Goods & Services Tax - Biggest Tax Reform Since Indian Independence

Posted in Finance Articles, Total Reads: 680 , Published on 05 November 2015
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"Single biggest tax reform since Independence"

"GST will ensure seamless transfer of goods and services, absence of Inspector Raj and no tax on tax"

- Mr. Arun Jaitley, to reporters, soon after tabling the 122nd Constitution Amendment Bill, in the Lok Sabha on 19th December 2014.


While the buzz word is black money and measures to effectively curb it, perhaps one of the biggest cause stems from the fact that ‘India is a land of taxes’. We pay taxes on consumption, savings and income. Let us look at the Indirect Taxes- we pay excise duty, import duties, central sales tax, service tax and even an entertainment tax, even as we watch an I.P.L. match. If all these were brought under the purview of one unified tax regime it lead to a simplification of things.


Goods and Services Tax was first introduced in the budget session during 2007. it is a single tax on manufacture, sale and consumption of goods along with services rendered in India. Currently, it is implemented in around 140 countries in the World and was first used by France in 1954.



Image: pixabay


Its ramifications are huge. Its impact spreads right from huge MNC conglomerates to the common man, simultaneously affecting various business operations like pricing, logistics, IT, accounting and tax compliance systems. Its scope will be comprehensive, analogous to the service tax regime with a few exemptions. As it is based on destination principle, imports will be taxed, exports exempted and interstate levy will be for the destination state instead of the state of origin.


An Illustration

Current Situation

Post implementation of GST

Manufacturer

Amount(Rs.)

Manufacturer

Amount(Rs.)

Assessable Value

1000

Assessable Value

1000

Add: Excise Duty@10%

100

Add: GST@10%

100

Sale Value

1100

Sale Value

1100


Retailer

Amount(Rs.)

Retailer

Amount(Rs.)

Cost Price

1100

Cost Price (Rs.1100 – Rs.100)

1000

Add: Expenses & Profit

400

Add: Expenses & Profit

400

Assessable Value

1500

Assessable Value

1400

Add: VAT@12%

180

Add: GST@12%

168

Sales Price

1680

Sales Price

1568

Analysis

Excise Paid by Manufacturer@10%

100

GST Paid by Manufacturer@10%

100

VAT paid by Retail Shop@12%

180

GST paid by Retail Shop@12%

(Rs.168 – Rs.100)

68

Total Taxes Paid

280

Total Taxes Paid

168

Here, Excise Credit of Rs.100/- is not available.

Here, GST Credit of Rs.100/- is available.


Interpretation

1. Lower tax burden by 40% in this case.

2. Lower Price for the consumer as well.

3. GST Credit available for manufacturer.

4. No Double Taxation.

  

Some predictions by leading Research Groups

1. National Council of Applied Economic Research (NCAER) - G.S.T. successful implementation will increase India’s GDP growth by 1% to 2%. , imports by 2.4-4.7% and exports by 3.2-6.3%.

2. CRISIL -GST is best way to mobilize revenue and reduce the fiscal deficit.


It will have 2 components- CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax).


A Snapshot

Indirect Taxes

Type of GST

Intra State Consumption of Goods and Services

Inter State Consumption of Goods and Services

Exports

Imports

Excise Duty

CGST

Levy of CGST and SGST rate

Integrated GST

Not Applicable

Levy of CGST and SGST rate

Service Tax

CGST Rate + SGST Rate Levied

Integrated GST

GST Not Applicable

CGST Rate + SGST Rate Levied

Custom Duties

Central Sales Tax

State Sales Tax

SGST

Entertainment Tax

State VAT

Professional Tax


Other Salient Features

1. Exact rate in percentage terms is undecided.

2. Likely that there is a Central, State and Integrated rate.

3. Likely to be differential rate of taxes for classes of goods i.e. essential goods and luxe goods.

4. All goods are covered in its purview except alcohol, petroleum and tobacco. Believed that the existing indirect taxation structure will continue for them.

5. Levied on all imports. Exports are outside its purview.

6. GST may be levied on advertisements. It will be notified on a different date for Petroleum.

7. Imposition of Stamp Duty will continue.

8. Apex body shall be the GST Council.

9. Removal of entry tax / Octroi across India.

10. Entertainment Tax to be imposed only at the panchayat/municipal level.


Challenges

The grey areas of the bill are

1. Successful Passage of the Bill - It has already been passed in the lower house or the Lok Sabha, where the BJP enjoys a brute majority. The real issue is the logjam in the Rajya Sabha where the government does not have the majority numbers.


