GST – Dawn of a New Era in Indirect Taxation
________________________________________
With its sincere efforts to introduce single Goods and Services Tax (GST) across the country the BJP-lead NDA government has opened a new chapter in taxation history of the country.
The government is all set to usher in the Goods and Services Tax, which will abolish all the myriad taxes that are being levied on goods and services by the Central and State governments such as octroi, central sales tax, state sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity and taxes on transportation. If everything goes as per the plan, the GST will come into effect from April 1, 2016. Such introduction of GST will remove these multiple layers of taxation that is holding back the economic growth of the country.
What is GST?
GST is a comprehensive value added tax levied on the manufacture, sale and consumption of goods and services at a national level. Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, all the tax paid by the goods manufacturers and service providers will be borne by the end consumer as he is the last person in the supply chain.
According to experts, the GST will not only make the tax system simpler, but also help in increased compliance, improve tax revenues and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate, which is the case in most of the developed countries.
Legislative History of GST
In 2000, Vajpayee Government initiated discussion on GST by setting up an empowered committee. The committee was headed by Asim Dasgupta, the then Finance Minister of West Bengal. It was given the task of designing the GST model and overseeing the IT back-end preparedness for its rollout. In the 2007-08 budget speech, the erstwhile Union Finance Minister P. Chidambaram announced that the GST would be introduced from April 1, 2010 and that the Empowered Committee of State Finance Ministers would work with the Central Government to prepare a road map for introduction of the new tax regime.
As a follow up, the Empowered Committee of State Finance Ministers decided to set up a Joint Working Group on May 10, 2007, with the Adviser to the Union Finance Minister and the Member-Secretary of Empowered Committee as co-convenors and the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries of the states as its members. The Joint Working Group, after intensive internal discussions as well as interaction with experts and representatives of Chambers of Commerce and Industry, submitted its report to the Empowered Committee on November 19, 2007.
This report was then discussed in detail in the meeting of Empowered Committee on November 28, 2007. On the basis of this discussion and the written observations of the states, certain modifications were made, and a final version of the views of Empowered Committee at that stage was prepared and was sent to the Government of India on April 30, 2008. The comments of the Government of India were received on December 12, 2008 and were duly considered by the Empowered Committee on December 16, 2008.
Despite initial efforts, the UPA government could not push the new tax regime. The BJP has not only made GST a key point in its election manifesto, but also taken it seriously once it came into power. The central government is working towards full-fledged implementation of GST from April 1, 2016 onwards.
As part of this effort, the government has given its consent for a constitutional amendment on December 17, 2014 and introduced 122nd constitutional amendment bill in Lok Sabha. This bill requires 2/3 majority in both houses of the parliament and also assent of more than half of the state legislative assemblies.
Such constitution amendment is required as – the states shall be given legal power to collect GST once it is introduced. Any transfer of power from the centre to state requires a constitutional amendment.
Salient Features of GST
Following are some of the important features of the GST:
• The alcoholic liquors have been kept out of GST purview and petroleum products were included.
• Those products fall in the range of GST only from the date notified by the GST Council.
• About 2/3 GST Council members come from the states and any decision of council can be enforced only after it secures the assent of 75% of the members.
• If states think that they are losing the revenues due to GST implementation, they are empowered to impose 1% more tax than the accepted GST for the first two years.
• If states incur revenue losses due to introduction of GST, the centre will compensate 100% loss for first three years, 75% of the loss on the fourth yeas and 50% of the loss in the fifth year.
• Though petroleum products are part of the GST regime, there will be no tax levied on them and states can continue to levy their value-added tax. In the beginning, the centre will collect excise tax for some years.
• All the state and central taxes will be levied through a single tax. As a result several taxes will be abolished and the practice levying taxes on taxes – tax cascading - will also be abandoned.
