Goods and Services Tax (GST) Bill

Goods and Service Tax has been in talks for many years and because of strong opposition from states it has always faced hurdles. The GST Bill has been pending since 2004. Now as economy is on the revival and with a strong administrative support we are seeing a great push on GST bill. I wish to answer all major questions on GST: what it is, why is it considered a big-ticket reform, what are the provisions of the bill introduced by the government recently in the Parliament, and what are the pros and cons of the bill as also the opposition from states and their reasons, and whether any changes have been made from the bill sought to be passed by the previous government. Let me give an overview.

What is GST bill?

The Goods and Services Tax(GST) is a tax that will replace all the indirect taxes such as Sales tax, Excise duty, Service tax, and Value-added tax (VAT) levied on goods and services by the government, both central and states, once it is implemented. The basic idea of this bill is to create a single, cooperative and un-divided Indian market to make the economy stronger and powerful. It is based on a tax-on-value-add concept which avoids duplication of taxes.

[It means any tax paid (with a few exceptions) will not form a component of the cost of goods sold.]

It was first recommended by Kelkar Task Force on implementation of Fiscal Reforms and Budget Management Act 2004. As per the proposed bill, we will be having only two taxes on all goods and Services: State Level GST (SGST) and Central Level GST (CGST). In case of Central GST, following Taxes will be subsumed with CGST which are at presently levied separately on goods and services by Central government:

• Central Excise Duty
• Additional Excise Duty
• The Excise Duty levied under Medicinal and toiletries preparation Act
• Service Tax
• Additional Custom Duty (CVD)
• Special Additional Duty
• Surcharge
• Education Cess and Secondary and Higher Secondary education Cess.

In case of State GST, following taxes will be subsumed with SGST; which are levied on goods and services by State Governments:

1. VAT/ Sales Tax
2. Entertainment Tax (unless it is levied by local bodies)
3. Luxury Tax
4. Tax on lottery
5. State Cess and Surcharge to the extend related to supply of goods and services.

The Bill as brought up by the newly elected Central Government is basically as follows:

• Center to compensate for the states' loss - 100% in first 3 years, 75% for the fourth year and 50% for the fifth year.
• Formation of GST council for deciding the GST Rates.
• States with manufacturing activities to enjoy protection for a little while.
• Mostly uniform rate, but little flexibility permissible.

The GST is worldwide accepted system. France was the first country to implement GST in 1954. Almost 140 countries have already implemented the GST including Australia, Canada, Germany, Japan and Pakistan. Canada has dual system of tax where tax is levied by both union and state. World Bank has been pushing India to introduce GST for a long time. The assumed rate of GST in India is about 16%-17%. This is much lesser when compared with the current rate of taxation. According to the current tax pattern, the tax rates about 35%-40%. It was declared in the last union budget that GST shall come into force on first day of April 2016.

Registered dealers will now get a 13 or 15 digit registration number something like this:IT-PAN GSTReg.No.

Why is it important?

It is routed as the biggest economic reform since Independence and rightly so, because it removes one of the most deadly ill-effects of indirect taxation - Cascading effect - to the point of no existence. It is one of the triggers that could help boost the country's economic fortune.

[No Cascading effect i.e. No tax on tax; No tax on tax i.e. Less Tax; Less Tax i.e Lower Prices.]

Economists are of the view that it will unite the country economically as it will remove various forms of taxes that are currently levied at different points. It will help in widening the coverage of tax base, improve tax compliance, remove existing unhealthy competition among states and re-distribute the burden of taxation equitably among manufacturing and services. Overall, it will result in increasing revenue at the Centre.

It is expected to nudge a rise in GDP. Economists peg the number at somewhere between 1~1.5% of the GDP. More optimistic estimates go all the way up to 2%. Isn't that wow enough? Numerically stating- 1.5% of GDP translates to 327,650 Crores of rupees. Now, that's wow enough. Owing to the delay in implementation we've already lost 327,650 Crores cumulatively. [Higher GDP is good for everybody.]

Why has it not been implemented?

There is no GST Bill as yet. What has been passed in the Lok Sabha is a bill to amend the Constitution to enable the introduction of GST.  For the tax to be implemented the Constitution has to be amended and a consensus must be reached within states. While earlier the State Governments were not keen on the GST as they were of the view that it could lead to revenue losses for them, recent developments indicate that most States have agreed to a 'Compensation Formula' that will compensate them for their losses.

The GST bills that will eventually be passed by Parliament and all state legislatures to operationalize GST will levy a single tax called GST (internally split into central GST and state GST) on the supply of goods and services. The GST can be implemented only through a  Constitutional Amendment Bill, which means it needs to be approved by  not less than two-thirds of the members present and voting in each House  of Parliament. The GST must also be ratified by the legislatures of at least one-half of the states.

