Post by Sonal Jiandani
GST, the Goods and Services Tax, has been hottest of the hot potato for the past few weeks. Despite the much brouhaha around, what is referred to as the 122nd amendment to the Indian Constitution, few have been able to understand the term, and fewer still have been able to wrap their minds around the concept.
Let us start from beginning, shall we? The genesis of the GST Act, that got a much anticipated nod from the Rajya Sabha on 3rd of August, during the monsoon session of the Parliament, can be traced back to around a decade ago. In 2007-08, the then Union Finance Minister Shri P. Chidambaram, made an announcement to the effect that GST would be introduced from April 1, 2010. What is so unsettling about GST that it took roughly ten years to implement? Through this short piece, I plan to address some basic doubts surrounding the so called ‘ambitious’ tax regime.
Tax is the major source of revenue to a government and the tax skeleton in India can be categorised into Direct and Indirect. Revenue sourced from indirect taxes forms 65% of the total revenue pool in India. Up until now, the indirect taxes have been mired into a complicated web. It has led to a myriad of problems, at the heart of which lies the cascading effect of taxes. Cascading effect of taxes, in layman terms, refers to tax on tax. What happens is that before any commodity is produced, inputs get taxed, and then after the commodity gets produced with input tax load, output is taxed again. This causes a burden of multiple taxation with a cascading effect.
The labyrinthine levies of multiple indirect taxes compounded with the unwelcome feature of multiple taxation inevitably dissolved the Indian market into multiple markets, with little justification for doing so. VAT, the Value Added Tax, was considered to be a major improvement over the pre-existing system for it introduced a system in which input tax is deducted from the overall tax burden. GST is deemed to be a further significant breakthrough- the next logical step- towards a comprehensive indirect tax in the country.
Is GST different from VAT? Yes and no. GST can be considered VAT 2.0. On paper, it still will be levied on the value added component of the good or service as it passes through the supply chain. But GST shall combine all the bells and whistles of the previous system into one harmonious tax. GST is a tax on goods and services under which every person is liable to pay tax on his/her output and is entitled to input tax credit (ITC) on the tax paid on the inputs. See, the idea is to achieve a unified market at the helm of which lies an understandable, reasonable and business-friendly tax structure.
- The GST shall have two components: one levied by the Centre to be known as CGST, short for Central GST and another levied by the States to be known as the SGST, short for State GST. Each State would have its own legislation to levy and collect GST. Rates for CGST and SGST would be prescribed appropriately, reflecting revenue considerations and acceptability.
- The GST would subsume around 8 taxes at the Central level and around 6 at the State level. This in itself would lead to elimination of the cascading effect of taxes.
- The CGST and SGST would be applicable to all transactions of goods and services. Barring a few contentious commodities such as alcohol, petroleum, ATF(Air Turbine Fuel), etc the commodity list under the ambit of GST is fairly extensive.
- One of the reasons to go the GST way is to facilitate seamless ITC across the entire supply chain (supplier of raw material
- In case a transaction occurs inter-state, the levy of the tax would be masked as IGST- Inter-state Goods and Service Tax. In this case, the proposal is to follow the ‘destination principle’, meaning that the importing state shall collect the proceeds of the tax. Under the current regime, we don’t follow this principle, i.e. the proceeds of a tax go to the exporting state.
- GST does not discriminate between goods and services. To put it in a better way, although the new legislation has clear specifications for what constitutes a good and what a service, but the tax to be paid would be the same after the consumption of either. So suppose the GST rate comes out to be x% (Patience. I am not getting into complicated algebra), then the rate of tax you’d pay after the consumption of either the good or a service would be x percent of the value of the good.
India’s intrepid stance on implementing a tax regime, proverbially touted as the best thing since sliced bread, is a testament to how committed it is in improving the ease of doing business in the country. The current structure of taxation flows against this tide of change. To put ourselves on the map as the new manufacturing hub of the world, it is high time that we walk the walk. Implementing an ambitious a tax regime as GST is the first step towards the cause. The work hasn’t finished yet, in fact it has just commenced.
(Sonal is pursuing her MA in Economics from DSE and is Senior Editor, Eostre)