IMPACT OF GST AND ITS IMPLEMENTATION

Author- Priyanka Porwal

 

 

GST or the Goods and ServicesTax is an indirect tax that brings together most of the taxes that are imposed on all goods and services (except a few) under a single banner. This is in contrast to the current system, where taxes are levied separately on goods and services.

The GST, however, is a comprehensive form of tax based on a uniform rate of tax for both goods and services. However, the GST is payable only at the final point of consumption.

A just and viable tax regime is vital for the sustainable economic growth and fiscal consolidation of any economy in the world.This assumes a greater importance in a developing economy like India where although we have a high demographic dividend, we are yet to convert it to the proportionate human capital, which will in turn benefit the social and economic growth of the country.In order to facilitate this, we need a conducive environment as we push forward towards becoming a better developed nation.In order to become a more economically developed nation, we need a transparent, just, equitable and fair taxation system that is easy to administer.

How will it work in India?

The GST was first mentioned in India during the 2006-2007 budget and the latest budget too includes the need to take steps to make the implementation possible by April 1, 2010. Given the federal nature of the country, GST in India is expected to take the form of a dual GST including both a Central and a state GST.

The Empowered Committee of the State Finance Ministers has been given the responsibility for creating a model and a roadmap for the GST. While there is very little clarity at present, it is expected that the central GST will subsume excise duty and service tax and the state GST may replace the VAT.

NEED FOR GST LEGISLATION

The tax-GDP ratio of a country is an important indicator that helps understand how much tax revenue is being collected by the government as compared to the overall size of the economy and unfortunately, this ratio is a dismal low for India despite having years of high growth, the lowest in BRICS countries.

From 2001 to 2015 the Indirect Tax-GDP ratio has increased from 10.28-11.6 only and therefore there is an urgent need to raise this ratio.The burden of regressive taxes is anotherissue that the GST aims to redress. Direct taxes are progressive taxes as they are contingent on the ability of the taxpayer to pay.In India, more than 60% of the total tax collected is accounted for indirect taxes, implying that the tax structure is extremely regressive and since the rich and poor are subject to the same tax rate which is unfair and therefore the indirect taxes need to be hauled.Furthermore, the sharing of financial resources and revenue from the tax system between the Centre and the State is made simpler by the GST tax reform.Furthermore the cascading of taxes with both the Centre and State levying taxes as the taxes levied by the State Government are not available to set off against the taxes being levied by the State Governments.At the central level GST will subsume Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty (Countervailing Duty), and Special Additional, Duty of Customs. At the State level, Subsuming of State Value Added Tax/ Sales Tax, Entertainment Tax, Central Sales of Tax, Octroi and Entry Tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling.

Also, the variety of VAT tax laws in the country with disparate tax rates and dissimilar tax practices divides the country into separate economic spheres thereby creating tariff and non tariff barriers thereby hindering the free flow of trade in the country.This in turn also constitutes high compliance cost for the taxpayers disadvantageous to economic growth of a country.

Application and tools of goods and services taxes

GST will be charged on the place of consumption of Goods and services. It can be levied on following:

  • Intra-state supply and consumption of goods & services
  • Inter-state movement of goods
  • Import of Goods & Services

Important features of Goods and Service Tax, Bill:

The GST shall have two mechanisms: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter denoted to as State GST). Rates for Central GST and State GST would be set appropriately, reflecting revenue considerations and acceptability. This twofold GST model would be implemented through manifold statutes (one for CGST and SGST statute for every State).

Though, the basic structures of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification would be uniform across these statutes 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 dealings 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 independently. It must be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST.

Since the Central GST and State GST are to be treated distinctly, taxes paid against the Central GST shall be permitted to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST.Cross utilization of ITC between the Central GST and the State GST would not be permitted except in the case of inter-State supply of goods and services under the IGST model.Preferably, the problem related to credit accumulation on account of refund of GST should be evaded by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax where, again refund/adjustment should be completed in a time bound manner.In order to make it practical, uniform procedure for collection of both Central GST and State GST is recommended in the respective legislation for Central GST and State GST.The supervision of the Central GST to the Centre and for State GST to the States would be given. This would infer that the Centre and the States would have parallel 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 present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is required. It is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be approved with satisfactory compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. To respect the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be stated that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

The States has opinion that Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect togross annual turnover. Particularly, there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also permit option for GST registration for merchants with turnover below the compounding cut-off.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 with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the predominant PAN-based system for Income tax, facilitating data exchange and taxpayer compliance.For the convenience of tax payer, 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.

