New Delhi: In about a week, the country is set to embrace a new indirect tax system, the goods and services tax (GST) that will dismantle state barriers to create a single national market, creating history, and giving a strong boost to a host of economic and development goals.
India’s transition to a countrywide, value-added tax system across goods and services is remarkable for a nation where state governments and local self- governments exercise considerable sovereignty in taxation. Rolling out GST on 1 July is the result of more than a decade of discussions, tussle among states, and between states and the Union government, instances of give and take, lobbying and compromises. The highlight of the reform is the creation of a federal tax institution, the GST Council, which has state ministers as members and the Union finance minister as chairman, which gives every state a say in the country’s indirect tax policy. A country like the US with similar strong taxation rights to individual states has so far not managed to have a GST despite all its benefits.
A seamless market of over a billion people and eight million registered indirect tax assessees paying a single tax for goods and services is likely to go a long way in achieving what the government has been trying to do through various measures—promoting the manufacturing sector, boosting exports, creating more jobs, improving the investment climate, cutting down tax evasion and lowering the compliance cost to businesses.
According to Ansh Bhargava, a senior consultant at Taxmann.com, a company that assists taxpayers, the single market concept is akin to signing a free trade agreement between different states of India. “The GST regime seeks to break the barriers that currently exist between states and make movement of goods between different states easier,” said Bhargava. Elimination of the tax-on-tax effect by providing input tax credit will lead to lower costs and make Indian products competitive in the global market, he said.
Consumers on the other hand are expected to benefit from transparency as well as reduction in prices of goods and services. Besides softening inflation, lower indirect taxes will also address the regressive nature of this levy which affects the rich and the poor alike, unlike taxes on income which is based on an assessee’s ability to pay.
For businesses, elimination of multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions will improve the ease of doing business and reduce avoidable litigation. A large part of the tax litigation in India is around tax exemptions.
However, GST that is ready for implementation is far from ideal. The guiding principle for the government while trying to secure consensus amid competing interests of various stakeholders was that it is better to have a good GST instead of waiting endlessly for the best one. From the concept of an ideal GST of low tax rate with few exemptions initially considered, the final form has four rates—5%, 12%, 18% and 28% for goods and services—with some items in the highest slab attracting an additional cess. Most of the items fall in the 12% and 18% slabs depending on the current tax burden on them.
Five hydrocarbons—crude oil, petrol, diesel, natural gas and jet fuel—are temporarily kept out of GST, while liquor is constitutionally kept out of the new tax regime. That was a compromise the Union government had to accept as states wanted the items on which tax collection is the easiest to be out of the new tax regime which gives little liberty to individual states to revise rates on their own.
The powerful federal indirect tax body, the GST Council, chaired by Union finance minister Arun Jaitley will consider inclusion of the hydrocarbons into the new tax regime once state revenues stabilize after GST implementation. Nearly 40% of state revenues are estimated to be from petroleum products.
States with a manufacturing base such as Maharashtra and Gujarat had their own concerns. These states currently get proceeds of a 2% central sales tax (CST) levied and collected by the centre on interstate trade in goods. Their argument was that significant investment has been made to create infrastructure for manufacturers, who export products to other parts of the country. GST being a destination-based tax on consumption, proceeds of tax on interstate supply of goods and services will flow to the state that is home to the consumer. These states argued for retaining CST in some form even in the GST regime. Madhya Pradesh and Maharashtra argued that local bodies, which raise resources through entry taxes, will be deprived of revenue.
To gets states on board, Union finance minister Jaitley agreed to fully compensate states for any revenue loss from GST implementation for five years. The compensation, which is specified in the Goods and Services Tax (Compensation to States) Act, 2017, will be computed taking the annual growth in state indirect tax revenue to be 14%.
V.S. Krishnan, adviser (tax policy group) at EY India and a former member of Central Board of Excise and Customs, said that although consuming states will benefit in the GST regime by way of tax revenue from interstate supply of goods and services, the exporting states will not stand to lose either. Exporting states will benefit from getting to tax services under the new indirect tax system, he said. As of now, the centre taxes production of goods and supply of services, while states get to tax sale of goods but not supply of services. In GST, this barrier is removed and both the Union and state governments get to tax the entire value chain of goods and services, increasing compliance, explained Krishnan.
There is still some work to be completed. One among them is to clear rules regarding e-way bills, an electronic permit for movement of goods. According to Prashant Deshpande, partner at Deloitte Haskins & Sells Llp, the e-way bill rules need to be very practical and minimize compliance burden. Also, states need to ensure that border check posts are eliminated.
GST in the current form is a diluted one in comparison to the original concept, but experts welcome its roll-out. “Introduction of GST is a very good start. Reforms, however, do not end here. Certain features can be further streamlined,” said Deshpande.