Gst and Taxation in India: The Way Ahead

The way Ahead Goods and Service Tax (GST) was rolled out in India on July 1st 2017, after several rounds of dead lock in the parliament. Observers have described the reform as the most meaningful change to India’s tax regima since the country became independent in 1947. A late night parliament session befitted this historic moment. Though the prime minister of India Narendra Modi is the principle driving force behind GST, this epoch making reform reflects the collective will of 135 crore people represented in the sovereign parliament and state legislatures. The launch, however, was boycotted by several parties.

The GST was established to subsume various indirect taxes levied at different levels, with the idea of reducing rep-tape, plugging leakages and paring the way for a transparent indirect tax regime. What is GST? The GST is meant to be a unified indirect tax across the country on products and services. In the current system, tax is levied at each stage separately by the Union government and the States at varying rates, on the full value of the goods. But under the GST system, tax will be levied only on the value added at each stage. It is a single tax (collected at multiple points) with a full set-off for taxes paid earlier in the value chain.

Thus, the final consumer will bear only the GST charged by the last dealer in the supply chain with set-off benefits at all the previous stages. The GST is classified into two types State GST and Central GST. What is State GST and Central GST? For transactions within a State, there will be two components of GST - Central GST (CGST) and State GST (S

GST) - levied on the value of goods and services. Both the Centre and the States will simultaneously levy GST across the value chain.

The impact of the GST on the process of goods and services will largely depend on the item in question. It will also depend upon the respective state government and their intervention with respect to controlling prices essential commodities. Milk for example, which is likely to see a spike in prices after GST is implanted, can still be sold at cheaper rates, if the state government offers a subsidy on it. With respect to those living below the poverty line there might not be a direct impact of the GST on them as such since basic necessities like food are unlikely to attract the GST but increased collections of the GST with a larger tax base should provide on impetus to the government to allocate more money for social and poverty alleviation programmes.

How will GST help in getting rid of tax evasion? A comprehensive IT system, GSTN, will a-lot universal GST numbers to all manufacturers and traders, stockist, wholesalers and retailers. This will simplify the administration of indirect taxes and plug leakages. The government also plans to incentivise tax compliance by traders. It gives the country one uniform tax, and no frequent rate changes. A lower tax burden, one market to help business and no truck queues at state borders. GDP could raise by 2%. Less scope for evasion which means higher revenues. Lower taxes to boost exports. What it means for business? There won’t be any fear that a state will randomly raise taxes, and there will be transparency in taxes. Goods and services providers will get the benefit of input tax credit for the goods used effectively making the real incidence of taxation lower than the headline taxation rate.

The government has categorised items in five major slab – 0%, 5%, 12%, 18% and 28%. Here is the updated list of goods and services taxes under various GST slabs. Broadly service are expected to be costlier under GST regime, as the expected GST rate is higher than the existing service tax rate of 15% clearly, the GST is expected to bring down prices of indigenously manufactured good on account on current effective indirect taxes being higher as compared to recommended lower GST rates @ 5% and standard GST rate@ 12% and 18%. Thus, price of certain category of goods may come down depending on the effective rate of indirect taxes being paid at present and the tax brackets under which goods are classified under GST.

All restaurants, restaurants of hotels with room tariff of less than rs 7,500, Food parcels, Textile job work, transport services railways, air transport, supply of e-waste. 12% on apparel above rs 1000, frozen meat products, butter, cheese, ghee, dry fruits in packaged from, animal fat, sausage, fruits juices medicine, tooth powder, match sticks, colouring books, picture books etc. The government has opted for four slabs for both goods and services- 5%, 12%, 18% and 28%. In addition, several items face zero levy, while bullion will attract 3% GST and luxury an sin goods that are in the top bracket will also attract a cess that will be used to compensate states for revenue loss. GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.

A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business. Advantages of GST: GST will mainly remove the Cascading effect on the sale of goods and services. Removal of cascading effect will directly impact the cost of goods. The cost of goods should decrease since tax on tax is eliminated in the GST regime. GST is also mainly technologically driven. All activities like registration, return filing, application for refund and response to notice needs to be done online on the GST Portal. This will speed up the processes.

What changes has GST brought in? : GST will improve the collection of taxes as well as boost the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate. The Centre needs to follow through with pending legislation for the goods and services tax (GST). As the recent the lack of reforms in the indirect tax regime leads to high costs and inefficiencies in myriad ways. For instance, blocked input taxes or distorting tax-on-tax and cascading rates could add up to as much as three-fourths of investment in plant and machinery. The Centre needs to follow through with pending legislation for the goods and services tax (GST).

As the recent Arvind Subramanian expert committee points out, the lack of reforms in the indirect tax regime leads to high costs and inefficiencies in myriad ways. For instance, blocked input taxes or distorting tax-on-tax and cascading rates could add up to as much as three-fourths of investment in plant and machinery. Hence the pressing need to change over from the dual value-added tax (VAT) system in the Centre and the states to an integrated GST, with tax levied only on the value added and input tax credits seamlessly available across the value chain. It would shore up transparency and boost tax efficiency. As the report points out, the GST Bill does provide a 2% band for the states above the standard GST rate, for tax flexibility. But varying rates can distort and divert economic activity. The GST Council needs to work at uniform rates so as to have a truly national market. It also needs to decide on a date for including key petro-products in the GST regime. Such items do provide disproportionately high tax revenue for both the Centre and the states. But given the polluting externalities of petro-goods, along with the standard GST rate, a top-up non-Vatable rate of, say, 24% would make sense.

A similar rate structure can be envisaged for potable alcohol and tobacco. In due course, it would also make sense to include electricity duty and real estate in GST. As for the issues flagged by the Congress, a rigid GST rate in the constitutional amendment is unwarranted. It also makes sense for the political executive to resolve tax issues via consensus and, if need be, by setting up an expert committee. With regard to doing away with the 2% central sales tax, it would make better sense to reduce it by 1% now and bring it to zero in, say, two years, as the Centre compensates the states for revenue shortfall, if any, for five years. Final Verdict: Real estate is a beneficiary as 16 indirect taxes have been subsumed in a single GST at 12%. FMCG also benefits as logistics cost reduction will play a big role. If you run a business, chances are that GST has affected you, positively or negatively! The full impact of GST will take some time to play out, as companies evaluate the impact on their supply chains and as consumers and competition react to the price transmissions. For a comprehensive analysis on GST's impact on various sectors.

Works Cited

1. https://www.taxmann.com/blogpost/2000000031/what-is-gst-goods-and-services-tax-in-india.aspx
2. https://blogs.economictimes.indiatimes.com/figuringitout/way-ahead-is-to-reform-indirect-tax-regime-with-gst/
3. https://www.tradebriefs.com/index.php/component/content/article?id=466419
4. https://cleartax.in/s/gst-law-goods-and-services-tax. http://www.cbec.gov.in/htdocs-cbec/gst