Impact of GST on Indian Economy, Impact of GST in India.

Amidst economic crisis across the globe, India has posed as a beacon of hope with ambitious growth targets, supported by slew of strategic missions like ‘Make in India’, ‘Digital India’, etc. Goods and Services Tax (GST) is expected to provide the much needed stimulant for economic growth in India by transforming the existing basis of indirect taxation towards free flow of goods and services within the economy and also eliminating the cascading effect of tax on tax. In view of the important role that India is expected to play in the world economy in the years to come, the expectation of GST being introduced is high not only within the country, but also in neighbouring countries and in developed economies of the world.

(a) Increased FDI: The flow of Foreign Direct Investments may increase once GST is implemented as the present complicated/ multiple tax laws are one of the reasons foreign Companies are wary of coming to India in addition to widespread corruption.

(b) Growth in overall revenue: It is estimated that India could get revenue of $15 billion per annum by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. Over a period, the dilution of the principles may see that only part of this is accruing.

(c) Single point taxation: Uniformity in tax laws will lead to single point taxation for supply of goods or services all over India. This increases the tax compliance and more assesses will come into tax net.

(d) Simplified tax laws: This reduces litigation and waste of time of the judiciary and the assess due to frivolous proceedings at various levels of adjudication and appellate authorities. Present law appears to be much worse and an amalgam of the bad parts of VAT/ ST/ CE.

(e) Increase in exports and employment- GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production -land labour and capital.

Impact of GST on Indian Economy

  • Reduce tax burden on producers and foster growth through more production. This double taxation prevents manufacturers from producing to their optimum capacity and retards growth. GST would take care of this problem by providing tax credit to the manufacturer.
  • Various tax barriers such as check posts and toll plazas lead to a lot of wastage for perishable items being transported, a loss that translated into major costs through higher need of buffer stocks and warehousing costs as well. A single taxation system could eliminate this roadblock for them.
  • A single taxation on producers would also translate into a lower final selling price for the consumer.
  • Also, there will be more transparency in the system as the customers would know exactly how much taxes they are being charged and on what base.
  • GST would add to government revenues by widening the tax base.
  • GST provides credits for the taxes paid by producers earlier in the goods/services chain. This would encourage these producers to buy raw material from different registered dealers and would bring in more and more vendors and suppliers under the purview of taxation.
  • GST also removes the custom duties applicable on exports. Our competitiveness in foreign markets would increase on account of lower cost of transaction.
  • The proposed GST regime, which will subsume most central and state-level taxes, is expected to have a single unified list of concessions/exemptions as against the current mammoth exemptions and concessions available across goods and services
  • The present scenario of differing tax rates in different states obstructs cooperative federalism.
  • GST will bring uniformity and also deplete the cascading consequence of these taxes by giving input tax credit, having a comprehensive tax inclusion with minimum exceptions which will in turn help the Industry to benefit from the proposed common procedures and claim credit for the tax paid.
  • GST is expected to increase the mobilization of resources available for property alleviation and development of the country as pointed out by the Prime Minister, Narendra Modi.
  • This will take place in two ways: (a) directly the resources available to the poorer states will increase substantially; (b) indirectly as the tax base becomes more buoyant
  • The common base and common rates across goods and services and very similar rates across Centre and States will result in effective administration and increase compliance while also ensuring the better management of taxes collected in the State.
  • Also, there is a provision to maintain the requisite fiscal autonomy to the States with the power to levy additional excise taxes on certain “sin” goods like, tobacco, alcohol, etc.
  • The complicated tax-levy system categorized by distortions between States and Cente which divides the country into separate economic zones with the help of GST will become one common national market.
  • This impedes the Make in India process which will get a boost through GST as it is making tax compliance easier and removing ambiguity and at the same time as GST will be applied on imports, domestic manufacturing would be encouraged.
  • Tax Governance will get a positive boost through this regime, mainly, through the feature of input tax credit.
  • To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the tax chain which will ensure tax compliance. Also this would further require producers to buy materials from registered dealers and therefore will bring in more and more vendors in the taxation net.

