Goods and Services Tax (GST): Analysis
Aneesh has done a critical analysis of the recently passed GST bill in his blog: “Goods and Services Tax ( GST): Analysis” for the benefit of visitors to the page. Please also read a blog written by me earlier on the subject for better comprehension. It is one of the biggest economic reforms in India.
Background of GST
The GST Bill, 2014 proposes a national Value Added Tax to be implemented in India from 1 April 2017. GST would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace all indirect taxes levied by the central and state governments. GST would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method.
Taxable goods and services will not be distinguished from one another and taxed at a single rate in a supply chain till the goods or services reach the consumer. Exports would be zero-rated and imports would be levied the same taxes as domestic goods and services adhering to the destination principle. As India is a federal republic GST would be implemented concurrently by the central and state governments.
Salient features of GST Bill
- The GST shall have two components: one levied by the Centre and the other levied by the States. Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability.
- However, the basic features of law such as definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform as far as practicable.
- The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.
- The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited).
- To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.
- The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply that the Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
- The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.
- Each taxpayer would be allotted a PAN-linked taxpayer identification number. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax, facilitating data exchange and taxpayer compliance.
- Keeping in mind the need of tax payer’s convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.
Advantages of GST
- It is expected to add up to 2% to GDP.
- It is expected to increase compliance and thereby increase public revenue.
- Increase in public revenue will reduce fiscal deficit and provide the government scope to increase public spending to create and improve infrastructure and create jobs.
- Increased public spending will promote growth.
- Prices of goods and services are likely to fall because of the reduced tax burden.
- Reduction in costs of production will make Indian manufactured goods globally more competitive and hence promote exports. This will support the call for ‘Make in India’.
Disadvantages of GST
- Centralization: Since all the taxes will be replaced by GST. It will give more power in the hands of the Centre and States will have to surrender some of their powers along with a huge share of their revenue. It is against the spirit of federalism.
- May Not be consumer friendly: All the talk of reduced taxes and tax credit looks good on paper and is actually good for the manufacturers and traders. However, in the end the consumers will have to bear the burden of the overall tax and thus they might end up paying a higher price.
Challenges to GST
- Bill to be passed by majority of States: The GST Bill has to be passed by majority of State Governments in their respective State Assemblies which is a herculean task in itself. Revenue Neutral Rate: In GST regime the Govt. revenue is bound to differ. Hence through RNR the Govt. will try to implement the new tax in such a way that its revenue remains the same despite giving tax credits. Currently the indirect tax component is between 25-28% which is high compared to other countries. The Centre has finalised the RNR at 27%. Needless to say higher RNR would hamper the prospect of implementation of GST.
- Robust IT Network: The success of GST would greatly depend on the backbone of IT connecting all the States to the Centre and to each other. In this effort the Govt. has already assembles the Goods and Services Network (GSTN) which is operational since the last two years. However GSTN has yet to come up with a business model compatible to trade and industry practices. Any glitch on technical grounds would not only be a costly affair but also would bring the entire business to a virtual standstill.
- Provision for Rules: Currently, there is Central Sales tax for inter-States sales of goods and services however there is no service tax at the State level. Therefore, it would be essential to prepare comprehensive rules in order to tax the goods and services appropriately. The success of GST would hinge on the simplicity of rules to be followed by the businesses, in order to avoid unnecessary hassles.
- Extensive Training to Tax Administration Staff: GST is absolutely different from the existing taxation system. It, therefore, requires that tax administration staff at both Centre and States to be trained properly in terms of concept, legislation and procedure.
- Additional 1% Levy on GST: The purpose of additional levy is to compensate states for loss of revenue while moving to GST. The fundamental purpose of GST is to make India a single body where inter-state movement of goods is common. However the 1% situation would defeat the very purpose of GST in the country.
GST Reform: Work in Progress
There are 32 parties to the negotiations and so it would take considerable time to finalize the structure and operational aspects of the tax. The tax structure that would emerge from the negotiations may not be ideal. It would be unrealistic to expect a flawless GST. The structure that would emerge would be based on the consensus reached and it is necessary to ensure that the fundamental, sound features of the tax are not compromised. For the above reason GST reform should be treated as a process rather than an event. Once the basic features of the tax are implemented, it would be necessary to improve the structure and operational aspects of the tax over time. In fact, the introduction of GST is only the next stage of reforms. The GST reform is not a magic wand which will solve all the economic problems of the nation and we should keep our expectations realistic.