What is GST bill?
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.
Current Scenario: cascading effect of taxation
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.
How will GST be a remedy?
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.
What is the need for GST?
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.
What are the challenges in the implementation?
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.
Other factors to be considered:
- Since GST is a destination based tax, there should be clarity on where the goods are going. Proper methodology should be chalked out as it would require proper management in terms of services provided.
- There has to be uniformity in the implementation of GST in all states at the same time and the same rates or else it would be difficult to comply with the law provisions.
Features of GST:
- GST will have two components namely Central GST levied by the Centre and State GST levied by the states.
- Petroleum products, alcohol for human consumption and tobacco have been kept out of the purview of the GST.
- The final consumer will have to bear only the GST charged by the last dealer in the supply chain.
- The tax collected would be divided between the Centre and the States in a manner that would be defined by the parliament, as per the recommendations of the GST Council.
- The bill proposes an additional tax not exceeding 1% on inter-state trade in goods, to be levied and collected by the Centre to compensate the states for two years, or as recommended by the GST Council, for losses resulting from implementing the GST.
Advantages of implementing GST:
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 other advantages include:
- Reduction in prices: Manufacturers or traders would not have to include taxes as a part of their cost of production, which would lead to reduction in prices.
- Lower compliance and procedural cost: There would be reduction in the load to maintain compliance. Also keeping record of CGST, SGST and IGST separately would not be required.
- Move towards a Unified GST: Although India is adopting dual GST, it is still a good move towards a Unified GST which is regarded as the best method of Indirect Taxes.
- GST rollout can help boost India’s GDP growth by 100-200 bps or (1 to 2%) as this will help faster and cheaper movement of goods across the country with a uniform taxation structure.
- GST’s successful implementation would give a strong signal to the foreign investors about India’s ability to support business.
- GST will be beneficial with more transparency, efficient compliance, ramp up in GDP growth to the Centre, states, industrialists, manufacturers, the common man and the country at large.
What if India launches GST?
The long awaited GST bill if passed by India should have the following benefits, a few to mention:
- Will help in reducing tax evasion:
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.
- Removal of location bias approach:
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.
- Lesser incentive for tax evasion:
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.
- Unified market:
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.
- Increase in State revenues:
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.
- Improvement in tax governance:
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.
Impact of GST on the ‘Make in India’ initiative
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.
Roadblock to the introduction of GST
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.