Disputes about GST
Since the conception of idea, the GST has attracted a lot of disputes. The UPA government has introduced GST Bill in Lok Sabha in 2011, but lapsed. The NDA has come up a new bill. At this stage, the state governments have objected placing the petroleum products under the GST scope.
The centre has initiated talks with several state governments and finally withdrew its decision on petroleum products. The centre as well added Entry Tax in the new tax policy. These two measures have considerably bridged the gap between the policy stands of the states and the centre and cleared the major disputes, which have so far pulled down the uniform tax regime.
Importance of GST
The existing Value Added Tax regimes of states and centres are flawed. For example, the Central VAT or CENVAT which is levied by the central government hasn’t included the central taxes such as additional customs tax and surcharge. It hasn’t factored in the Value Added Chain of commercial distribution, which is below the manufacturing level. As a result, revenues of central government have come down drastically.
At state level, the luxury and entertainment taxes that are to be levied on the goods and services that are part of VAT are being collected separately. Besides that, the state VAT and CENVAT both are being levied on the value of goods and services. The GST has come into picture when the central government wanted to avoid this multiple taxation.
Model of GST
• While all the countries have single GST models, India has opted for Dual GST model, which empowers both the centre and states to collect the GST. Accordingly, the GST has been divided into two types – the Central GST, levied by the central government and the State GST, levied by the state governments and Union Territories. The state and central GST would be decided based on two factors – revenue and acceptability.
• The state and central GSTs are applicable to all the transactions of goods and services. This classification is used to divide the goods and services into the state and centre lists. While making the lists, the international GST methods and the traits of service sector of India are taken into consideration.
• Collection methods of both GSTs are the same. The collected revenue would be deposited in respective accounts.
• Since both the GSTs are treated separately, the tax that is being paid on the basis of central GST gets input tax credit. These rules are equally applicable to state GST too.
• The cross utilisation of input tax between the state and central GSTs is not allowed.
• Every tax payer would be issued PAN-based Tax Payer Identification Number. It has 13 digits and there are two additional numbers to recognise the state GST and one additional number recognise the central GST.
Technology of GST
Making full of technology has been one of the important ideas of GST framework. The government is working on a special IT platform for smooth implementation of the proposed Goods and Services Tax (GST). The IT special purpose vehicle (SPV) christened as GST N (Network) will be owned by three stakeholders—the centre, the states and the technology partner NSDL.
Benefits of GST
World over, GST has been implemented in over 150 countries. Almost all the developed countries have this advanced tax regime. Following are some of the important benefits the GST ushers in for Indian economy:
Simpler Tax Structure: As multiple taxes on a product or service are abolished and a simplified tax regime comes into place, the tax structure is expected to be much simpler and easier to understand. Paperwork will be easier and there will be a reduction in accounting complexities for businesses. A simple taxation regime can make the manufacturing sector more competitive and save both money and time. According to some estimates, the implementation of GST would push up GDP by 1%-2%. According to National Council for Applied Economic Research, implementation of GST would improve the GDP by 2% -2.5 %.
Increased Tax Revenues: A simpler tax structure can bring about greater compliance, thus increasing the number of tax payers. According to an estimation, the tax-rate under the proposed GST would come down, but the number of assesses would increase by 5-6 times. As a result, tax collection would go up despite the reduction in the tax rates. When the GST was introduced in New Zealand in 1986, it yielded revenues that were 45 per cent higher than anticipated, in large part due to improved compliance. In Canada, introduction of GST resulted in an increase in potential GDP by 24 per cent, consisting of 12.4 per cent increase in national income.
Competitive Pricing: GST will eliminate all other forms of indirect taxing. This will effectively mean that the tax paid by the final consumer will come down in most cases. According to Vijay Kelkar, President of 13th Finance Commission, GST will redistribute the tax burden between the manufacturing and service sectors and this leads to quantitative change tax regime. It will benefit not only the three sectors of the economy, but also ordinary consumers as prices would come down.
