Rasananda Panda & Prashanta Ch. Panda in Ahmadabad, September 4, 2016 : One Nation, One Tax is latest buzzword. Goods and Service Tax [GST] is aimed to become one such in India with Parliament and more than half of the state Assemblies passed the 122nd Constitution Amendment Bill brining a path breaking structural changes in Indian Tax System.

GST is the most revolutionary tax reform in the post independent India which will pave the way in streamlining the variety of taxes and loss of revenue due to subsuming of taxes like value-added tax (VAT), central sales tax (CST), service tax, customs duty, excise duty, entry tax, etc. It is a comprehensive indirect tax on manufacturing, sale and consumption of goods and services throughout India collected at each stage of sale or purchase of goods or services based on the input tax credit method.

The GST will be one indirect tax for the whole nation making India a consolidated huge common market. Direct beneficiary of GST will be the final consumer who will bear only the charges at the end of the supply chain, with set-off benefits at all the previous stages. GST is seen as a major change and will bring positive cash flow in the Indian Market.

Evolution of GST in India

The evolution of GST owes existence to the introduction of indirect taxes in India over the years. For the first time LK Jha committee in 1976 recommended VAT as an indirect tax. Later in 1991 Chelliah Committee suggested VAT/GST which was accepted by then Government. In 2000, Vajpayee led government set up an empowered committee to make GST adaptive. This committee was also responsible for making backend preparations to launch GST. Further, in 2002-2004 Kelkar Task Force committee suggested a comprehensive GST.

The committee in its report on “Implementation of the Fiscal Responsibility and Budget Management Act, 2003” recommended the destination based VAT on goods and services known as GST to eliminate the distortions and taxing consumption. Later in 2006 for the first time the then finance minister of UPA government, Mr. P. Chidambaram proposed the introduction of GST by 1st April 2010. The roadmap of GST since then can be presented as below.

Courtesy – EY Building a better working world

GST at World Forum

As per World Bank report 2015, over 160 countries have implemented value added tax (VAT), GST being part of it. Larger federals that have adapted GST are European Union, Canada, Brazil, Indonesia, China, and Australia. These countries also face serious challenges in its governing. Countries like Brazil, Russia and Argentina has independent VAT at centre and states. Thus difference in base and rates makes the administration and compliance difficult to manage inter-state transactions. Whereas in countries like Australia, Switzerland, Germany etc. VAT is levied and administered at centre, leaving no fiscal powers to the states. GST is levied between 5-20% throughout the world. The following table is list of the rates of GST in countries.

TABLE – 1: Rates of GST charged around Globe.

Courtsey- EY

(* Rate shown here is most common standard rate; for regional variations.  ** Rates for small businesses and special schemes)

Structure of Indirect Taxes in India

The Indian Federal system follows the dual system of taxation of goods and services unlike dual GST. There are various taxes levied on different goods and services and services. Indian tax system has always been complex. The custom duties and excise duties are administered centrally. Sales tax is levied by the state governments. This characteristic of Indian tax system also contributes to the challenges faced in economic growth of the country. There are seven major types of taxes levied on recognized businesses and consumers at different stages. These taxes are not integrated with states or vice versa. These are easily evaded and lead to lose of revenue for the government.

The recent report on revenue neutral rate finds that the current tax structure being highly complex bears the loss of 2.7 per cent of GDP for the centre and state together. Further, due to complexity and adversely designed tax structure of India, in relation to goods, centre loses 1.8 lakh crore which is 1.5 per cent of GDP as exemption. For services centre has one statutory rate in practice, which amounts to fix a different rate than standard rate due to abatement offered by the government in the sector.

It is also complex to differentiate between goods and services in some cases, thus threshold limit of Rs. 10 lakhs is offered. It is difficult to implement standard rate at the Centre and the State, as the State has much larger portion of the base as compared to that of the Centre. The State taxes more than 65 per cent of goods or services at lower rate category, from which intermediary goods reserves the maximum portion. Thus, it becomes necessary to put higher standard rate as so much of the base is put at lower rate. The Centre fails largely in providing provision for input tax crediting for goods, and incomplete cross-crediting between goods and services.

