The Goods and Services Tax (GST) is all set to be rolled out from 1st July 2017.
The 101st Constitutional Amendment Act, enabling the introduction of GST, was passed in the parliament last year.
If you are not well-versed with the concept of GST, I suggest you read this article explaining the basics of GST: GST Explained
The final design of GST has been worked out by the GST Council (the GST Council comprises of state finance ministers and is chaired by the Union finance minister.)
FINAL STRUCTURE OF GST
The GST rates have been finalised. The Government has categorised 1211 items under various slabs ranging from 0 % to 28 %
- No tax or zero-rated (0%)- Necessities such as food grains, cereals, fruits, vegetables, milk etc. Healthcare and education services.
- 5 %- Other essentials like sugar, tea, coffee, edible oil, toothpaste, kerosene, insulin, transport services etc.
- 12 %- Butter, cheese, ghee, cell phones etc.
- 18 %- Most of the goods as well as services are kept under this slab. Biscuits, jams, cornflakes, pasta etc.
- 28 %- Cars, Air Conditioners, refrigerators, make-up and demerit goods like Bidi.
- Apart from the above slabs, Gold, gems and jewellery will attract 3 % GST and Rough precious and semi-precious stone will attract 0.25 %
- Further, there will be an additional levy (cess), over and above the GST rate on five products namely tobacco, pan masala, aerated drink products, coal and motor vehicles.
Every entity with an annual turnover of greater than 20 lakhs will have to register under GST.
However, an entity with supplies only within a state and having a turnover between 20 lakhs and 50 lakhs can opt for composition levy scheme. Under the scheme, the entity can opt to pay a certain percentage of their turnover as tax, instead of GST. The rate is 1% for traders and 2 % for manufacturers.
Suppliers operating in multiple states are required to register in every state.
Lastly, the GST has introduced an anti-profiteering clause. The tax burden on the suppliers of goods and services is expected to decline in most sectors due to lower GST rates and Input tax credit. Therefore, as per the anti-profiteering rules, the benefits of lower tax burden will have to be passed on to the consumers by reducing the prices proportionately.
FLAWS IN THE GST STRUCTURE
- The GST has multiple rates and exemptions. The goods have been categorised in 5 slabs. It defeats the purpose of GST to simplify and rationalise the tax structure of India. (by levying a single rate on all goods and services across all states.)
- The taxpayers can take advantage of multiple tax rate to fall in the lower tax slab. To illustrate: there is a separate GST for Roasted Coffee (5 %) and instant coffee (18 %). It could lead to tax disputes. Also, hotels and restaurants fall in multiple tax brackets with Rooms and restaurants in 5-star hotels taxed at 24 % and so on.
- The compliance burden of businesses operating in more than one states has increased. They will have to register for GST in every state where they have operations. This will create a barrier to interstate trade.
- The above requirement will be a problem particularly in the services sector like E-commerce which usually operates in many states.
- Before GST, services were taxed at a single rate of 15 %. Now, they fall in multiple slabs with most services like Telecom, financial services, IT services attracting a higher GST of 18 %. The tax burden on some services provider will increase.
- The anti-profiteering rules lack clarity and will create a lot of uncertainty. It could lead to increase in harassment by the tax officials. As per an article in the Livemint, anti-profiteering rules have not yielded desired results (of reduced prices) in countries where it was adopted. It was a disaster in Malaysia where it led to tax terrorism.
Keeping aside obvious flaws in the design of GST, it is a major improvement on the present system with a large number of indirect taxes.
Also, multiple GST rates were inevitable. A Low GST rate would have hurt Government revenues and a high GST rate would have caused a huge political backlash due to its inflationary impact. The present GST structure is politically less risky, as efforts have been made to keep the rates closer to the cumulative indirect taxes (excise, VAT etc.) currently paid by the taxpayers.
The Government should be lauded for its efforts to be able to implement GST. It is a commendable exercise in co-operative federalism. Most of the opposition to GST had come from the states due to the fear of loss of autonomy and revenues.
The Central Government successfully got the states on board through effective negotiations. They worked together in the GST council to work out the finer details of GST.
To conclude, efforts should be made towards a simplified GST with a single rate.
Apart from that, concerted efforts should also be made to reform India’s Direct taxes. Most of the reforms in India have been done on the Indirect taxes front which is inherently regressive in nature (The burden of indirect taxes are borne by poor as well) and it is a well-known fact that only 1 % of India’s population pay direct taxes.
Most of the developed countries raise more revenues through direct taxes and we should move towards that as well.
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