GST – A game-changer for India

Prakash Chawla*
The 122nd Amendment to the
Constitution will go down in India’s political-economic history as a watershed,
as it is about to give the country the most progressive tax reforms till date
in the form of Goods and Services Tax (GST) which should make life easier for
the trade and industry and more importantly reduce the cost of goods and
services for the consumer, without compromising on the revenues of either the
Centre or the States. In fact, the GST should lead to a tax buoyancy and push
to the Gross Domestic Product between 1-1.5 per cent with clearance of the cob
web of taxes.
The excitement among the industry, trade and
investors is justified. By a single measure, India would move up the World Bank
ranking of ease of doing business by several notches. It is true the GST Bill
has been pending for over a decade but the fact that the NDA Government has
been able to build a wide political consensus on, what has been the most
contentious issue, has conveyed a huge positive signal to the rest of the world
that India enjoys a broad political support for the economic reforms, crucial
for over a billion people.
What is GST?
It is a plethora indirect taxes
which contribute to bulk of revenues of the states and just about half of the
tax kitty of about Rs 16 lakh crore
of the Central Government. While direct taxes like the personal income tax
concern a small fraction of the population, the indirect taxes affect every
Indian. Since the indirect taxes are on consumption ,
rich and poor , both have to pay the same amount.
Presently, the Constitution gives mandate to the Centre and
the States to levy indirect taxes ranging from excise duty, customs, service tax. Valued Added Tax or sales
tax, entertainment tax, octroi, entry tax, purchase
tax, luxury tax and different surcharges. Both the Centre and the States
have their own official machineries to collect these taxes. But for Central
excise and VAT, most of the taxes get calculated on a base which itself has
been subjected to taxation at some or the other stage of manufacturing value
chain. So, it is a tax on tax making goods and services rather expensive for
the ultimate consumer while making life hard for the trade and industry. The
most visible example of inefficiencies of the system can be seen at inter-state
borders with long queues of trucks being subjected to different kind of tax
inspection and payment of octroi and entry tax,
blocking traffic on the highways for hours together.
With the roll out of the GST, expected from April 1, 2017,
all these taxes would be subsumed into a single tax for the consumer. The
Centre would levy and collect Central Goods and Services Tax (CGST), and States
would levy and collect the State Goods and Services Tax (SGST) on all
transactions within a State. The input tax credit of CGST would be available
for discharging the CGST liability on the output at each stage. Similarly, the
credit of SGST paid on inputs would be allowed for paying the SGST on output.
Services and goods would be subjected to taxes only on value addition at each
stage, thus bringing down the overall tax burden for the consumers.
From manufacturing to destination
As against the present system where the taxes like excise and
Central sales tax are levied on manufacturing at the factory gate or on
inter-state movement of goods, the GST involves taxation at the destination
level. This could mean gains for the consuming state and loss for the
manufacturing state. This is why the state with a good manufacturing base like
Tamil Nadu was opposed to the GST and consuming states like Bihar, West Bengal
and Odisha favoured the
same. But, the GST Bill provides for fully compensating the losses to the
states for five years. The earlier provision of additional one per cent levy
for the losing states has now been done away with.
Impact on inflation
Analysts feel that in the short term, there could be some
impact on prices of services which now attract an average service tax of around
14 per cent only at the Central level. However, in the case of manufactured
products like automobile, the standard GST could be much lower than the
combined present effect of excise and state levies. However, in the medium to
long term, this should play out. On the whole, GST should be anti-dote to
inflation and would thus be people-friendly along with trade /industry
friendly. It would also bring in a lot of unorganized sector of the economy
within the mainstream.
GST Rate
There would be about three rates – Standard rate in the form
of X which will cover bulk of the items , X-minus for the items of mass
consumption and X-plus for the luxury goods or the so-called “sin goods’’. In
the Constitutional Amendment, there is no mention of the GST rates, which would
be decided by the GST Council comprising of Union Finance Minister as the
Chairman and Finance ministers of the states. Any decision of the GST Council
would require three-fourth approval of the Council. The states would have two
–third of the voting powers and the Centre one-third. The Congress Party has
demanded a ceiling of 18 per cent on GST standard rate while the government is
called upon to ensure the revenue neutral rate (RNR). Any major deviation from
RNR could be counter-productive either for inflation or for fiscal prudence.
Getting the right RNR both for the Centre and the states would be a major
challenge.
Left out
Petroleum products and alcoholic beverages have been left out
of the GST, for now, on concerns of the states which feared these major revenue
heads could not be bargained for. For the sake of wider political consensus,
these heads have been left for the future reforms.
What Next?
After approval of Parliament, the GST Bill would go for
ratification by at least half the states. The process is expected to be
completed very soon. Afterwards, Parliament will have to again pass two
enabling bills – one for the Central GST and the other for the Integrated GST.
Besides, the state legislatures will have to pass the enabling law of State
GST. In the meantime, work on the central IT backbone being prepared by a
non-profit organisation is being done on a
war-footing for the possible roll out from the next financial year.
* Prakash Chawla
is a senior journalist and commentator. He mostly writes on political-economy
and global economic issues.