Furthermore, the dual monitoring structure of the GST by both Centre and State will make tax evasion more prone to detection.There will be reduction in prices of goods as taxes would now be exempted from the production cost and at the same time it will put better goods and services within the reach of a larger number of the populace and as such increase the living standards of the country.The successful implementation of GST would give a strong signal to the foreign investors about India’s increased creditworthiness, lesser compliance and procedural costs in the taxation sphere and remove the complexities faced by the foreign investors who were reluctant to invest in consonance with the existence of virtual economic zones throughout the country.

GSTN, the Goods and Services Tax Network:

Along with GST, there are a number of reforms that the Government is bringing in to strengthen the manufacturing bone of India.GSTN, the Goods and Services Tax Network is being setup with the objective to provide the requisite IT infrastructure and services for the proper roll-out and implementation of GST.It is a company under Section 25 which implies that it is a non-government, private limited company which will not work for profit.

The division of powers is such that the Central Government holds 24.5% equity in GSTN while the states inclusive of NCT of Delhi and the union territory of Puducherry and the Empowered Committee of the State Finance Ministers collectively hold another 24.5%, the remaining 51% vests with other Government financial institutions.This company will work towards providing a proficient GST Eco-System. It will encourage and collaborate with GST Suvidha Providers to roll out GST applications for providing simplified services to the stakeholders.It is also entrusted to carry out research in order to conclude better and best practices and to indulge in staff training and also consultancy to the Tax Authorities and other stakeholders.Another very important feature of the GSTN is to develop Tax Payer Profiling Utility which is a very important aspect in ensuring efficient administration and achieve the GST goals.

GST Council

This is the most important aspect of the Goods and Services Tax, in ways bigger than the GST bill too, as the entire structure of GST is contingent on this foundation.It is an apexbody headed by the Union Finance Minister Mr. ArunJaitley with the State-nominated ministers and the Union Minister of State for Finance( In charge of Revenue) as members.It is imperative to note that the decisions of the GST Council will shape whether this ambitious tax reform will achieve its due desired effect or not.

Harmonizing GST laws is essential

The central sales tax is a useful model; states enjoy the risks and rewards of tax ownership. The replacement of state sales tax by the value-added tax (VAT) in 2005 was considered a significant step forward in the reform of domestic trade taxes in India.

The state VAT design was based largely on the recommendations of the 1994 report of the National Institute of Public Finance and Policy, led by the late AmareshBagchi. In recommending a state VAT, the Bagchi committee report recognized that it was not a perfect solution but was a feasible option within the framework of the Constitution and would lay the foundation for an even more rational regime in future.

The Centre and states have now embarked on implementing this more rational regime, in the form of a dual goods and services tax (GST), to be levied concurrently by both levels of government.A dual structure would mean that there would be a central GST and a state GST, each levied on a comprehensive base comprising both goods and services. Thus, a transaction would attract both taxes.

Ideally, both taxes should have been merged into a single national GST, with an appropriate sharing of revenues between the Centre and states. However, given the federal structure of the Constitution, a dual GST is a political necessity.It is essential that the GST laws are harmonized between the Centre and states, and among states. This will simplify compliance, reduce administration costs and improve revenue collections: a win-win for governments and taxpayers.

There are several dimensions to harmonization-tax base and rates, tax administration and tax legislation, and rules and procedures.It is essential that the base for the tax covers both goods and services in a seamless manner and is uniform throughout the country. Under the best international models, GST is levied on all supplies, whether of goods, services, real property, intangibles, or any combination of these. Moreover, the tax applies at all points in the supply chain.

The current division of tax base under the Constitution between an exclusive Centre list and an exclusive state list is archaic and no longer tenable in India’s modern economy. The Constitution needs to be amended to give both levels of government concurrent powers to levy tax on all supplies, with the proviso that the state tax would be restricted to supplies for consumption within that state.

Application of tax on a comprehensive base would automatically ensure uniformity of the base between the Centre and states, and across states. Under VAT, states have exercised their fiscal autonomy to deviate from the common base agreed to by a committee of state finance ministers. Such deviations are unfortunate and should be resisted.

