GST Bill in India for Economic Inclusion and Employment Opportunities
Posted in Finance Articles, Total Reads: 1230
, Published on 01 August 2016
A lot has been talked about this fascinating name- Goods and Service Tax (GST) bill; many views have been portrayed for and against GST bill. Many politicians and Scholars had been penning down their opinions on the topic. Many theories have come up which explains the implications of the Goods and Service Tax bill. GST bill was introduced by Arun Jaitley in Lok Sabha on December 14, 2014. Finance minister described it as “Single Most Tax Reform after 1947”. The bill was enacted by Lok Sabha on 6 May, 2015. However, the bill is yet to be passed by Rajya Sabha (as on 14th May, 2016)
Let’s get to the basics first; GST [The constitution (One Hundred and Twenty-Second Amendment) Bill,2014] is majorly targeted to ensure the transformation of India as n uniform market by breaking fiscal barriers between states and bringing the economic integration in the country. GST will do so by removing the cascading of taxes (Double taxation). GST is in no doubt, one of the most significant reform in the Indian taxation system. It is sure to result in an improved tax compliance.
GST will be levied on the value-additions at each stage of production only. It will subsume all the other indirect taxes in India being charged. The indirect taxes (charged by state as well as centre) that will be clubbed are Value Added Tax (VAT), Sales Tax, Excise duty, Service tax, Entertainment tax, Special additional duty on all customs, all kind of Cesses and Surcharges (including state), Luxury tax, Tax on Lottery etc.
GST will be exacted and gathered at every last phase of offer or buy of merchandise or administrations, however on the bases of information expense credit technique. This lets the GST-enlisted organizations to assert a duty credit up to the worth they paid amid the buy of merchandise and administrations. It is outstanding that under GST, every one of the merchandise and administrations (with the exception of particular rundown of exempted things) are not recognized from each other and will be charges at single rate till it ranges to the buyers. Additionally, the fares would be zero-appraised and imports would be exhausted comparably as the residential products and adjusting holding fast to the rule of destination.
Let’s understand it better with an example. Let us assume hypothetically that there will only be one kind of tax being charged on the goods and services produced- ABC @ 10 per cent. Producer X procures raw materials worth INR 10 millions, carries out expenses of INR 5 million and keeps an operational profit margin of INR 2 million. X will be charged for ABC twice, in procurement of raw materials as well as sale of goods.
Total tax paid by X = 10 per cent of 10 millions (Raw material)
10 per cent of 17 million (Sale)
Therefore total tax paid by X in this case is INR 2.7 million
If GST is applied, the tax payer (in this case X) will get a tax credit of INR 1 million while paying tax during sale, (equal amount of credit as he has paid during procurement of raw materials). Hence, the total tax X has to pay during the sale will be only INR 0.7 million.
One may argue that a similar function is performed by VAT, so what’s the need of GST?
There are key contrasts between both. VAT changes over the states, unlike GST. There are examples of state cutting the tax rates to draw in more financial investors or charging more tax to increase tax incomes. This won't be conceivable under GST. The assessments would be isolated amongst state and focus by a recipe. GST, not at all like VAT will encourage consistency the nation over. There would not be any extra duties to be paid crosswise over particular states. It is imperative to note that there is no tax credit being accommodated between state exchanges under VAT.
The GST has been implemented in more than 140 countries across the globe. Although most countries have implemented a unified GST model, India is expected to adopt the Dual model of GST, like it is applied in Brazil and Canada. Dual structure implies that there will be two components- Central GST and State GST. Both will have separate powers to administer and legislate their respective taxes.
So is it safer to say that the GST will bring the prices to cheaper levels?
Not really! Well, in fact this is the most fragile area of GST. It has been numerous times attacked by the oppositions. Since the taxes are distributed among the chain, consumer prices are expected to rise in order to maintain the current tax revenues. However, the ruling government has justified by stating that GST will provide tax cuts across various brackets; but the critics aren’t entirely satisfied with this. The major citation has been that the taxpaying population in India is too less and in addition, the tax cuts to a small taxpaying segment is supposedly meager.
According to Arun Jaitley, GST will result in the improvement of 2 per cent in the GDP. After missing numerous deadlines latest being 1st April, 2016; government continues to stay optimistic for the implementation of the bill.
Let’s have a quick look at the major demands of opposition the opposition party (Congress) to pass the GST bill. Congress proposes three reforms in the bill
1) A provision capping of GST at 18 per cent to be added to bill itself (the rates have not been finalized yet)
2) Scrap the proposed additional levy of 1 per cent (over and above GST rates) for manufacturing state (it was to be given to the states who argued that they should be compensated for investments made by them in order to improve their manufacturing capabilities)
3) Change in the composition of GST council; Congress seeks one-fourth share of centre (against the proposed composition of two-third comprising of states and one-third from centre)
A prolonged thought on the GST bill would lead into the conclusion that GST is surely the reform India should look forward to as it would lead to higher outputs, economic inclusion and greater employment opportunities; but his will come in a long term. Initially, it is expected to cause higher inflation and dearer administrative costs. But before that, it will continue to face stiff competition from high tax revenue earning states due to loss of their autonomy.
This article has been authored by Keval Boricha from IIM Raipur
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