Moreover, politicians object it because that's what politicians do. GST is not going to cause inflation. In fact, it will curb the cascading effect of the un-adjustable CST on inputs cutting costs to the end consumer.

Advantages of the bill

1. GST is a transparent tax and multiple taxes that currently exist will no longer remain in the picture.
2. GST will not be a cost to registered retailers therefore there will be no hidden taxes and the cost of doing business will be lower.
3. Benefit people as prices will come down which in turn will help companies as consumption will increase.
4. There is no doubt that in production and distribution of goods, services are increasingly used or consumed and vice versa. Separate taxes for goods and services, which is the present taxation system, requires division of transaction values into value of goods and services for taxation, leading to greater complications, administration, including compliances costs. In the GST system, when all the taxes are integrated, it would make possible the taxation burden to be split equitably between manufacturing and services.
5. GST will be levied only at the final destination of consumption based on VAT principle and not at various points (from manufacturing to retail outlets). This will help in removing economic distortions and bring about development of a common national market.
6. It will also help to build a transparent and corruption free tax administration. Presently, a tax is levied on when a finished product moves out from a factory, which is paid by the manufacturer, and it is again levied at the retail outlet when sold.
7. The GST is not meant to favour one class or the other. It is supposed to be a revenue-neutral form of taxation which will make collection and administration easier, and do away with inter-state discrepancies. By doing that, it will demolish a few trade barriers, making markets larger and more efficient. This, in turn, benefits everyone.
8. Properly done, GST can reduce logistics costs by removing the need for businesses to set up multiple warehouses for tax purposes.
9. Increase GDP, tax-GDP ratio and revenue surplus.
10. The threshold for registering as a dealer/manufacturer/service provider is ₹10 L meaning anybody having a turnover of Rs. 10 Lakh or more is mandatorily required to register under the Act as per prescribed rules. This plugs the gaping hole of the unorganized sector being left out. The immediate benefit of the above mentioned rule would be that big companies will now be able to claim set-off on the taxes paid to the small supplier.
11. It will boost the tax net of Central Government and the money earned will be spent in infrastructure and some will be spend on inclusive growth and main advantage tax evasion will erode in coming years if this is implemented effectively.
12. It is seen as an economic unifier that brings all the states and the centre together.

Disadvantages of bill

1. It requires strong IT (Information Technology) infrastructure at grass-root levels. India essentially lacks this. This factor is going to be the bottleneck, if not addressed well in advance.
2. Taxes on items containing alcohol and petroleum products are kept out of GST. They will continue to be taxed as per existing practices. Heavy loss to the exchequer.
3. Tax-sharing between states and the Centre was another bottleneck. Nice to see that there is a consensus now.
4. Critics have argued that the GST is a regressive tax, which has a more pronounced effect on lower income earners, meaning that the tax consumes a higher proportion of their income, compared to those earning large incomes. An ‘Aam-aadmi’ (common man) filing the tax-returns will have to suffer.
5. The introduction of the GST would negatively impact the real estate market as it would add up to 8 per cent to the cost of new homes and reduce demand by about 12 per cent.
6. India has opted for a dual-GST model. Critics claim that CGST, SGST and IGST are nothing but new names for Central Excise/Service Tax, VAT and CST and hence GST brings nothing new to the table.

Why are some states against GST?

Although GST is the simplest form of tax system for businesses, some states fear that they will lose revenue owing to lower tax rates. But, centre has given assurance to cover the loss in case the expected revenue is not collected.

In a deviation from its earlier stand, the government has agreed for a phased roll-out of GST. States will also have the flexibility to opt out of GST.

Conclusion

A Well designed GST will lower the tax rate by broadening the tax base and minimizing exemptions. It will foster a common market across the country and reduce compliance costs. It will facilitate investment decisions being made on purely economic concerns, independent of tax considerations. It will promote exports. GST will also promote employment. Most importantly, this results in better administration of tax.

In my opinion, there are more positives to the GST Bill than negatives. The negatives are mostly minor, arising out of the structural problem in the country. This should have been done long back, which otherwise created more confusion, helped merchants evade taxes and accumulate black money. This is surely going to be an important milestone in the future of India's business landscape. It will go a long way and change the way we view compliance. The introduction of this Act has more benefits than what meets the eye. It's something we all should be proud of irrespective of our political ideologies, affiliations or propensity.

Happy to see that government with such a strong mandate is pushing forward the agenda.

Jai Hind :)