As regards the tax rate, two primary tax rates are contemplated-a standard rate and a lower rate applicable to food and other specified necessities. While a lower rate for food may be inevitable on social, economic and political grounds, it runs the risk of seriously compromising the objective of base harmonization.

New Delhi: Implementation of the proposed Goods and Services Tax (GST) and opening up of FDI will fuel the growth of FMCG sector in India by taking the total size of industry to Rs4.5 lakh crore ($95 billion) by 2018, according to a Ficci-Technopak report.

FMCG sector has grown consistently during the last three to four years and has reached the level of Rs1.25 lakh crore ($25 billion) sales in 2008, the report said.Even without the FDI and GST, the industry is poised to grow at 10-12% for the next 10 years to reach Rs2.06 lakh crore by 2013 and Rs3.55 lakh crore by 2018, it pointed out.Demand from the rural areas would be instrumental in fuelling the growth of FMCG companies in India,” Ficci general secretary Amit Mitra told reporters while releasing the report.

Opening up of FDI and implementation of GST in India will further boost the sector, which may take the size of the industry to 4.5 lakh crore by 2018, Mitra said.

The study also urges the government to enforce trade mark and copyright laws to drastically reduce counterfeits, and protect the rights of the consumers and FMCG companies.

Speaking about the potential of the sector, Mitra said, it is among the largest employers in India and livelihood of 13 million people associated with 8 million ‘kirana´ stores are directly depended on it.

New Delhi: Implementation of India’s most ambitious tax reform, the goods and services tax (GST), could start on 1 April, 2010, even if all the states do not come on board, finance minister Pranab Mukherjee said on Tuesday.

Admitting that implementing GST won’t be easy, Mukherjee said the chairman of the empowered committee of state finance ministers AsimDasgupta had assured him that the differences among states could be resolved. “I know there is a problem. As in VAT (value-added tax), some (states) did not join us. It may happen in this case,” Mukherjee told a gathering of industrialists, referring to the possibility of GST being rolled out in April 2010 without all states coming on board.

VAT, the precursor to GST, was introduced in January 2005 without a couple of large states such as Tamil Nadu and Uttar Pradesh signing on initially. Recently, the Tamil Nadu government has expressed reservations about the April 2010 deadline for GST, terming it premature.

GST system in India by April 2010

In the conference of the State Finance Ministers, the Finance Minister Mr. Pranab Mukherjee has proposed the state finance ministers to work over on the delayed issues of the tax. The Central introduces the Goods and Services Tax (GST) which is one of the most critical parts of the economic reforms of the country.

Mr. Mukherjee has proposed in the conference of the State Ministers “GST will be the main motive of focus from April 1, 2010. It is one of the most critical parts of the country’s economic reform.” Mr. Mukherjee also added “the central will continue to play a major role in the affairs of Value Added Tax (VAT) as well as it will remain an active catalyst in the GST.” Through the new tax system GST many indirect taxes are going to get exchanged at the state and central levels.

The Central Government has published affluent essential circulars regarding the eradication of double benefits under the VAT and Central Sales Tax (CST) compensation packages which has been duly agreed by the states. Previously compensation has been incurred on the loss of revenue on the implementation of VAT and gradual reduction of CST rate to the states by the central. “AamAadmi” the word used by the finance minister towards the citizens of the country. He said that the states priority should be in looking towards the growth of the sectors like infrastructure, agriculture, employment generation etc.

The apprehension of the central has risen by viewing its corrosion over the financial discrepancy that has soared up to 6.2 percent of GDP in 2008-2009. Mr. Mukherjee expressed his views by adding that the huge levels of financial incongruity are absolutely non-sustainable from the medium to the long term process of the states as well as for the central.

An essential step is required to boom up the economic higher growth as soon as possible without any kind of fiscal licentiousness.By realizing the fact about 6.7 per cent growth rate during 2008-09, the Finance Minister said “India is rising as the second-fastest growing economic country in the world.” Furthermore, he said, the core sector industries, as well as crude oil, coal, cement and steel, during April 2009 have made a great mark on the economic graph “which has provided an assurance to bring back again the economy on the way of expansion.”

