The inordinate delay in enacting Goods and Services Tax (GST) is possibly in view of inhabitable circumstances in a parliamentary democracy like ours wherein the government aptly carries an obligation to enact any new law only through the established procedure of law which includes wider consultations on critical issues embedded in the proposed bill, assigning adequate rooms to the views of the major constituents and all stakeholders.
It’s a settled position that the country has chosen to get rid of inefficiency, opaqueness and dishonesty and has, therefore, given adequate electoral mandate to the government of the day to move this country forward. In this regard, bringing reforms including scrapping those laws considered less useful and enacting progressive ones, particularly in the economic realm, is a vital step to cater to the aspiration of nation building.
There is a widespread feeling that GST could be a game changer aligned to the spirit of flagship reforms. The evolution journey of our economy originated with forest economy gradually moved towards agricultural economy before becoming an industrial economy and now service economy accounts for a major pie in Indian economic arena. Though the corresponding evolution in the country’s tax system has happened but unfortunately not in tandem.
A lot of economies worldwide abandoned the laws which operated in isolation and transited to the unified model i.e. Consolidation of several independent laws that existed for goods and services. GST is all about this unification. This also discontinues the complex task of distinguishing goods and services which at times are overlapping and prone to seamless integration. India may have lost the opportunity of pioneering the enactment of GST but it’s high time the country stands united to ensure the successful implementation of GST sooner than later.
To put the record straight, the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 got passed in the Lok Sabha on 6 May 2015, pending with the Rajya Sabha. Being a constitutional amendment bill, Joint Session of Parliament is not an option, meaning unless the bill is duly passed by the Rajya Sabha, GST may never see the light of the day. The Amendment seeks to facilitate the introduction of GST in the country. The proposed amendments in the Constitution will confer powers both to the Parliament and the State legislatures to make laws for levying GST on the supply of goods and services on the same transaction.
The rationale of GST arguably lies in the present exclusive division of fiscal powers vested with both Central and State Governments leading to multiplicity of indirect taxes, which resulted in a complex structure that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is cascading of taxes due to ‘tax on tax’ meaning no credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa.
Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’. In other words, this is a move towards more comprehensive credit availability mechanism as compared to existing partial claim system. The introduction of GST would perhaps mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution i.e. both Centre and States will be empowered to levy GST across the value chain.
The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country. GST is expected to simplify and harmonize the indirect tax regime in the country.
It is also aimed at reducing cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. It is also expected that introduction of GST will foster a common or seamless Indian market and contribute significantly to the growth of the economy. It is estimated by the scholars of Economics that a successful GST has the potential of contributing to our GDP growth rate in the range of 2% to 3%.Further; GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure.
Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders. It is in the fitness of the things to recollect features of the envisaged GST system. Dual GST: The Centre would levy Central Goods and Services Tax (CGST), and the States would levy the State Goods and Services Tax (SGST) on all transactions within a State. Inter-state Transactions and the IGST Mechanism: The Centre would levy Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services.
The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. Destination Based Consumption Tax: GST will be a destination based tax meaning all SGST collected will ordinarily accrue to the State where the consumer resides. Existing Central & State Taxes to be subsumed: Central Excise Duty, Service Tax, VAT/Sales Tax, Central Sales Tax (levied by the Centre and collected by the States), Entertainment Tax, Octopi and Entry Tax (all forms) Cesses and surcharges in so far as they relate to supply of goods and services shall be eliminated with GST’s implementation.
Basic Custom Duty will, however, continue. Scope: All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST.GST Council: This will be a joint forum of the Centre and the States. This would function under the Chairmanship of the Union Finance Minister and will have Minister nominated by each of the States and UTs with Legislatures, as members. The Council will make recommendations to the Union and the States on important issues like tax rates, exemption list, threshold limits, etc. The states collectively shall have a higher weightage in voting right than the Centre.
This is to protect the interests of each State and the Centre when the Council takes a decision and is in the spirit of co-operative federalism. Floor rates of GST with band: GST rates will be uniform across the country.
However, to confer fiscal autonomy to the States and the Centre, there will a provision of a tax band over and above the rate of the floor rates of CGST, SGST and IGST. Initially, all three rates are expected to be closely aligned to the Revenue Neutral Rates (RNR) of the Centre and the States. A designated working group is assigned the task of determining the RNR as an essential component of GST preparations. Goods and Services Tax Network (GSTN): This is a not-for-profit company formed to provide shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders.
GST Compensation: Due to the shift from origin based to destination based indirect tax structure, some States might face drop in revenue in the initial years hence the Centre has committed to compensate all their losses for a period of 5 years of transition phase. This would unarguably be the massive Tax Reform in the post independence era.
As the proposed legislation mandates for a paradigm shift in the horizon of indirect tax structure, this has a potential of impacting the economy in a significant way and as such it has not been a smooth sail through among the spectrum of all stake holders. Needless to mention, non-cooperation by the oppositions is more driven by limited political factors in complete disregard to the potential benefits expected to accrue and hence detrimental to the economy. World over investors are impressed with the increased business friendly environment in India and GST may safely be expected to act as a catalyst of propelling growth engine set in under the present regime and further cheer up the current sentiment.
In the interest of the country’s economy, the move towards enacting the long due tax simplification bill must be accelerated keeping in the mind that scope for subsequent improvisation through political intervention always remains opens in a democratic system of ours.