The Rajya Sabha has finally passed the constitutional amendment Bill enabling the roll-out of the Goods and Services Tax. The Goods and Services Tax (GST) has been touted as the biggest tax reform in India since its independence.
The Government has set 1 April 2017 as the deadline for its implementation. This article explains GST and its impact in a simplified manner.
What is Goods and Services Tax (GST)?
- GST is a single tax that will replace all the existing indirect taxes levied in India. These taxes include Sales tax (VAT), Excise Duty (CENVAT), Service Tax, Octroi, Entertainment tax, Luxury tax, etc.
- The seller of goods or services will be given input tax credit (ITC) for the tax already paid on inputs/ raw materials. To illustrate: Let us say that the GST rate is 10 % and is levied on all products with no exemptions. A chips manufacturer buys raw materials worth Rs. 10 (potatoes etc.), makes chips, and sells it to a retailer at Rs 20. The GST payable by him on sales will be Rs. 2 (10 % of 20). But, he will get an input tax credit on the GST paid on potatoes by the supplier (Re. 1). Thus, the final amount of GST payable by him will be Re 1. (Rs 2 – Re 1)
- GST is proposed to have a dual structure. It means it will be levied by both Central and the state.
- There will be three kinds of taxes levied in the GST regime: Central GST, state GST and integrated GST. Central GST and State GST will be charged on intra-state sales and will be collected by the Centre and the state respectively. Integrated GST will be charged on inter-state sales. It will be collected by the Centre.
Example: If a manufacturer in Assam sells his goods in Assam, he will have to pay Central and State GST.
If the manufacturer in Assam sells his goods to a retailer in Haryana, he will have to pay integrated GST to the centre. This will be shared by the Centre and the state (Haryana). This is because the goods are sold in Haryana (destination principle)
When the retailer in Haryana sells the goods to final consumers in Haryana, he will pay Central GST and State GST. He can claim input tax credit of the amount of integrated GST already paid by the manufacturer in Assam - State GST will follow the destination principle that is it would be applied in the state where the product is sold.
- GST will replace all indirect taxes and will be levied on all goods and services. The exceptions are: petroleum product, Entertainment and amusement tax levied and collected by Panchayat/ Municipality/ District Council, alcohol, stamp duty, customs duty, tax on consumption and sale of electricity
What are the benefits of GST?
GST has been adopted by around 140 countries around the world. It’s benefits are:
- Simplified tax regime: Currently there are multiple indirect taxes (around 15) levied by the Central and the State Government and they differ across states. GST will simplify and rationalise the tax structure of India by bringing in a regime of a single and uniform tax.
- Increased revenues: A simple tax regime will reduce the cost of compliance and hence increase the number of taxpayers. This will help increase tax revenues. Also, the tax base will be comprehensive as all goods and services will be taxed with a few exemptions.
- Reduce the cascading effect of taxation: As mentioned earlier, GST is a uniform tax levied on value-added. Levy at each stage of sale/ purchase will be set-off against taxes paid by the supplier in the previous stage. Through this set-off mechanism, GST is levied only on value-added. To illustrate: Let’s say GST is 10 %. Continuing with our earlier example, if you make a packet of chips (manufacturer) and sell it for Rs. 30, your GST should come out to be Rs 3 (10 % of Rs. 30). But, this tax is levied only on value-addition and so you’ll be allowed to claim a tax credit to the value of GST already paid by the supplier in the previous stage. Let’s say you bought raw materials (potatoes etc.) worth Rs. 10 for making chips. The supplier of the raw materials has already paid Re. 1 (10 % of Rs. 10) as GST. So, the chips manufacturer can claim a tax credit of Re. 1 and pay only the remaining Rs. 2 as GST. Thus, there is no cascading effect and no burden of ‘tax on tax’.
- Improve the ease of doing business: Currently, doing business across state borders is very difficult due to differences in tax procedures. GST will lead to a unified economy and allow businesses to expand their operations with ease. It will also improve manufacturing in India, attract foreign investment and lead to job creation. The founder of Flipkart, Sachin Bansal has described GST as a reverse brexit moment for India.
- Boost GDP: The economists forecast that the roll-out of GST will boost GDP by 0.5%-2%. This is because of the positive impact on tax revenues and economic effects of a unified tax regime.
- Optimal supply chain decisions: Currently, all supply chain decisions are guided with the view to reduce the burden of indirect taxes. GST will do away with the interest rate differentials and lead to seamless movement of goods and services between states. Read this article to appreciate the importance of optimal supply chain: India’s reverse Brexit: GST will create million of formal jobs
Why do the states not want the GST to be implemented?
Because of the fear of loss of fiscal autonomy and revenues. To allay the concerns, the centre has agreed to compensate the states for the first 5 years for any losses.
Why is the constitutional amendment necessary to implement GST?
It’s necessary to enable central and states to levy all kinds of taxes. The GST will subsume all indirect taxes. But, as per the constitution, Central could not levy taxes on goods apart from manufacturing (excise) and primary import (customs) and States did not have the power to levy a tax on services. The amendment fixes this problem.
Now that the constitutional amendment bill has passed, what next?
- Though it is a mere technicality, the bill will have to tabled again in Lok Sabha with the amendments made in the Rajya Sabha and finally approved by the President
- 50 % of the states will have to ratify the constitutional amendment for it to become valid. The centre will have to get the states on board and allay their concerns.
- Now that the constitution has been amended, actual GST bills will have to be passed in the parliament. The opposition wants the bills to be introduced as finance bill and not money bill. The procedure of passage of money bill gives greater power to Lok Sabha than Rajya Sabha. So, Lok Sabha can override the decisions taken by the Rajya Sabha. The opposition has a majority in Rajya Sabha. Hence, they want the bill to be passed as Finance Bill and not money bill. To know about it in detail, you can refer to this article What is Money Bill and Finance Bill?
- A GST council will be set up (as per the bill) to adjudicate any dispute arising due to GST.
- A GST rate will have to be finalised by the GST Council which is neither too low nor too high. The concept of Revenue Neutral Rate has been introduced. It is that rate when applied will leave all states with the same revenue as before. The National Institute of Public Finance has estimated this rate to be 27 % which is quite high and will not be acceptable to the taxpayers. Read more about RNR (Revenue Neutral Rate)
- A GST network ( IT system for GST) will have to be launched to facilitate online registration, tax payments etc.
- The centre and the states will have to work together in harmony to put in place a system for GST collection. We will need a common platform to replace around 15 indirect taxes which are collected separately. The Government’s chief economic adviser, Arvind Subramaniam, warned that the new single tax will be “fiendishly, mind-bogglingly complex to administer”
Thus, the bill passed in the Rajya Sabha is just the beginning of the whole process to implement GST before its deadline of April 2017. Also, the economy might slow down after the implementation of GST as it takes time for the system to stabilise and the benefits will emerge gradually.
[You may read: The final structure of GST]