Boost to exports: When the cost of production falls in the domestic market, Indian goods and services will be more price-competitive in foreign markets. This can bode well for exporters, who compete with manufacturers abroad facing a lower cost structure. An estimate by National Council for Applied Economic Research, implantation of GST will boost annual exports by 10% -14%.
Fiscal Consolidation: The current state of the Indian economy demands fiscal consolidation and reduction in fiscal deficit. A recent report by CRISIL states that GST is the country’s best bet to achieve fiscal consolidation. As there is not much scope to reduce Government expenditure, increasing tax revenues is the best alternative to improve the fiscal health.
The tax rates of GSTs haven’t been finalised. However, irrespective of the tax rate, it is logical and apparent from examples of other countries that GST is a critical tax reform needed for any country.
Doubts over Implementation
Though the differences between the states and the centre have come down drastically after ongoing talks, which have resumed at the initiative of new government, still there are issues to be solved.
• Still some of the states are objecting bringing petroleum products and entry tax into the scope of GST.
• They are also demanding the exemption of real estate transactions and stamp duty from the scope of GST.
• The new Finance Minister hasn’t taken the recommendations of Empowered Committed of the State finance ministers into consideration. This may result in a new dispute.
It is yet to be seen how much time and effort are required to implement the GST from April 1, 2016.
Opinions on GST
GST is the biggest indirect tax reform after the independence. This tax regime would promote single market across the country. It improves the state finances and strengthens the country’s economy.
Arun Jaitley, the Union Finance Minister
Introduction of GST is a key fiscal reform. It will help India to grow as an economic super power.
Sachin Menon, KPMG CEO.
Price stabilisation will possible as there would no cascading of tax. This will improve the GDP of the country.
Saktikant Das, Revenue Secretary
Bringing the petroleum products and entry tax under the scope of GST is an encouraging development. It will certainly boost the investors’ confidence and will help attract more investments.
Prasanth Deshpande, Deloitte
GST will deprive the state governments of their revenue sources. The loss must be compensated in full.
Mamata Benerjee, Chief Minister, West Bengal.
________________________________________
With its sincere efforts to introduce single Goods and Services Tax (GST) across the country the BJP-lead NDA government has opened a new chapter in taxation history of the country.
The government is all set to usher in the Goods and Services Tax, which will abolish all the myriad taxes that are being levied on goods and services by the Central and State governments such as octroi, central sales tax, state sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity and taxes on transportation. If everything goes as per the plan, the GST will come into effect from April 1, 2016. Such introduction of GST will remove these multiple layers of taxation that is holding back the economic growth of the country.
What is GST?
GST is a comprehensive value added tax levied on the manufacture, sale and consumption of goods and services at a national level. Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, all the tax paid by the goods manufacturers and service providers will be borne by the end consumer as he is the last person in the supply chain.
According to experts, the GST will not only make the tax system simpler, but also help in increased compliance, improve tax revenues and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate, which is the case in most of the developed countries.
Legislative History of GST
In 2000, Vajpayee Government initiated discussion on GST by setting up an empowered committee. The committee was headed by Asim Dasgupta, the then Finance Minister of West Bengal. It was given the task of designing the GST model and overseeing the IT back-end preparedness for its rollout. In the 2007-08 budget speech, the erstwhile Union Finance Minister P. Chidambaram announced that the GST would be introduced from April 1, 2010 and that the Empowered Committee of State Finance Ministers would work with the Central Government to prepare a road map for introduction of the new tax regime.
As a follow up, the Empowered Committee of State Finance Ministers decided to set up a Joint Working Group on May 10, 2007, with the Adviser to the Union Finance Minister and the Member-Secretary of Empowered Committee as co-convenors and the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries of the states as its members. The Joint Working Group, after intensive internal discussions as well as interaction with experts and representatives of Chambers of Commerce and Industry, submitted its report to the Empowered Committee on November 19, 2007.
