstate commerce has been hampered due to the dead-weight burden on Central sales tax and entry taxes, which have no offsets. All this will go once the GST is in place. It will enhance the ease of doing business, and make our products more competitive against imports.
The adoption of the GST is an iconic example of what Prime Minister Narendra Modi has called “cooperative federalism”. It represents a national consensus; an outcome of a grand bargain struck together by 29 States and seven Union Territories with the Central Government. The States agreed to give up their right to impose sales tax on goods (VAT), and the Centre gave up its right to impose excise and services tax. In exchange they will each get a share of the unified GST collected nationally. The anticipated additional gains in efficiency, competitiveness and overall tax collections are what drove this bargain.
Once the GST is in place, it means a unified, un-fragmented national market for goods and services, accessible to the smallest entrepreneur. Companies need not maintain stock depots to avoid paying interstate taxes. This will free up some capital. All this will add to demand, and also efficiency. The National Council for Applied Economic Research and others have estimated that national GDP growth can go up by one percentage point on a sustained basis.
Fourth, because the structure of claiming input tax credit is linked to having proof of taxes paid at an earlier stage in the value chain; this creates interlocking incentives for compliance between vendor and customer. No more questions from a vendor: “Would you like that with receipt or without receipt?” Because of this inherent incentive, the total taxes paid, and hence collected, may go up significantly. This provides buoyancy to the GST. In fact, a significant part of the black economy will enter the tax-paid economy.
A GST council will be set up within 60 days of the enactment of the GST bill, comprising of the Union Finance Minister as the Chairman, MOS Revenue/ Finance and State Finance Ministers as members of the GST council which will make important recommendations like GST rates, list of exempted goods and services, the threshold limit of turnover for application, Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply etc.
One of the main objectives of GST would be to eliminate the double taxation i.e. cascading effect of taxes on products and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative. Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes collected: GST, being a destination-based consumption tax based on VAT principle.
Integration of various taxes in a GST system would make it possible to give full credit to input tax. There would be a two rate tax structure – a lower rate for necessary items and items of basic importance and standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For goods in general, Govt is considering pegging the rate of GST around 20 %, that is well above the global average of 16.4%, however below the revenue neutral of 27%.
MODEL OF GST
* The GST will have two components: one levied by the Centre (referred to as Central GST or CGST) and the other levied by the states (referred to as State GST or SGST). Rates for Central GST and state GST would be announced appropriately keeping in view revenue considerations and acceptability.
* The CGST and SGST would be applicable to all transactions of goods and services made for a consideration except exempt goods and services.
* Existing CST (Central Sales Tax) would be discontinued.
* Centre would levy IGST (Cumulative rate of CGST and SGST) on all interstate transactions of goods and services with appropriate provisions of consignments and stock transfers. The input tax credit of CGST and SGST will be allowed as applicable.
GST can prove advantageous to the dealers and consumers at large. Instead of maintaining big records, returns and reporting under different statutes, all assesses will find comfort under GST as the compliance cost will be reduced. Due to full and seamless credit, manufactures and traders do not have to include the taxes as a part of cost of production, which is a very big reason to say that we can see a reduction in prices.
By bringing all the indirect taxes into a single bucket, govt will be able to cover each and every manufacturer, service provider, seller who were not made liable to tax earlier due to different exemptions under various laws. Also, simplified procedures also encourage dealers to comply with tax rules and laws.
However, there are certain difficulties involved in the implementation of GST. The fundamental problem involved is the decision of revenue – neutral rate of GST that will be acceptable to all those involved and also whether there will a single rate or two rates at state and central levels. If different states opt for different SGST rates, the very purpose of GST will be defeated.
Thus, GST is not only a combination of VAT and other indirect taxes but also a step taken to eradicate the problem and to plug the various loopholes in the present indirect tax system.
Implementation of GST is liable to cause inflation in the initial stage but will surely result in more employment opportunities and economic growth in our country and Indians will become employment providers rather than employment seekers in the recent future.
(The author is a Chartered Accountant)
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