August 17, 2016
Goods and Services Tax (GST) is defined as the tax levied when a consumer buys a good or service. It is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services. GST aims to replace all indirect levied on goods and services by the Indian Central and State governments. GST would subsume with a single comprehensive tax, bringing it all under a single umbrella, eliminating the cascading effect of taxes on the production and distribution prices of goods and services.
The current multi-staged tax structure has charges from the State and Union governments separately, leading to cascading effect of taxes. There are taxes at different rates and at multiple points. The Centre has taxes like Income tax, service tax, central sales tax, excise duty and security transaction tax while at the State level it includes VAT or sales tax, octroi, state excise, property tax, entry tax and agriculture tax. These taxes lead to increased tax burden on the Indian products affecting the prices and sales in the domestic as well as international markets.
Remedy to the above scenario of multiple taxes and its cascading effect which is a burden on common man is GST. The framework of proposal has dual GST which means it will have a federal structure. GST will basically have three kinds of taxes namely Central, State and one called integrated GST that will help to tackle inter-state transactions. Under the current GST tax reform, all forms of supply of goods and services like transfer, sale, barter, exchange and rental will have a CGST and SGST.
One can explain the impact of cascading taxes with an example. Say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. In this case while B was computing its sales tax liability, it also included the sales tax paid on previous purchase, which is how it becomes a tax on tax. This is also referred to as taxes on taxes. This is where the need for GST arises to do away with the phenomenon.
India is adopting a dual GST, namely the Central GST (CGST) and state GST (SGST). The main hurdle in the implementation will be the coordination among different states. The Centre and States will have to come to consensus on the uniform GST rates, inter-state transaction of goods and services, infrastructural requirements to implement the new tax reform, all of which needs to be worked upon for the smooth transition into GST pattern.
Introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would help mitigate the double taxation, leading to a common national market. From the consumers point of view, the advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. (Source: Wikipedia)
The long awaited GST bill if passed by India should have the following benefits, a few to mention:
All the distributors will prefer purchase with invoices, because that would give them better profit margins as the distributor will get credit of all the taxes paid at the previous stage. Currently, it is the distributor who has to bear the burden of the excise duty. So if the customer insists on taking the bill, we can presume that the tax evasion should fall. This will indeed be the biggest advantage of GST.
GST would help to even out the tax structures across various states, omitting location bias. As taxes should not be a hindrance to the investment decision of an individual, introduction of GST would help an investor to put up business units in any state without the worry of tax difference. This would boost the business in undeveloped locations as well.
Currently, taxes are being paid on the entire underlying value of a product or service, but with GST, companies will have to pay tax only on the value-addition. This would lead to reduction in the actual tax paid and also decrease the incentive for evasion.
With the implementation of GST, there will be cut down of individual taxes imposed by the central government as well by the states. This would lead to a unified market and would boost the movement of goods across states with drop in the business costs.
GST will expand the tax base and thereby lead to increase in the revenues available at the states’ and centre’s disposal. This would thereby help in increasing the resources of the poorer / consumer states like, Bihar, Uttar Pradesh and Madhya Pradesh will increase substantially.
GST would improve tax governance in two ways. One it is related to self-policing incentive inherent to a valued-added tax that can work very powerfully in the GST. The second relates to the dual monitoring structure of GST, one by the States and the other by the Centre.
The current indirect tax regime is a hindrance in the growth of the domestic manufacturing sector as well as flow of foreign investment to the sector. Introduction of GST is important as it would help alleviate the situation. There would be reduction in cost of manufacturing both from a tax view as well as compliance front. Inspite of being one country, India has more than 30 markets which would be transformed into a single market with GST. Since it will also be applicable on imports, the tax factor working against ‘making in India’ will disappear, further boosting the production and in turn the exports as well.
The Monsoon session of the Parliament that has begun recently will go on till August 12. The bill has already been cleared in the Lok Sabha. Once again, hopes are high that the Goods and Services Tax Bill will get passed in the Rajya Sabha, making way for this reform to become legislation and eventually get implemented next year.
GST still has a long way to go before it is finally implemented. After the Bill is passed in both the Houses of Parliament by two thirds majority, it will be sent to the State Legislatures for ratification. At least 50% of the State Legislature approval will be required before the proposed Constitution amendments are brought into effect. After this, the Parliament would be required to legislate laws pertaining to CGST and IGST.
GST will bring in transparent and corruption-free tax administration, removing the current shortcomings of the supply chain owing to the multi-layered policies. GST is not only investor or business friendly but also consumer friendly. GST is the need of the hour and any hindrance to its enactment is clearly unjustified and not in national interest. Critics argue about the feasibility of implementing GST. But one should always remember that there is no reform that is perfect. It is important that we start with the current bill and gradually improvise the same in due course.
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