This report was then discussed in detail in the meeting of Empowered Committee on November 28, 2007. On the basis of this discussion and the written observations of the states, certain modifications were made, and a final version of the views of Empowered Committee at that stage was prepared and was sent to the Government of India on April 30, 2008. The comments of the Government of India were received on December 12, 2008 and were duly considered by the Empowered Committee on December 16, 2008.
Despite initial efforts, the UPA government could not push the new tax regime. The BJP has not only made GST a key point in its election manifesto, but also taken it seriously once it came into power. The central government is working towards full-fledged implementation of GST from April 1, 2016 onwards.
As part of this effort, the government has given its consent for a constitutional amendment on December 17, 2014 and introduced 122nd constitutional amendment bill in Lok Sabha. This bill requires 2/3 majority in both houses of the parliament and also assent of more than half of the state legislative assemblies.
Such constitution amendment is required as – the states shall be given legal power to collect GST once it is introduced. Any transfer of power from the centre to state requires a constitutional amendment.
Salient Features of GST
Following are some of the important features of the GST:
• The alcoholic liquors have been kept out of GST purview and petroleum products were included.
• Those products fall in the range of GST only from the date notified by the GST Council.
• About 2/3 GST Council members come from the states and any decision of council can be enforced only after it secures the assent of 75% of the members.
• If states think that they are losing the revenues due to GST implementation, they are empowered to impose 1% more tax than the accepted GST for the first two years.
• If states incur revenue losses due to introduction of GST, the centre will compensate 100% loss for first three years, 75% of the loss on the fourth yeas and 50% of the loss in the fifth year.
• Though petroleum products are part of the GST regime, there will be no tax levied on them and states can continue to levy their value-added tax. In the beginning, the centre will collect excise tax for some years.
• All the state and central taxes will be levied through a single tax. As a result several taxes will be abolished and the practice levying taxes on taxes – tax cascading - will also be abandoned.
Disputes about GST
Since the conception of idea, the GST has attracted a lot of disputes. The UPA government has introduced GST Bill in Lok Sabha in 2011, but lapsed. The NDA has come up a new bill. At this stage, the state governments have objected placing the petroleum products under the GST scope.
The centre has initiated talks with several state governments and finally withdrew its decision on petroleum products. The centre as well added Entry Tax in the new tax policy. These two measures have considerably bridged the gap between the policy stands of the states and the centre and cleared the major disputes, which have so far pulled down the uniform tax regime.
Importance of GST
The existing Value Added Tax regimes of states and centres are flawed. For example, the Central VAT or CENVAT which is levied by the central government hasn’t included the central taxes such as additional customs tax and surcharge. It hasn’t factored in the Value Added Chain of commercial distribution, which is below the manufacturing level. As a result, revenues of central government have come down drastically.
At state level, the luxury and entertainment taxes that are to be levied on the goods and services that are part of VAT are being collected separately. Besides that, the state VAT and CENVAT both are being levied on the value of goods and services. The GST has come into picture when the central government wanted to avoid this multiple taxation.
Model of GST
• While all the countries have single GST models, India has opted for Dual GST model, which empowers both the centre and states to collect the GST. Accordingly, the GST has been divided into two types – the Central GST, levied by the central government and the State GST, levied by the state governments and Union Territories. The state and central GST would be decided based on two factors – revenue and acceptability.
• The state and central GSTs are applicable to all the transactions of goods and services. This classification is used to divide the goods and services into the state and centre lists. While making the lists, the international GST methods and the traits of service sector of India are taken into consideration.
• Collection methods of both GSTs are the same. The collected revenue would be deposited in respective accounts.
• Since both the GSTs are treated separately, the tax that is being paid on the basis of central GST gets input tax credit. These rules are equally applicable to state GST too.
• The cross utilisation of input tax between the state and central GSTs is not allowed.
• Every tax payer would be issued PAN-based Tax Payer Identification Number. It has 13 digits and there are two additional numbers to recognise the state GST and one additional number recognise the central GST.
