The implementation of Goods and Services Tax from is expected to give a strong boost to a host of economic, development goals.
In
about a week, the country is set to embrace a new indirect tax system, the
goods and services tax (GST) that will dismantle state barriers to create a
single national market, creating history, and giving a strong boost to a host
of economic and development goals.
India’s
transition to a countrywide, value-added tax system across goods and services
is remarkable for a nation where state governments and local self- governments
exercise considerable sovereignty in taxation. Rolling out GST on 1 July is the
result of more than a decade of discussions, tussle among states, and between
states and the Union government, instances of give and take, lobbying and
compromises. The highlight of the reform is the creation of a federal tax
institution, the GST Council, which has state ministers as members and the
Union finance minister as chairman, which gives every state a say in the
country’s indirect tax policy. A country like the US with similar strong
taxation rights to individual states has so far not managed to have a GST
despite all its benefits.
A seamless
market of over a billion people and eight million registered indirect tax
assessees paying a single tax for goods and services is likely to go a long way
in achieving what the government has been trying to do through various
measures—promoting the manufacturing sector, boosting exports, creating more
jobs, improving the investment climate, cutting down tax evasion and lowering
the compliance cost to businesses.
According to
Ansh Bhargava, a senior consultant at Taxmann.com, a company that assists
taxpayers, the single market concept is akin to signing a free trade agreement
between different states of India. “The GST regime seeks to break the barriers
that currently exist between states and make movement of goods between
different states easier,” said Bhargava. Elimination of the tax-on-tax effect
by providing input tax credit will lead to lower costs and make Indian products
competitive in the global market, he said.
Consumers on
the other hand are expected to benefit from transparency as well as reduction
in prices of goods and services. Besides softening inflation, lower indirect
taxes will also address the regressive nature of this levy which affects the
rich and the poor alike, unlike taxes on income which is based on an assessee’s
ability to pay.
For
businesses, elimination of multiple levies and creation of a single market with
fewer tax rates and fewer tax exemptions will improve the ease of doing
business and reduce avoidable litigation. A large part of the tax litigation in
India is around tax exemptions.
However, GST
that is ready for implementation is far from ideal. The guiding principle for
the government while trying to secure consensus amid competing interests of
various stakeholders was that it is better to have a good GST instead of
waiting endlessly for the best one. From the concept of an ideal GST of low tax
rate with few exemptions initially considered, the final form has four
rates—5%, 12%, 18% and 28% for goods and services—with some items in the
highest slab attracting an additional cess. Most of the items fall in the 12%
and 18% slabs depending on the current tax burden on them.
Five
hydrocarbons—crude oil, petrol, diesel, natural gas and jet fuel—are
temporarily kept out of GST, while liquor is constitutionally kept out of the
new tax regime. That was a compromise the Union government had to accept as states
wanted the items on which tax collection is the easiest to be out of the new
tax regime which gives little liberty to individual states to revise rates on
their own.
The powerful
federal indirect tax body, the GST Council, chaired by Union finance minister
Arun Jaitley will consider inclusion of the hydrocarbons into the new tax
regime once state revenues stabilize after GST implementation. Nearly 40% of
state revenues are estimated to be from petroleum products.
States with
a manufacturing base such as Maharashtra and Gujarat had their own concerns.
These states currently get proceeds of a 2% central sales tax (CST) levied and
collected by the centre on interstate trade in goods. Their argument was that
significant investment has been made to create infrastructure for
manufacturers, who export products to other parts of the country. GST being a
destination-based tax on consumption, proceeds of tax on interstate supply of
goods and services will flow to the state that is home to the consumer. These
states argued for retaining CST in some form even in the GST regime. Madhya
Pradesh and Maharashtra argued that local bodies, which raise resources through
entry taxes, will be deprived of revenue.
To gets
states on board, Union finance minister Jaitley agreed to fully compensate
states for any revenue loss from GST implementation for five years. The
compensation, which is specified in the Goods and Services Tax (Compensation to
States) Act, 2017, will be computed taking the annual growth in state indirect
tax revenue to be 14%.
V.S.
Krishnan, adviser (tax policy group) at EY India and a former member of Central
Board of Excise and Customs, said that although consuming states will benefit
in the GST regime by way of tax revenue from interstate supply of goods and
services, the exporting states will not stand to lose either. Exporting states
will benefit from getting to tax services under the new indirect tax system, he
said. As of now, the centre taxes production of goods and supply of services,
while states get to tax sale of goods but not supply of services. In GST, this
barrier is removed and both the Union and state governments get to tax the
entire value chain of goods and services, increasing compliance, explained
Krishnan.
There is
still some work to be completed. One among them is to clear rules regarding
e-way bills, an electronic permit for movement of goods. According to Prashant
Deshpande, partner at Deloitte Haskins & Sells Llp, the e-way bill rules
need to be very practical and minimize compliance burden. Also, states need to
ensure that border check posts are eliminated.
GST in the
current form is a diluted one in comparison to the original concept, but
experts welcome its roll-out. “Introduction of GST is a very good start.
Reforms, however, do not end here. Certain features can be further
streamlined,” said Deshpande.