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Tryst with GST

The GST Bill is stuck in the parliament for clearance. If accepted by all, it will benefit the economy. Know more about GST and its benefits.

Tryst with GST

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.

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