Value Added Tax: Indian tax system as stated is characterised by multiplicity of levies and complexity of structure on the same base. Further, the same good is levied twice at centre and state, leading to conflicts on the authority affecting it’s longitudinally. Value added Tax VAT was introduced to overcome the double coincidences of tax. The tax is charged on the value added on the goods and services at each stage. However, the approach is not as successful as it was thought to be. In relation to goods, States have structure with multiplicity of rates, for instance inter-state trades are charged octroi and entry tax in-spite of inclusion of VAT. State losses 1.5 lakh crores under the extensive exemptions of 90 items like agriculture equipment, aquatic feed, cereals and pulses etc. The Centre and State differ with respect to base rates as States charges lower taxes to a much larger portion – like intermediate goods at States are typically placed in lower rate category.

The GST, therefore, is a unique opportunity to simplify and rationalize the Indian tax structure. Further, GST will also eliminate serious anomalies and will make tax structure consistent with policy objectives.

Benefits of GST

The GST is much awaited reform needed in Indian tax arrangements. GST is expected to address the structural distortion of India’s tax system. The effective implementation of GST will not only reform the administration ambiguity but will provide ease of doing business in India. As an administration reform, GST will introduce a dynamic yet comprehensive IT system in India. The implications of the IT system will be useful for registrations, returns, payments, etc. for the taxpayers online, which would make compliance easy and transparent. It will ease Centre as well as State in administration of GST due to end-to-end IT system. GST is also seen as measure to control tax evasions in the country, the inbuilt mechanism of GST is expected to incentivise the tax compliance by traders. GST will enable uniformity in tax rates across the country, thus facilitating the business entities with the opportunity to work Pan-India. With uniformity of tax-rate across the country and seamless tax-credit system throughout the value-chain will minimise cascading of taxes in the country. This will also reduce the hidden cost of doing business, leading to increased opportunity for self-employment, trade and industry in the country. GST completely and systematically set-off input goods and services, i.e. it includes major Centre and State taxes, subsuming central taxes thus reduce the price of locally manufactured goods and services, making them competitive for national as well as international market. From consumer point of view GST will curb the tax-burden which consumer suffers due to tax evasions at various stages. Government will benefit by implementing GST- it replaces many taxes collected at various stages – thus it will reduce the cost of collection of tax revenues which will lead to increased efficiency and thus higher revenues. Over and above these benefits, GST has some straight-forward benefits which can be listed as

• With implementation of GST, there will be one standard rate throughout the country with fewer exemptions. The expected standard rate will range from 18-20 per cent.
• The implementation of GST will be highly disincentives tax evasions.
• Lower inflation rates are expected once traders compete as well as due to lower input costs.
• IT will work as back-bone or support system for GST, under which matching of supplier and purchase invoices will be mandatory and abiding, and thus reduction of fraud and tax evasions will be observed.
• IT system will be proved as additional privilege added to direct taxes.
• Smooth inter-state transactions as tax is paid with respect to input tax credit chain.
• Liquidity leverage for the inter-state trader as no blockages of funds as the payment of taxes.
• Dual compliance at the Centre and the State will improve revenue and reduce black marketing in the country.
• With present system at place the implementation of GST will result into efficient collection of revenue. Such improvement will contribute to countries well-being.
• GST is expected to remove negative favours to foreign goods, as imports and domestic goods will be levied under GST. Thus, making India globally competitive atleast in domestic market.

Macroeconomic Reforms

The proposed tax will facilitate and accelerate the macroeconomic reforms in the country. GST will work as a catalyst to reduce inequality in the society. GST will be assigning goods to different tax categories encouraging equity. Hence, goods with merit or that accounts for major part of expenditure of poorer will be either exempted or put in lower rate category.  However, this feature will be reduced for richer class of people. Thus, the inequality in the country, which has been major concerned post independence, will be reduced. Further, GST will make FMCG goods cheaper as the concept of one tax applied pan India and it adjusts the tax paid in advance, thus making goods pocket friendly to the consumer.

