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A historic indirect tax reform

Finance Minister Arun Jaitley and his team, as also the representatives of the states in GST Council, deserve compliments for bringing about this game-changing legislation.

A historic indirect tax reform

The Goods and Services Tax is scheduled to roll out from 01 July 2017. This tax promises to benefit both the taxpayer and the tax administrator.  It aims at making India a single market with uniformity in tax levies across the country. When implemented, GST will eliminate the plethora of tax rates on goods and services, reducing these to four slabs for products and three for services. The system will also do away with the humongous corruption at check posts across cities and state borders. There are expectations that this game changer will expand tax revenues and increase GDP.  

The evolution of GST dates back to Vajpayee’s NDA I regime. A major success story of Finance Minister  Yashwant Sinha  was the introduction of uniform sales tax levied by different states and the concept of value added tax. Dr Manmohan Singh’s UPA government continued with the simplification of the tax regime and the roadmap for GST. It should go to the credit of  Finance Minister Arun Jaitley in having long discussions with state finance ministers ironing out differences relating to the states’ interests, adopting a consensus approach, and eventually getting the bill passed by the Parliament. 

 

Tamil Nadu’s effective presentation 

Tamil Nadu stoutly resisted the GST on the grounds of loss of income. In fact, it was one of the few states that did not pass the GST bill in the state legislature. Later it fell in line and provided invaluable inputs that resulted in arriving at the consensus of compensating losses fully over the first five years. 

In his long tenure as the chief minister of Gujarat, Modi had a full grasp of states’ tax revenues. He has repeatedly been stressing the importance of cooperative federalism. Jaitley gave full weight to this concept and agreed to the suggestions of the GST Council dominated by state ministers. 

Jaitley’s single-minded determination in building the consensus helped in the smooth passage of the bill in both the houses. Parliament sat for long hours in April and listened with keen interest to the viewpoints of the government and senior leaders from the Congress, the BJD, the Communists and the TMC. Since Congress took the initiative to work on GST, the passage was smooth. Even when Jairam Ramesh sought several amendments, Dr. Singh graciously helped in the smooth passage. The four bills relating to the Centre could thus be passed.

Now, the bills relating to the states have to be passed by the state legislatures over the next few weeks. Since the GST Council comprising all the states and the Centre had unanimously approved the details, this formality is expected to be completed before June.

But this is just the beginning.  Thousands of businesses across the country have to be prepared for the switch over. This process of education is going to be time-consuming. 

The services sector accounts for an estimated 60 per cent of the GDP but has been contributing only to 12 per cent of tax revenues. GST is expected to bring a much larger number of services under the tax net. The tax rate presently at 15 per cent is poised to increase to an 18 per cent. 

 

Will take a couple of years to settle down

Dr S Narayan, former Finance Secretary, says that it would take a lot of time to solve the glitches and settle down to the new regime. He points to the experience of developed countries like Australia and Canada taking around two years to adjust to the GST regime.  This delay should not matter. A similar significant change of bringing about uniformity in sales taxes levied by the states and the introduction of the value added tax was smooth and the economy settled down quickly to the change. 

Tax expert Dr. Parathasarathy Shome has pointed to the cost of tax collection that was 1.36 per cent dropping to 0.6 per cent now and is the lowest in the world. He suggested investing more on modernising tax administration. With the promise of increased tax collections, this should not pose a problem. The switch can be expected to improve the tax-GDP ratio, help eliminate tax evasion and ultimately contribute sizably to the GDP. 

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