One of the major Indirect Tax reforms that India is going to face is in form of Goods & Services Tax (GST), which will replace the current Multiple Indirect Tax regime. GST is being debated over in India for about more than a decade and it has gone through various meetings of Finance Ministers & related officials, meetings of Empowered Committee of State Finance Ministers but has been pending for long mainly due to rebel by state governments saying that they will lose a major source of their revenue after its implementation.
But now, with the Centre and states finally reaching a consensus on the contours of the GST, as the Centre has agreed to compensate states for period of a 3-5 years (Not Confirm yet) it is in limelight again, and everybody wants to talk about its Pros & Cons, Rate of tax, Procedures etc.
So, the first question that arises in one’s mind is What is GST?
GST refers to Goods & Services Tax, which is a comprehensive tax levy on manufacture, sale and consumption of goods & services on national level.
GST is a new tax regime, after whose implementation, “Single Taxation” system would come into being in India. Which simply means it would replace the current multiple Indirect Tax structure. At the Central level, it will subsume Central Excise duty, Service tax and additional customs duties while at the state level it will replace VAT, Entry Tax, Local body Tax, Octroi duty, Luxury Tax, Lottery Tax and Electricity Duty. Also, the Central Sales Tax (CST) would be completely phased Out. State taxes on petroleum products will continue for a few years after GST is introduced, as per the deal brokered between the Centre and states. State taxes on alcohol and tobacco, too, would remain.
If seen at Global level, around 125 countries had already implemented GST and most of them have single tax system unlike India. But as said, Better late than never; now India is also going to implement it soon.
Need of GST
Change in existing tax structure is indispensable. There is need to get through the older regime and adopt a simpler, better, and more effective tax structure in order to pave way for more transparent and efficient tax structure. And, it is not only desirable but also imperative in emerging economic environment.
The Present tax regime is so complex and diverse in nature that taxpayers need more administration, consultation and in turn leading to increased cost.
GST, being a destination based consumption tax based on VAT Principle, would greatly help in development of common national market.
GST will have 2 components, namely-
1. Central Goods & Services Tax (CGST)
2. State Goods & Services Tax (SGST)
Taxes & Duties to be merged in CGST are:
1. Service Tax
2. Custom Duty
3. Excise Duty
Taxes & Duties to be merged in SGST are:
2. Entertainment Tax
3. Lottery Tax
4. Luxury Tax
5. Sales Tax
6. Other State Tax & Duties
To monitor the Inter-state trade of goods and services, a new mechanism has been developed under GST, called Inter-state Goods & Services Tax (IGST). And, let me clear one thing first, that Inter-state Goods & Services Tax (IGST) is Not a third tax in addition to CGST & SGST, its only a mechanism to monitor the inter-state trade and to ensure that SGST goes to ultimate Consumer State. As GST is destination-based tax hence, besides Centre the consumer state will get the whole amount of SGST and the revenue out of a interstate transaction to the selling state will be Zero.
Also, as GST being based on VAT Principle, it will allow the entities to get full credit of input taxes paid.
Benefits of GST
A. Simpler Tax Structure: As multiple taxes on a product or service are eliminated and a single tax comes into place, the tax structure is expected to be much simpler and easier to understand. Paperwork will become simpler and there will be a reduction in accounting complexities for businesses. A simple taxation regime can make the manufacturing sector more competitive and save both money and time.
B. Increased Revenue for Govt. Exchequer: A simpler tax structure can bring about greater compliance, thus increasing the number of tax payers and in turn tax revenues for the Government.
C. Competitive Pricing: As it will replace the multiple form of taxes, which effectively mean that in most cases the tax to be paid by ultimate consumer will come down. Thus, lowering the prices leading to increase in consumption; which will again be beneficial for companies.
D. One India One Tax Rate One Market: Currently, rates for various taxes differ from state to state making tax calculation and administration complex and also, goods are being sold within tax or by illegal ways to other states to avoid CST and entry tax which is not good from view point of national growth. After the implementation of GST, there will one tax rate all over the India and all other Indirect taxes would be replaced making a common national market.
E. Boosting the Exports: When the cost of production falls in the domestic market, Indian goods and services will be more price-competitive in foreign markets. This can bode well for exporters, who compete with manufacturers abroad facing a lower cost structure.
F. Better Economic Health: A study by the National Council of Applied Economic Research estimated that roll out of the tax would boost the GDP growth by anywhere between 0.9-1.7 percent. A CRISIL report had also said GST was the best way to mobilise revenue and reduce the fiscal deficit. As there is not much scope to reduce Government expenditure, increasing tax revenues is the best alternative to improve the fiscal health.
What’s there in for Consumers?
With cascading taxes gone, over a period of time, the lower tax burden would translate into lower prices for goods.
And now, the Most Important question, i.e., What would be the Rate of Tax?
The rate for GST is yet Undecided, but it would be in a range that would make exports competitive. A sub-committee of the Empowered Committee of state finance ministers had proposed Revenue-Neutral Rates (RNR). For those who don’t know, Revenue Neutral Rates (RNR) refer to rate of tax where Govt. can get at least same tax which both Centre & State are getting under present system, although it is very difficult as there will be Neither Multiplicity of taxes nor cascading effect in GST, which is present in current scenario.
RNR proposed by Empowered Committee for the Central and state components are at 12.77 % and 13.91 %, respectively, taking the effective GST rate to 26.88 %. However, discussions are still going on for the rate of Tax and it will be clear only after the official announcement by Government.
“GST” Constitution Amendment Bill (No. 192 of 2014) has been presented in Parliament in December, 2014 to make necessary amendments in Constitution to facilitate the implementation of GST. Also, Finance Minister Arun Jaitley is expected to present the GST Bill in parliament in Budget session of 2015.
GST is expected to come into force from April, 2016.
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