Insights into Issues: Goods and Services Tax
Goods and Services Tax
GST encapsulates the dictum – “One nation, one indirect tax”. It will make India one unified common market.
GST was first mooted in the year 2003 by Kelkar Task Force on indirect taxes, who had suggested subsuming various central and state indirect taxes into one indirect tax. To implement this vision, an Empowered Committee of State Finance Ministers was created and tasked with the responsibilty of ironing out the differences and taking this monumental reform forward.
Features of GST
- Single tax on supply of goods and services, right from the manufacturer to the consumer
- It is a destination based tax unlike the present taxation scheme which is origin based
- It is a value based tax as credits of input taxes paid at each stage will be available in the subsequent stages
- The final consumer will bear only the GST charged by the last dealer in the supply chain
- At the central level, following taxes are being subsumed under GST
- Central Excise Duty
- Additional Excise Duty
- Service Tax
- Countervailing Duty
- Special Additional Duty of Customs
- At the state level, following taxes are being subsumed under GST
- State VAT/Sales Tax
- Entertainment Tax
- Central Sales Tax
- Octroi and Entry Tax
- Purchase Tax
- Luxury Tax
- Taxes on lottery, betting and gambling
- Administration of GST
- Since there is a federal structure in India, there are two components of GST – Central GST and State GST
- Both CGST and SGST will be simultaneously levied across the value chain, both on goods and services
- The tax will not be levied on exempted goods (alcohol, petroleum and its products) and those transactions which are below the prescribed threshold limits
- Input tax credit of CGST will be available for discharging liablity on CGST itself. Similarly for SGST. Thus no cross utilization of credit would be permitted except in case of IGST
- IGST would come into picture when there is an inter state transfer of goods and services (u/a 269A(1)). IGST rate would be roughly equal to the sum of CGST and SGST. Following diagram explains the working of IGST
- For implementation of GST in the country, Central and State governments have registered Goods and Services Tax Network (GSTN) which is a not for profit, non government company to provide shared IT infrastructure to central and state government, tax payers and other stakeholders. The tax payments and credit will be done through an online network.
- Taxation on Imports – CVD and SAD on imports to be subsumed under GST. The states where goods are imported will gain their share from the IGST paid on imported goods
Features of 122nd Constitutional Amendment Bill
- Conferred simultaneous power upon Parliament and State Legislature to make laws governing GST
- Subsuming Central and State taxes under GST as described above
- Levy of IGST on inter state transactions of goods and services
- GST on all goods and services except alcoholic liquor. Petroleum and petroleum products shall be subjected to the levy of GST on a later date as decided by the GST Council.
- GST Council, a constitutional body, created with 2/3rd representation from states and 1/3rd from centre to examine issues related to GST and Make recommendation on rates, taxes, cesses, surcharges, exemption list, dispute resolution etc. All decisions in GST Council to be taken by 3/4th It will function under the chairmnanship of Union Finance Minister
- Compensation to states for the entire amount of revenue losses for 5 years
- For Business and Industry
- Easy compliance as one tax to be paid
- Creation of one market which will facilitate Ease of Doing Business iin India
- Removal of cascading taxes which will lower price, thereby boosting demand, a shot in the arm for the beleagured corporate sector
- Improve competitiveness as the transaction cost for doing business would reduce. Also, now the most competitive good will sell across the country irrespective of the location where it is manufactured.
- All the above advantages are expected to provide a boost to the ambitious Make in India programme of the government
- For Consumers
- No cascading burden of taxes which would moderate inflation
- More transparency in taxation regime and easier to understand for the customers
- For government
- The new taxation regime will be easier to adminsiter for the government
- The input tax credit system creates a mechanism for self policing
- Dual monitoring by centre and states will lead to tax competition and cooperation between centre and states. On the flip side, corporates fear two sources of interface with tax department
- Better control on leakages due to lesser evasion
- Higher revenue efficiency
- More money to spend on welfare expenditure
- Since, GST is a destination based tax, poorer states which have low level of manufacturing and services industry are expected to benefit
- The new taxation regime will be easier to adminsiter for the government
GST and its impact on Fiscal Federalism
The Constitutional provisions with respect to Fiscal Federalism has two major imbalances
- Vertical Imbalance –The mismatch between expenditure and revenue requirements. The centre possessed more revenue but less expenditure whereas the vice versa is true for states
- Horizontal Imbalance – There is disparity in revenue accrued by the states
So far, states also had autonomy in deciding tax rates for those items falling in the state list, as well as deciding VAT rates.
With the advent of GST, following issue is likely to crop up in Fiscal Federalism
- States will lose their autonomy in deciding taxation rates based on their expenditure plan. In GST regime, rates will be decided by GST Council. However, as per the GST Bill, the Council will fix the “floor rate along with bands”. This will leave some autonomy for the states to tinker with the tax rates to suit themselves.
- There is also the issue of states having the ability to impose sin tax on goods such as fast food (done in Kerala recently)
However, it is to be realized that GST is the need of the hour. Moreover the Indian GST regime offers advantages unlike the GST regime in other large federal polities, where the system is either
- Too centralized, which deprives sub federal levels of fiscal autonomy, such as in Australia, Germany, Austria
- Or, independently administered, which creates too many differences in tax bases and rates that make compliance difficult and also makes inter state transaction difficult to tax, such as in South Africa
The Indian sytem however establishes a modicum of coordination like in Canada. Common base and common rate will facilitate tax administration and ensure compliance. Reasonable exceptions, as decided by GST Council, will provide a degree of fiscal autonomy to the states.
The Empowered Group of State Finance Ministers during the course of their discussion have kept the interest of states on board and GST Council has emerged as a key institution of Centre State Relations. A reform of the nature and magnitude of GST will require a leap of faith to be taken, as issues are certain to crop up, which has to be resolved effectively through the aforementioned mechanism.
Other Issues with GST
- Deciding a Revenue Neutral Rate – A revenue neutral rate is one which does not lead to a fall in tax revenues. It is also to be ensured that the rates are not fixed too high as to lead to inflation. In the report by Arvind Subhramaniam, he has suggested creating 3 bands with a RNR OF 16%.
- Deciding the exemption limit below which traders will not come under GST regime
- Readying the IT infrastructure for administration of GST
- Devising an effective mechanism to deal with dual policing by centre and state to administer and implement GST