The introduction of unified gods and services tax (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 idea, formation of task force, to passage in Parliament. It represents a Herculean, nationwide, multi-party consensus- building exercise which is finally bearing fruits, officially known as The Constitution (One Hundred and twenty second Amendment) Bill, 2014, proposes a national Value added Tax to be implemented in India from 1 April 2017
There are few steps that lie ahead following the Rajya Sabha’s nod to the Constitution Amendment Bill.
Changes made to the bill in Rajya Sabha will have to be approved again by the Lok Sabha (either in a special session, or the winter session).
The Bill needs to be ratified by a majority of the states (15/29). Following this, it will be sent to the President.
After Presidential assent, a GST Council compromising representatives from the states and centre will be set up.
The council will help codify central GST and State GST laws which would be passed by Parliament and State assemblies.
GST Network, the IT backbone of GST, to facilitate online registration, tax payment and return filing would be introduced.
GST Network will create an online portal. The portal will begin migrating data on existing taxpayers under the current VAT/excise/service tax regimes.
All businesses will be given a GST identification number, a 15- digit code comprising their State code and 10 characters PAN.
The GST Network has already validated the PAN of 58 lakhs businesses from the tax department.
Government is already enabling “master trainers”, who would train accountants, lawyers and tax officers on the new system
GST will replace State taxes, Value Added Tax, Central Excise Duty, including additional excise duties, excise duty under medicinal and toilet preparations (Excise Duties) Act, 1955.
Octroi and Entry Tax, Service tax.
Purchase Tax, Additional Customs Duty
Taxes on lottery, betting and gambling, Central Sales Tax levied by the Centre and collected by the States.
State cesses and surcharges Central surcharges and cesses relating to supply of goods and services.
Luxury Tax, Special Additional and Duty of Customs.
Entertainment tax, other than the tax levied by the local bodies.
Major benefits of GST
It addresses a 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 dead weight burden on Central sales tax and entry tax, 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 producers more competitive against imports.
GST will increase the resources available for poverty alleviation and development
Indirectly: tax base will rise
Directly: the resources of poorest state: U.P., Bihar, M.P., who happens to be large consumers, will increase substantially.
The adoption of the GST is an iconic example of what PM Narendra Modi has called “cooperative federalism”. It represents a national consensus; an outcome of grand bargain stuck together by 29 States and 7 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 service tax. In exchange they will each get a share of unified GST collected nationally. The anticipated additional gains in efficiency, competitiveness and overall tax collections are what drove this bargain.
GST will facilitate ‘Make in India’ by making one India.
CST on interstate sales of Goods
Numerous intra state taxes
Extensive nature of countervailing duty exemptions that favours import over domestic production.
Once the GST is in its place, it means a unified un-fragmented national market for goods and services, accessible to the smallest entrepreneur. Companies need not maintain stocks 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.
GST would improve even substantially tax Governance in 2 ways:
The first relates to the self- policing incentives inherent to a value added tax. To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in value added/ tax chain.
The second relates to the dual monitoring structure of the GST, one by State and one by Centre.
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.
Boost to investment have been documented in the report on the Revenue Neutral Rate that was submitted in December last year
The fewest flaws at inception
First is the question of uniform GST rates. An early report of finance minister from 2003 mentioned a rate of 12% but over the years this rate drifted higher and now is 18%. The empowered committee of finance minister uses a concept called “Revenue Neutral Rate”. It is that uniform rate which when applied will leave all states with the same revenue as before. So no state should lose out by signing up to the GST. But this approach is faulty, since unless we try it for a year or more we won’t be able to gauge the buoyancy of the GST. In trying to assuage the fears of the states, the calculation of the RNR has been loaded by every possible existing rate. This has caused the RNR to steadily escalate upward. But approach is to keep the GST rate low initially and promise to fully reimburse loosing state by the end of the year.
The report urged, GST be comprehensive, in its coverage, that exemptions from the GST be limited to a few commodities that catered to clear social benefits and that most commodities be taxed at the standard rate.
Another issue is that GST is an indirect tax, by its nature, indirect tax is regressive because they affect the poor more than the rich. India’s ratio of indirect to direct tax collection is 65:35, which is exactly the opposite of the norm in most developed countries. India’s ratio of direct tax to GDP is one of the lowest in the world and is badly needs to expand the direct tax net. Unless s rate cap I adopted, the GST rate could easily drift higher further hurting India’s income inequality.
It is far better to start and allow the process of endogenous change to unfold over time than to wait Gogot-like for the best time and best design before it is introduced.
Tax litigation is another issue. Approximately Rs 1.5 lakh crore is stuck in litigation related to Central excise and service taxes. On the other hand the State level VAT is administered in a way that empowers tax officials to dispose of cases quickly. Disputes involving Central taxes go through an appeal and tribunal processes and a drag on years. It is important that GST approach leans towards the more efficient State-level model
GST-type taxes in large, federal system are either overly centralized, depriving the sub-federal levels of fiscal autonomy. (Australia, Germany, Austria.) Where there is dual structure they are either administered independently creating too many differences in tax bases and rates that weaken compliance and make inter-state transactions difficult to tax.( Brazil, Russia, Argentina). Where administered with a modicum of coordination which minimizes these disadvantages ( Canada and India), but does not do away with.
The major problem comes in implementing the GST is the governance within the GST Council. It is de facto council of states, along with representatives from the Union Finance Ministry. It seems that one state will get on vote irrespective of its size. This seems unfair. An economically larger states, contributing a bigger chunk of the GST Pie, should have a greater say similarly the special needs of smaller states should also be headed
The Indian GST will be a leap forward in creating a much clearer dual VAT which would minimize the disadvantages of completely independent and central system
Exceptions in the form of permissible additional excise taxes on special good ( Petroleum and Tobacco) for centre, a petroleum and alcohol for states will provide the requisite fiscal autonomy to states.
Finally the issue of State’s autonomy. India will be uniquely large democracy that adopts a nationwide GST with virtually no taxing powers to state. In a situation where state want to undertake special spending programmes to respond to State specific situation, such as disaster?
In 1982, the CM of Tamil Naidu upgraded a midday meal scheme which his opponents criticized as being an empty promise and fiscally reckless. In response he raised taxes on goods (not possible in GST regime) and made the programme so successful that it is praised to this day. Similarly in the drought crises year of 1972, the Maharashtra government imposed a profession tax on city dwellers (not possible under GST) to fund an innovative programme called the rural “ Employment Guarantee Scheme”, which 3 decades later was acknowledged nationally as the inspiration behind the National Rural Employment Guarantee Act. The GST regime should remain sympathetic to this issue of state’s fiscal autonomy. The local bodies are not even discussed
The GST is obviously not a panacea for all ills of India’s economy it is nevertheless a revolutionary and long pending reform. It promises economic growth and jobs, better efficiency and ease of doing business, and higher tax collection.