Investments will lead to growth: In the current tax system investment is discouraged majorly in the capital goods as applications of excise duties and VAT to capital goods make goods costlier. Further, there is no benefit or set-off or input tax credit provided for these goods, which leads to reducing investment in capital goods, resulting in lower employment and output. GST is expected to increase the investment as it will be easier for the government to take advantage of input tax credits for the capital goods. Under the current tax system, it is observed that capital equipments acquired for use in transportation, infrastructure, distribution, or construction sectors are exempted from the Union excise duties as these sectors are out of the scope of excise duties which is applicable to manufacturing only. Similarly, no State VAT is applicable to the capital goods acquired by the service sectors like Telecommunications, IT industry, insurance etc. National income accounts data of 2014-15 suggests that there was Rs. 7.4 lakh crore of investment in plant and equipments from non-government and non-household sector. The same data also states that indirect tax collection for capital goods purchases for which CENVAT credit was claimed was only Rs. 1.6 lakh crore. GST is expected to fill this huge gap. According to the revenue neutral rate report 2015, it is expected that provided a seamless and efficient crediting of taxes on capital goods, GST will make capital goods cheaper by 12-14 per cent which will definitely boost investment and hence the growth is foreseen with long-term sustainability. This report also suggest that price elasticity of investment demand for capital goods is -0.5, hence a reduction in price will increase the total investment demand for capital goods by 6 per cent, with investment in machinery close to 2 per cent. This increase in investment will lead to increase in GDP by 0.5 per cent as it is assumed that there is an incremental capital output ratio of 4.

Ceiling Tax Evasion: GST will have dual monitoring effects by Centre as well as by State. Thus increases the probability that evasion will be detected. Further, under GST a dealer is incentivised by input tax credit claims. That is each dealer has an edge for incentive to request document from the dealer preceding him in supply chain, provided the chain is not broken due to exemptions, especially applicable to intermediate goods. This will curb the black money in the market thus incentive for the country’s growth.

Unifying India: India is fragmented along the state lines; this incoherence is due to various taxes like central sales tax (CST) and other inter-state taxes over and above countervailing duties exemptions to imports makes domestic products less competitive to imports. Foremost let us consider CST, which is charged at 2 per cent on inter-state sales of goods, leads to increase in cost of goods which makes it incompetent to goods produced locally in the jurisdiction of consumption. Adding to this, CST can easily be avoided if manufacturer opt for stock transfers to different locations.

However, this avoidance of CST is compensated with logistical and warehousing costs incurred by the manufacturer at multiple locations. Quantifying the impact of CST on domestic product trade flows between States is nearly 50 per cent, needless to say along with the considerable loss of revenue to centre due to tax avoidance. Second, considering the fact that the countervailing duties (CVD) and special additional duties (SAD) are exempted, are negatively favouring the goods produced domestically.  Thus, making goods produced in India expensive than imports.

However, eliminating such CVD/SAD will boost the make in India concept of present government a key reform effort. Currently, domestically produced non-oil goods are taxed at 9 per cent whereas the effective collection rate for CVD is only 6 per cent, the difference thus revealing the favour to foreign products over domestic products along with fiscal cost of Rs. 40,000 crore. GST will subsume many of these taxes making domestic products affordable and competitive to imports.

With implementation of GST, the CVD on inputs can always be reclaimed as an input tax credit. By enacting exemption free GST, Indian economy will enable two-way sword one – all the penalties on domestic products will be eliminated making it at par with foreign goods and GST levied on imports will ensure neutrality. Two, make in India will be promoted without restricting or violating any of international trade obligations under World Trade Organization (WTO) or free trade agreements (FTAs).

GST has generated a lot of hype in the country. The effective implementation of GST will boost up Indian economy and prove India’s presence in world platform. The global performance of GST is evidence of higher rate of stability, decreased rate of inflation, increase in employment opportunities and growth in output.