The passage of the Goods and Services Tax (GST) Bill, officially called the Constitution (One Hundred and Twenty Second Amendment) Bill, 2014 recently passed in the Rajya Sabha is seen as one of the biggest reforms undertaken by the government since the opening up of the economy in 1990. While there is some road still left to be travelled towards implementation, yet its passage in the Parliament ensures that it will be a reality soon. The GST seeks to replace Central Excise Duty, Service Tax and at the same time will subsume State VAT, Central Sales Tax, and Purchase Tax, among other taxes. In effect, this bill seeks to end the cascading effect of indirect taxation in India.
Before understanding GST, we must understand the present system of indirect taxation prevalent in India. The constitution divides taxation powers between centre and states. Both levels of government have some exclusive areas where they can levy tax. Income tax, which includes tax on company profits, is in the exclusive domain of central government. These taxes are referred to as direct taxes. Indirect taxes are taxes levied on manufacture of goods, provision of services and consumption, which are again in exclusive domain of central government. Taxes on consumption, on the other hand, are under the exclusive domain of state governments.
This system of indirect taxation had some problems. First, there was the issue of multiplicity of taxes. From the moment a product was manufactured, it was treated to a bevy of taxes from central excise to VAT. This added to the total cost of the product which was borne by the final customer. Another problem was that, different states had different taxation rates. Some states had lower VAT rates compared to others. This created a chance of tax evasion and states lost out on revenue that it had to earn.
GST seeks to correct these anomalies in the system. It seeks to replace the indirect tax regime in India which is replete with multiplicity of laws and barriers in interstate movement of goods. At the fundamental, GST is a value added tax. This will be levied at all points in the supply chain where credits will be allowed for any tax paid on inputs acquired for use in making the output. Since the GST will be tax added on each stage of value addition, the final consumer will bear the GST charged by the last dealer in the supply chain, with set off benefits for all previous stages. It would be applicable for both goods and services wherein the exemptions given are minimum. A minimalistic system that has less discretion will function as a much more transparent and robust system. The GST regime seeks to correct those faults that were present in the indirect taxation regime. GST will make India one unified market.
GST will seek to help the consumer in the following ways. First, all taxes will be collected at the point of consumption. This means that if any product is taxed at 18% (which is the GST rate fixed for now), it will include both central government’s taxes and state government’s taxes. This will decrease the cost of goods in long run and can create an environment of lower inflation rates in the country. Seen in this light, GST can also play an important role towards achieving the recently announced inflation policy where the government will attempt to keep inflation at 4% with tolerance level pegged upto 2%. Second, once barriers between states are removed, we as consumers will not end up paying “tax on tax” which is what happens when goods move across state borders. It will also widen the tax base which is necessary for lowering tax rates and eliminating classifications. GST will result in harmonisation of Central and State tax systems which would reduce duplication and compliance costs. The automation of compliance costs will also result in reduction of errors, thereby increasing efficiency.
In keeping with the federal structure of the country, GST will have two components: Centre GST (CGST) and States GST (SGST). This is keeping in mind the fact that base and essential design features would be same. Both the system will be based on tax on the destination model. Thus, exports would be zero-rated, and imports would attract the tax in the same manner as domestic goods and services. Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the destination State). The GST will be accompanied by the GSTN which will work towards capacity building among others. Officers are already being trained towards administering the new GST.
However the GST will face stiff challenges in its road to implementation in the coming years. The first challenge percolates to the rate at which GST will be launched. The prevailing sentiments seems to be at 18%, which will finally be decided and yet to be notified by GST council, in the long run. While different studies have pointed to different rates, it would undoubtedly help the consumers when the present rate would be fixed at a level which would negate the cascading effects of indirect taxation.
Another challenge that has to be encountered is administering the GST with minimum exemptions. New Zealand had the best GST model when it started out with the taxation rate fixed at 10% with almost zero exemption rates. However as most taxation analysts would like to point, tax policies can never be fixated in one particular realm, as with changing circumstances and economic behaviour, taxation policies need to change as well. Today, New Zealand has increased its taxation rate from 10% to 15% .Countries have fared better in administering the GST regime when they have reduced the exemption while widening the base. This is the challenge India will hope to encounter and successfully resolve.
The third challenge would be the implementation itself. India since its independence has achieved its political unity while the economic unity remains a distant dream. India is composed of various states with different financial standings .While states like Maharashtra and Gujarat are capable of generating their own revenues, the north eastern states, for example, are not on a strong financial footing. Yet the GST will seek to treat every state equally. While this would be challenging, yet it would also harmonise the country as an economic entity in the end. In the long run, GST seeks to benefit all and can truly act as a harbinger of the next round of economic reforms. The road to the same is tricky but the goal is worth it.
- Ibu Sanjeeb Garg ( Views expressed by the author are personal)