- GST (one hundred and twenty-second constitutional amendment) bill has been passed in the lok sabha and Rajya sabha.
- It heralds the first significant step towards the indirect tax reform in India.
- It is a tax levied when a consumer buys a good or service. It is meant to be a single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc.
- This is how it is done in most developed countries.
- We don’t go into the specific commodities. Except liquor and petroleum, all the commodities fall under the ambit of GST.
- However, the bulk of the revenue comes from these two sources.
- Certain highlights of GST bill:
- The bill seeks to shift the restriction on states for taxing the sale or purchase of goods to the supply of goods or services
- The bill seeks to establish GST council( constituted by the President of India) tasked with optimizing tax collection for goods and services by state and centre
- GST council would consist of :(i) the Union Finance Minister (as Chairman), (ii) the Union Minister of State in charge of Revenue or Finance, and (iii) the Minister in charge of Finance or Taxation or any other, nominated by each state government.
- The GST council will be the body which will decide the taxes to be levied by the centre, state and local bodies will go into the GST
- The parliament can decide on compensating states for up to five year period if states incur losses by implementation of GST.
What are probable political aspects of the GST?
- After the Lok sabha passes it, more than half the states have to ratify it with simple majority.
- It seems like, the states would pass it as there largely prevails a consensus on it.
- Constitution of GST council will begin only after more than half the states have agreed to pass it. Then, the bill would go back to the President. After the President’s assent, the council will be formed.
- The proposal to have 1pc levy on the manufacturing states has been decided to be scrapped and so has been the demand for constitutional cap on the GST cap.
Advantages of GST:
- For business and industry
- Ease of compliance: A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
- Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
- Removal of cascading: A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
- Improved competitiveness:Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
- Gain to manufacturers and exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.
- For Central and State Governments
- Simple and easy to administer: Multiple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the Centre and State levied so far.
- Better controls on leakage: GST will result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
- Higher revenue efficiency: GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore, lead to higher revenue efficiency.
- For the consumer
- Single and transparent tax proportionate to the value of goods and services: Due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country today are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
- Relief in overall tax burden:Because of efficiency gains and prevention of leakages, the overall tax burden on most commodities will come down, which will benefit consumers.
What are the challenges?
- The bill passed is only an enabling legislation. It has made only unified the country into a single market.
- Real challenge lies in fixing the rate. Further, compensating the states for the losses remains a sticky point.
- The procedure to decide the rate is not clear, as each state might come up with a different revenue base.
- The central government may not have as much money to compensate for the notional losses the states may suffer from.
- A reasonably systematic process for compensation- like parameters, formula etc, and not crude negotiations still needs to be evolved.
- Another area is integrating diverse areas of tax administration. The challenges do not lie only from the tax administration but also from the perspective of the assesee’.
- Many of the small traders do not have a structured and consistent accounting system. The larger traders have a tax structure built on the old accounting system.
- For instance, under gst, any service with sales, has to be taxed. Earlier, service was taxed bait by bait.
- There was also a demand to make GST a financial bill and not a money bill. The fundamental reason for that demand is because, if it is a money bill, Rajya sabha cannot vote on it but only recommend amendments. If a bill contains only the tax rate, it has to be a money bill. If the bill has any other provisions it cannot be a money bill. Therefore, this itself can become a bone of contention.
- Small traders will be brought into the tax net .This would take away the discretion of the small traders to issue a receipt or not to issue one .
- Similarly, even consumers might loose the discretion of paying without a receipt. Hence, the challenge is to change this mindset/attitude of the consumers as well as sellers.
- Sales tax consultants, chartered accountants, tax officials might be affected. So managing these professionals is a matter of political skill.
- States might tend to exaggerate the losses.
- Fear of job losses in unorganized sector may be unfounded as there is no empirical evidence or a study which suggests so.
- Further, the fear that this might trigger an inflation may also be unfounded. If the prices of goods come down then there is no need to worry.
CONCLUSION AND WAY FORWARD:
- We may have to evolve a formula from an independent commission like that of a finance commission. However, the novelty of the GST may pose a challenge. Further, a broad political consensus needs to be developed between different parties and states, especially those states like UP, Gujarat, Punjab which have elections coming up in the ensuing year. Furthermore, the structure and institutions to evolve a new regime requires a smooth transition. Therefore, the GST council, which is mandated to help transit this change should ensure an inclusive and multi stakeholder approach with focus on co-operative federalism.