GST Explained

GOODS & SERVICES TAX 

History of GST 

Its been a long journey , the concept was first introduced by Atal bihari gov in 2000 , and ideas and discussions kept on going and finally a concrete step was taken in manmohan singh gov in  a formal announcement was made in the 2006 Budget by P Chidambaram, the then finance minister. Since then it has missed several deadlines. The BJP government is now hoping for a nationwide roll-out of GST from April 2016. 

With the Centre and states finally reaching a consensus on the contours of the Goods and Services Tax (GST), India is all set to roll out the largest indirect tax reform since the introduction of the value-added tax in 2005. Finance minister Arun Jaitley is expected to table the Constitution Amendment Bill in the current session of Parliament to meet the deadline of April 1, 2016, for its introduction. 

What is GST? What does it replace?

 It is a value-added tax, which means a levy at each stage of production, sale or consumption will be set off against taxes paid in the previous stage. 

Through a system of tax credits, those who are in the chain in the intermediate stage will get credits or refunds for whatever levies they have paid. The end consumer will have to pay the entire tax. 

Unlike the existing VAT, which is levied only on manufactured goods, GST will also include services and credits will be given.

GST will be levied both on goods (manufacturing) and services. It will convert the country into unified market, replacing most indirect taxes with one tax. 

It would have a dual structure — a Central component levied and collected by the Centre and a state component administered by states.

At the Central level, it will subsume Central excise duty, service tax and additional customs duties while at the state level it will include value-added tax, entertainment tax, luxury tax, lottery taxes and electricity duty.

Central sales tax (CST) will be completely phased out. Entry tax or octroi would be subsumed from the start.

But 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.

As with VAT, the tax will be charged on each stage of value addition. At each stage, a supplier can off-set the levy through a tax credit mechanism. This means, the consumer pays GST added on by only the last dealer in the supply chain.

The rate for GST is as 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 the Central and state components at 12.77 per cent and 13.91 per cent, respectively, taking the effective GST rate to 26.88 per cent. This is much stiffer than the 14-16 per cent in most countries as well as the recommendation of a taskforce of the Thirteenth Finance Commission of 12 per cent (7 per cent for state GST and 5 per cent for central GST).

Why was it held up? 

When the system was first discussed there was great enthusiasm. But, slowly states started raising objections as individual finance ministers would lose control over the taxation system and may be unable to give hand-outs. The other area of concern is potential loss of revenue from cash cows such as petroleum, which makes up for almost half the revenue for some states. In addition, states started raising objections so that they could strike a better bargain with the Centre. 

The GST is a uniform countrywide tax on goods and services which will replace the current plethora of Central and state taxes. It will create a single Indian market which will boost trade and business and increase tax compliance. It is good for manufacturers, traders, governments and consumers. One major area of difference between the Centre and the states relates to the compensation to be paid to the states for their loss of revenue resulting from a shift to the new tax system. 

Another was about the items to be included in the GST regime. While ideally all goods and services should be included, the states wanted petroleum, tobacco and alcohol to be excluded. A GST without these items would not make sense. The compromise seems to be that alcohol may be excluded from the GST and petroleum products may be kept out for some years. It is desirable to define the period at this stage itself. It is not a good idea to create exemptions in any tax system as they will create distortions and make the system less efficient. The states have, however, done well to agree that entry tax may be subsumed in the GST.

The clause for compensation for states may be included in the Constitution amendment bill so that there is a firm guarantee that the Centre will respect its |commitment. The states had become apprehensive and distrustful of the Centre in this respect because the latter has gone back on its promises in the past. A GST system resulting from all these compromises may not be the best but Centre’s thinking may be that it is better than having no GST at all. In the past, near agreements on GST have proved deceptive and the latest accord should not go their way.

Why do states fear they will lose revenue? How much do the states expect to lose?

Presently, states earn nearly 50 per cent of revenues from levies on petroleum products. Concerns have mounted over potential losses due to subsuming of state levies into GST. States have raised concerns of revenue loss due to the phase out of the CST, which they have pegged at
Rs 34,000 crore.

On a theoretical level, RNR for GST would ensure that there are no losses to either the state or the Centre. Indirect tax collections are in fact expected to go up on the back of better tax compliance under the regime.

But as a sweetener, the Centre has agreed to include a provision on compensation for a period of three years on losses arising out of GST to states in the Constitution amendment Bill. Jaitley has also promised Rs 11,000 crore to states as CST compensation in this fiscal. Further, to give fiscal autonomy to states, the Centre will collect taxes from traders having a turnover of over Rs 1.5 crore while the states will tax those having a turnover between Rs 25 lakh and Rs 1.5 crore.

Will states not charge octroi after GST is introduced?     

All entry taxes, including octroi will be subsumed in GST from the start as they have a cascading impact. However, since it is estimated to account for nearly 14 per cent of the total tax collections by states of Rs 3,50,000 crore, the Centre has agreed for a special dispensation allowing states to levy an additional 1 per cent tax in lieu of entry tax.

How does the economy and the corporate sector in particular benefit from GST? 

What does it mean for the consumer?

It may result in a lower burden on consumers as the levy will be at the point of sale and the central and the state taxes will be merged into one levy.

With cascading taxes gone, over a period of time the lower tax burden would translate into lower prices for goods, which is of course, dependent on what the GST rate would be.

What's the gain for the corporate sector? 

The incidence of tax in sectors such as real estate is expected to come down by 25% since companies will be able to claim credits or set offs for tax on goods and services. In addition, the refund mechanism for taxes paid across the country is expected to be more efficient, thanks to the proposed IT backbone. Currently, industry complains that refunds and credits are tough to claim and even more difficult to get. 

What will be the gain for the government and the economy? 

The tax system is expected to be more efficient and revenue collections will be boosted. 

The rationale behind GST is that it simplifies the indirect tax regime with a single tax. A study by the National Council of Applied Economic Research estimated that roll out of the tax would boost the GDP growth by 0.9-1.7 per cent  & indirect taxes collected by the Centre and states in India will be boosted from current 5%of GDP to upto 12 % of GDP. A Crisil report had also said GST was the best way to mobilise revenue and reduce the fiscal deficit. Removal of cascading taxes makes the manufacturing sector more competitive and cut down on the tax compliance burden.