GST – A game-changer for India

Prakash Chawla *

The 122nd Amendment to the Constitution will go down in India’s political-economic history as a watershed, as it is about to give the country the most progressive tax reforms till date in the form of Goods and Services Tax (GST) which should make life easier for the trade and industry and more importantly reduce the cost of goods and services for the consumer, without compromising on the revenues of either the Centre or the States.

In fact, the GST should lead to a tax buoyancy and push to the Gross Domestic Product between 1-1.5 per cent with clearance of the cob web of taxes.

The excitement among the industry, trade and investors is justified. By a single measure, India would move up the World Bank ranking of ease of doing business by several notches. It is true the GST Bill has been pending for over a decade but the fact that the NDA Government has been able to build a wide political consensus on, what has been the most contentious issue, has conveyed a huge positive signal to the rest of the world that India enjoys a broad political support for the economic reforms, crucial for over a billion people.

What is GST?

It is a plethora indirect taxes which contribute to bulk of revenues of the states and just about half of the tax kitty of about Rs 16 lakh crore of the Central Government. While direct taxes like the personal income tax concern a small fraction of the population, the indirect taxes affect every Indian. Since the indirect taxes are on consumption , rich and poor , both have to pay the same amount.

Presently, the Constitution gives mandate to the Centre and the States to levy indirect taxes ranging from excise duty, customs, service tax.

Valued Added Tax or sales tax, entertainment tax, octroi, entry tax, purchase tax, luxury tax and different surcharges. Both the Centre and the States have their own official machineries to collect these taxes. But for Central excise and VAT, most of the taxes get calculated on a base which itself has been subjected to taxation at some or the other stage of manufacturing value chain.

So, it is a tax on tax making goods and services rather expensive for the ultimate consumer while making life hard for the trade and industry. The most visible example of inefficiencies of the system can be seen at inter-state borders with long queues of trucks being subjected to different kind of tax inspection and payment of octroi and entry tax, blocking traffic on the highways for hours together.

With the roll out of the GST, expected from April 1, 2017, all these taxes would be subsumed into a single tax for the consumer. The Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.

The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. Services and goods would be subjected to taxes only on value addition at each stage, thus bringing down the overall tax burden for the consumers.

From manufacturing to destination

As against the present system where the taxes like excise and Central sales tax are levied on manufacturing at the factory gate or on inter-state movement of goods, the GST involves taxation at the destination level. This could mean gains for the consuming state and loss for the manufacturing state.

This is why the state with a good manufacturing base like Tamil Nadu was opposed to the GST and consuming states like Bihar, West Bengal and Odisha favoured the same. But, the GST Bill provides for fully compensating the losses to the states for five years. The earlier provision of additional one per cent levy for the losing states has now been done away with.

Impact on inflation

Analysts feel that in the short term, there could be some impact on prices of services which now attract an average service tax of around 14 per cent only at the Central level. However, in the case of manufactured products like automobile, the standard GST could be much lower than the combined present effect of excise and state levies.

However, in the medium to long term, this should play out. On the whole, GST should be anti-dote to inflation and would thus be people-friendly along with trade /industry friendly. It would also bring in a lot of unorganized sector of the economy within the mainstream.

GST Rate

There would be about three rates – Standard rate in the form of X which will cover bulk of the items , X-minus for the items of mass consumption and X-plus for the luxury goods or the so-called “sin goods’’. In the Constitutional Amendment, there is no mention of the GST rates, which would be decided by the GST Council comprising of Union Finance Minister as the Chairman and Finance ministers of the states. Any decision of the GST Council would require three-fourth approval of the Council.

The states would have two –third of the voting powers and the Centre one-third. The Congress Party has demanded a ceiling of 18 per cent on GST standard rate while the government is called upon to ensure the revenue neutral rate (RNR). Any major deviation from RNR could be counter-productive either for inflation or for fiscal prudence. Getting the right RNR both for the Centre and the states would be a major challenge.

Left out

Petroleum products and alcoholic beverages have been left out of the GST, for now, on concerns of the states which feared these major revenue heads could not be bargained for. For the sake of wider political consensus, these heads have been left for the future reforms.

What Next?

After approval of Parliament, the GST Bill would go for ratification by at least half the states. The process is expected to be completed very soon. Afterwards, Parliament will have to again pass two enabling bills – one for the Central GST and the other for the Integrated GST. Besides, the state legislatures will have to pass the enabling law of State GST. In the meantime, work on the central IT backbone being prepared by a non-profit organisation is being done on a war-footing for the possible roll out from the next financial year.