The GST (Goods and service Tax) Bill rolling out the country’s biggest indirect tax reform since 1947 has been subject to heated debate since it was introduced for discussion in 2009 by the previous UPA government. After the 7 years of discussion between the centre and states it is been presumed that consensus on sharing tax revenue has now been developed. The newly formed NDA government is committed to introduce the bill in the present session of parliament.
“In view of the near unanimous support of states, that it is going to be a win win situation for all, we will go ahead with the Constitution Amendment in the current session of Parliament,” FM Arun Jaitley said after a meeting with the members of the Empowered Committee of state finance ministers on goods and services tax.
GST is an integrated scheme of taxation that does not discriminate between goods and services and is a part of the proposed tax reforms that centre on evolving an efficient and harmonized consumption tax system in the country.
GST is expected to replace the plethora of indirect taxes including service tax, central excise duty, additional excise and customs duties, central surcharges and cesses, state VAT, state sales tax, entertainment tax not levied by local bodies, luxury tax, taxes on lottery, betting and gambling, tax on advertisements and state cesses and surcharges related to supply of goods and services. As these taxes have been ineffective and have suffered from a litany of infirmities, including exemptions and multiple rates, GST is expected to transform the labyrinthine patchwork of taxes to a lean, streamlined process.
FIVE important features of GST
1. Two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST) ,rates for which would be prescribed appropriately, reflecting revenue considerations and acceptability.
2. The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST
3. A two-rate structure -a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.
4. The GST will be levied on import of goods and services into the country
5. The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply a reduction in unhealthy competition among the centre and the states over tax revenue that was prevalent earlier and an increase in harmonious functioning between them.
The implication of GST assures a single taxation system in the entire country for all goods and services making tax compliance easier and more effective. The major benefits of GST are:
a. It will boost up economic unification of India
b. It will assist in better conformity and revenue resilience
c. It will evade the cascading effect in Indirect tax regime. For instance, when a paper making company produces registers, the Central Government charges an excise duty on them as they leave the factory. Whereas on the lower end of the supply chain i.e. at the retail level, VAT is charged, without giving credit of the excise duty levied earlier. But in GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.
d. It will certainly reduce the tax burden for consumers
e. It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST
f. It will bring uniformity in tax rates with only one or two tax rates across the supply chain
g. It will result in a good administration of tax structure
h. It will increase tax collections due to wide coverage of goods and services
i. It will result in cost competitiveness of goods and services in Global market
j. It will reduce transaction costs for taxpayers through simplified tax compliance
k. It will result in increased tax collections due to wider tax base and better conformity
What are the key problems in the current taxation system for goods and services in India that the proposed GST plans to improve upon?
The key problems in the current taxation system in India can be categorized into:
a. Taxation at Manufacturing Level i.e. CENVAT is levied on goods manufactured or produced in India which gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied which through judicial proceedings has been observed to be a severe impediment to an efficient and neutral application of tax
b. Exclusion of Services from state taxation has posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which entail a transfer of the right to use goods without any transfer of their ownership. Though these problems have been addressed by amending the Constitution to bring such transactions within the purview of the State taxation, services per se remain outside the scope of state taxation powers.
c. Tax Cascading – Oil and gas production and mining, agriculture, wholesale and retail trade, real estate construction, and range of services remain outside the ambit of the CENVAT and the service tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits are allowed for the inputs of the exempt sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.
d. Complexity- In spite of the improvements made in the tax design and administration over the past few years, the systems at both central and state levels remain complex. The systems suffer from substantial compliance gaps, except in the highly organized sectors of the economy. According to Mr. Sunil Birla, Partner, Haribhakti & Co., Chartered Accountants, the implementation of GST would be a positive step towards “a strong single taxation system wherein various Central and State statutes will be subsumed into one comprehensive enactment”
The states want petroleum, alcohol and tobacco to be kept out of the purview of the GST.
Seen as key to facilitating industrial growth and improving the business climate in the country, the GST bill needs to be passed by a two-thirds majority in both houses of parliament and by the legislatures of half of the states in the country to become law.
By subsuming most indirect taxes levied by the central and state governments such as excise duty, service tax, VAT and sales tax, the Goods and Services Tax proposes to facilitate a common market across the country, leading to economies of scale and reducing inflation through an efficient supply chain.