Technology of GST
Making full of technology has been one of the important ideas of GST framework. The government is working on a special IT platform for smooth implementation of the proposed Goods and Services Tax (GST). The IT special purpose vehicle (SPV) christened as GST N (Network) will be owned by three stakeholders—the centre, the states and the technology partner NSDL.
Benefits of GST
World over, GST has been implemented in over 150 countries. Almost all the developed countries have this advanced tax regime. Following are some of the important benefits the GST ushers in for Indian economy:
Simpler Tax Structure: As multiple taxes on a product or service are abolished and a simplified tax regime comes into place, the tax structure is expected to be much simpler and easier to understand. Paperwork will be easier and there will be a reduction in accounting complexities for businesses. A simple taxation regime can make the manufacturing sector more competitive and save both money and time. According to some estimates, the implementation of GST would push up GDP by 1%-2%. According to National Council for Applied Economic Research, implementation of GST would improve the GDP by 2% -2.5 %.
Increased Tax Revenues: A simpler tax structure can bring about greater compliance, thus increasing the number of tax payers. According to an estimation, the tax-rate under the proposed GST would come down, but the number of assesses would increase by 5-6 times. As a result, tax collection would go up despite the reduction in the tax rates. When the GST was introduced in New Zealand in 1986, it yielded revenues that were 45 per cent higher than anticipated, in large part due to improved compliance. In Canada, introduction of GST resulted in an increase in potential GDP by 24 per cent, consisting of 12.4 per cent increase in national income.
Competitive Pricing: GST will eliminate all other forms of indirect taxing. This will effectively mean that the tax paid by the final consumer will come down in most cases. According to Vijay Kelkar, President of 13th Finance Commission, GST will redistribute the tax burden between the manufacturing and service sectors and this leads to quantitative change tax regime. It will benefit not only the three sectors of the economy, but also ordinary consumers as prices would come down.
Boost to exports: When the cost of production falls in the domestic market, Indian goods and services will be more price-competitive in foreign markets. This can bode well for exporters, who compete with manufacturers abroad facing a lower cost structure. An estimate by National Council for Applied Economic Research, implantation of GST will boost annual exports by 10% -14%.
Fiscal Consolidation: The current state of the Indian economy demands fiscal consolidation and reduction in fiscal deficit. A recent report by CRISIL states that GST is the country’s best bet to achieve fiscal consolidation. As there is not much scope to reduce Government expenditure, increasing tax revenues is the best alternative to improve the fiscal health.
The tax rates of GSTs haven’t been finalised. However, irrespective of the tax rate, it is logical and apparent from examples of other countries that GST is a critical tax reform needed for any country.
Doubts over Implementation
Though the differences between the states and the centre have come down drastically after ongoing talks, which have resumed at the initiative of new government, still there are issues to be solved.
• Still some of the states are objecting bringing petroleum products and entry tax into the scope of GST.
• They are also demanding the exemption of real estate transactions and stamp duty from the scope of GST.
• The new Finance Minister hasn’t taken the recommendations of Empowered Committed of the State finance ministers into consideration. This may result in a new dispute.
It is yet to be seen how much time and effort are required to implement the GST from April 1, 2016.
Opinions on GST
GST is the biggest indirect tax reform after the independence. This tax regime would promote single market across the country. It improves the state finances and strengthens the country’s economy.
Arun Jaitley, the Union Finance Minister
Introduction of GST is a key fiscal reform. It will help India to grow as an economic super power.
Sachin Menon, KPMG CEO.
Price stabilisation will possible as there would no cascading of tax. This will improve the GDP of the country.
Saktikant Das, Revenue Secretary
Bringing the petroleum products and entry tax under the scope of GST is an encouraging development. It will certainly boost the investors’ confidence and will help attract more investments.
Prasanth Deshpande, Deloitte
GST will deprive the state governments of their revenue sources. The loss must be compensated in full.
Mamata Benerjee, Chief Minister, West Bengal.
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