THE POSITIVE IMPACT OF GOODS AND SERVICE TAX

  • GST is a single taxation system that will reduce the number of indirect taxes. Earlier, indirect taxes were charged as central excise, VAT, service tax, etc. From now, a single taxation term would cover all of those indirect taxes.
  • The Prices of products and services would reduce so this system would prove to be beneficial for the people who are fed up of paying huge prices.
  • This would reduce the burden from the state and the central government. Presently separate taxes are levied on goods and services that you produce. With the introduction of GST, all of these indirect taxes would come under a single roof.
  • Market development.GST would not be charged at every point of sale like other indirect taxes so this way, market would be developed.
  • Corruption-free taxation system.GST would introduce corruption-free taxation system. In the present scenario, the tax is levied at the time of product release from the manufacturing site, and after that retailers also pay it.
  • Positive impact on the Central and the State level
    According to the latest reports, the introduction of GST would help India to gain $15 billion every year. Let us see how:
  • Improved exports
  • More opportunities for employment
  • Enhanced economy growth
  • Reduced burden on central and state government.
  • The tax structure will be lean and simple.
  • The whole Indian market will be an incorporated market which may transform into lower business costs. It can simplify seamless movement of goods across states and reduce the transaction costs of businesses.
  • It is beneficial for export businesses. Because it is not applied for goods/services which are exported out of India.
  • Its implementation has long term benefit. The lower tax burden could translate into lower prices on goods for customers.
  • The Suppliers, manufacturers, wholesalers and retailers are able to recover GST suffered on input costs as tax credits. This decreases the cost of doing business, thus enabling reasonable prices for customers.
  • It can bring more transparency and better compliance.
  • GST implementation can control corruption. Number of departments (tax departments) will reduce which in turn may lead to less corruption.
  • More business persons will come under the tax system thus broadening the tax base. This may lead to better and more tax revenue collections.
  • Companies which are under unorganized sector will come under tax area.
  • The procedure of GST registration would also be made simple, thereby improving the ease of starting a business in India.

NEGATIVE IMPACT OF GOODS AND SERVICE TAX

  • According to many economists, the introduction of GST in the country would impact real estate market. This would increase new home buying price by 8% and reduce buyers’ market by 12%.
  • GST levied by the government as CGST for central, SGST for state government are nothing but fantasy terms representing older terms Service Tax, CST, and VAT in a new way.
  • GST is a confusing term where double tax is charged in the name of a single taxation system.
  • Most of the indirect taxes would now start coming under GST. The Central excise tax is levied at the time of Manufacturing but GST is levied till the selling stage.
  • Most of the dealers don’t pay central excise tax and cheat the government by simply paying the VAT. But all of those dealers would be forced to pay GST.
  • The tax structure will be lean and simple.
  • The whole Indian market will be an incorporated market which may transform into lower business costs. It can simplify seamless movement of goods across states and reduce the transaction costs of businesses.
  • It is beneficial for export businesses. Because it is not applied for goods/services which are exported out of India.
  • It’s implementation has long term benefit. The lower tax burden could translate into lower prices on goods for customers.
  • The Suppliers, manufacturers, wholesalers and retailers are able to recover GST suffered on input costs as tax credits. This decreases the cost of doing business, thus enabling reasonable prices for customers.
  • It can bring more transparency and better compliance.
  • GST implementation can control corruption. Number of departments (tax departments) will reduce which in turn may lead to less corruption.
  • More business persons will come under the tax system thus broadening the tax base. This may lead to better and more tax revenue collections.
  • Companies which are under unorganized sector will come under tax area.
  • The procedure of GST registration would also be made simple, thereby improving the ease of starting a business in India.

The Congress leader Rahul Gandhi’s charge of GST rates being “insensitive” to the disabled, saying a discounted 5 percent levy will bring down prices of assistive devices for physically-challenged and promote domestic manufacturing. From Braille writers and Braille paper to wheelchairs, talking books, Assistive Listening Devices (ALD) and implants for the severely physically-challenged, as many as 22 items for them will attract a Goods and Service Tax (GST) of 5%.

The rate was kept at 5% because the inputs and raw material like steel used for manufacturing these assistive devices or equipment attract 18% GST. Since the final consumer tax is lower than the tax on inputs, domestic manufacturer can claim refund. If the GST tax was zero it would have meant that domestically manufactured equipment would have been uncompetitive as compared to imports.

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