2. Procedural Requirements when draft bill is released -by the Central Government and the Empowered panel of finance ministers.

A. Collation of the views and recommendations of all stakeholders. This is necessary to ensure a correct, comprehensive and standard implementation of GST

B. Getting the states on board who refused to pass the bill is going to be an extremely difficult proposition

C. Once the draft bill is passed and the above steps are followed, the process has to be repeated in order to ensure a nationwide applicability of the Uniform GST Rules.


3. Revenue Neutral Rate (RNR) is defined as a tax regime where the rate of GST post implementation will not lead to any revenue loss to the government. The situations becomes different under GST because of giving tax credits on input and input service. A higher than existing rate is going to adversely impact the economy.

Current Average Rates Stats:

A. Cenvat Rate is 12%

B. Service-tax rate is 14%

C. VAT rate is between12.5% to 15% depending on States.

D. Overall Indirect Taxes are between 25-28% which is higher than the global average.


National Institute of Public Finance and Policy (NIPFP) estimated RNR to be 27% (during) 2010 and now it has been asked to compute based on 2014-15 data. The final rate has to be approved by the EC with 3/4 majority.

For information of readers, the comparison of VAT Rate / RNR of peer Countries with that of India is as under:

Japan

5%

South Africa

14%

Germany

16%

China

17%

U.K.

17.5%

Russia

18%

Japan

5%

South Africa

14%


4. Cut off Limits- under Excise Duties it is Rs 150 lakhs, State VAT is between 10-20 lakhs and 10 lakhs is for Service Tax. There is a dispute between EC which is in favour of lowering the limit and the Central Government which wants a 25 lakh limit.


5. A strong IT infrastructure -which is the back bone for the entire system to work. It connects all stakeholders like the various governments, industries, and banks etc. on a continuous basis.



6. Point of Taxation rules -with compete clarity is essential as multiple rates under the jurisdiction of state and central government will be in vogue. The CBDT (Central Board of Direct Taxes) and CBEC (Central Board of Excise and Customs) need to issue various circulars and clarifications on this behalf.


7. The 1% additional tax – will possibly go against the very spirit of the bill. While it has been introduced to compensate for revenue loss it will lead to distorted supply chain management and inefficiencies in manufacture of goods and services.



Benefits

While there might be the perception that its introduction should not happened. There are several plus points that merit the introduction.

1. No Double taxation, as has been discussed in the illustration.

2. Unified taxation system will support easy comprehension and better compliance.

3. Unified Market Place will ensure seamless transfer of goods and lower transaction costs for business.

4. Better macroeconomic management will result due to exemption on exports, which will greatly boost and promote exports. At the same time it will keep a tab on imports.

5. Potentially lower costs for consumers - due to lower rates of taxes and cost savings for businesses.

6. Better supply chain management due to lower costs of logistics, and with the incremental 1% imposition of GST it will lead to reorganization of logistics and will ultimately result in setting up of supply chains near manufacturing and consumption intensive states.

7. Ease of doing business due to lower costs and easier compliance with laws.

8. Impetus to manufacturing sector due to the incentives realized because of factors like economies of scale in production and distribution, lower costs etc will further the "Make in India" scheme. There will be an increase in investments by foreign and domestic players.

9. Removal of cascading effect will improve the global competitiveness of India.

10. Boost in Indian G.D.P. by 1-2% nearly due to increased investments and growth in exports. India will gain some $15 Billion per year as per some experts due to increase in exports, employment opportunities and growth.


Conclusion

Unless India takes rapid strides towards a unified market, her prospects of being a major economic power seem farfetched. There are various benefits and the speedy implementation of GST with the support and cooperation of the governments, parties and the electorates will do wonders.


Food for thought

1. The broad differences between the dual rates of GST against the age old tested and settled regime- Central Excise/Service tax (Central Level) and VAT (State Level)?

2. If Central Sales Tax is allowed as credit similar to IGST with a proper national IT network support system, what will be the economic implications?

3. Actual utility if stamp duties, petroleum, electricity and tobacco products are also included in GST?


This article has been authored by Saket Pachisia from XLRI


References

1. Tax Guru.

2. CA Club.

3. Journals.

4. Discussion with Professionals.


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