Goods and Service Tax
Biggest tax reform in Bharat since independence
Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and services – it is one of the biggest taxation reforms in Bharat and all set to integrate State economies to boost overall growth. It will simplify and harmonize the indirect tax regime in the country. It will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one state 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. It is thus expected that introduction of GST will foster a common and seamless market in Bharat and contribute significantly to the growth of the economy.
The proposed GST has been designed keeping in mind the federal structure enshrined in the Constitution and will have the following important features:
- A new Article 246A is proposed which will confer simultaneous power to Union and State legislatures to legislate on GST.
- Central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), etc. will be subsumed in GST.
- At the State level, taxes like VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax, etc. would be subsumed in GST.
- All goods and services, except alcoholic liquor for human consumption and petroleum will be brought under the purview of GST. The present taxes levied by the States and the Centre on petroleum and petroleum products, i.e., Sales Tax/VAT, CST and Excise duty only, will continue to be levied.
- Both Centre and States will simultaneously levy GST across the value chain. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
- The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. There will be seamless flow of input tax credit from one State to another. Proceeds of IGST will be apportioned among the States.
- GST is a destination-based tax. All SGST on the final product will ordinarily accrue to the consuming State.
- GST rates will be uniform across the country. However, to give some fiscal autonomy to the States and Centre, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.
- It is proposed to levy a non-vatable additional tax of not more than 1% on supply of goods in the course of inter-State trade or commerce. This tax will be for a period not exceeding 2 years, or further such period as recommended by the GST Council. This additional tax on supply of goods shall be assigned to the States from where such supplies originate.
- Creation of a Goods & Services Tax Council – It will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister and will have Ministers in charge of Finance/Taxation or a Minister nominated by each of the States & UTs with Legislatures, as members.
The Council will make recommendations to the Union and the States on important issues like tax rates, exemptions, threshold limits, dispute resolution modalities etc.
- It is proposed to do away with the concept of ‘declared goods of special importance’ under the Constitution.
- Centre will compensate States for loss of revenue arising on account of implementation of the GST for a period up to five years. A provision in this regard has been made in the Amendment Bill (The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year).
- The proposed amendments in the Constitution will confer powers both to the Parliament and State legislatures to make laws for levying GST on the supply of goods and services in the same transaction.
- Help in increasing GDP – According to estimates by the National Council of Applied Economic Research, the implementation of GST can enhance India’s GDP by 0.9-1.7% as the current system of multiple taxes was leading to distortion in allocation of resources as well as production inefficiencies.
- GST will remove the cascading effect since currently both state VAT and CENVAT are levied on goods at point of sale and production stages, respectively.
- Increased tax compliance
- Major step towards uniform taxation regime as followed in many developed countries like Canada, German
- States fear loss of revenue: As GST is a destination based tax, producing states are demanding better compensation.
- An additional, non-creditable tax of 1% on the inter-state movement of goods will lead to a net 3%-7% additional tax on manufacturing activity. Imports would get a fillip as they would not be subjected to the additional tax, dealing a blow to the government’s ‘Make in India’ program.
- GST excludes potable alcohol, tobacco and petroleum products. Taken together, they account for a large chunk of the indirect tax base in the country. Unfortunately, this exclusion is largely triggered by some of the states’ myopic desire to preserve their revenue streams.
- Exclusion of real estate from the GST would cause more problems. It would mean that credit would not be available for the inputs used in construction of factories, offices and civil structures.
- Concern regarding rates of GST- It will be decided by GST council. It is said to have a revenue neutral rate such that no loss in pre and post GST revenues. It is believed that GST rate will be somewhere around 22% -26%.
On the whole, GST is an important reform for Bharat and should be passed by Rajya Sabha at the earliest. A lot will also depend on the IT infrastructure & monitoring mechanisms post implementation.