The Saga of Goods and Services Taxes in India
– Deepak Nair*
The idea of bringing GST to India was first introduced by ex-FM P. Chidambaram in Union budget 2006-07 with an expectation of making it effective from 1stApril 2010. Post that, the framework underwent a number of discussions and committees with the most recent news being its ratification by 9 states.
The central government, currently, has the power to levy tax on manufacture of goods while State governments have power to levy tax on the sale of goods. In case of Inter-State sales, Centre has the power to levy a tax (Central Sales Tax) but, the tax is collected and retained entirely by the originating State. For services, Centre is empowered to levy service tax through Finance Act 1994. GST model, to work effectively in a federal setup, requires amendments in the Constitution to concurrently empower the Centre and States to levy and collect GST. This change is being brought about by 122nd Constitutional Amendment Bill, 2014. The Bill needs to be passed by a two-third majority in both Houses of Parliament and subsequent ratification by at least half of the State Legislatures. Owing to the necessity of having a constitutional amendment in place to make the model workable, GST shall come into force only if it is ratified by at least 15 states.
Practically speaking, the burden of indirect taxes on the final consumer comes to around 25-30% of the total cost of any product being purchased. These taxes include Excise Duty (taxes on manufacturing), Service Tax (taxes on consumption of services), State Value Added Tax, Central Sales Tax (taxes on selling), Luxury and Entertainment Taxes.
Primarily, the reasons to bring about a change in any taxation structure are:
· Simplification of the structure
· Enhancement of tax base i.e. ambit or population bearing the tax, and
· Plugging the loopholes in existing statute/s.
GST goes a long way in this arena. First, the GST Act, 2016 states that, subject to certain exceptions, all goods being sold and services rendered in the territory defined in the act shall be taxable within this statute. The impact this has is to substantially widen tax base of all the statutes that GST supersedes. Second, GST framework shall take away ‘cascading effect’ of taxes. Cascading effect here refers to tax being levied on a tax itself. For example, when a product is manufactured, excise duty is applied on it. Further, governments levy State and Central sales taxes on the product when it is being sold to the end consumer. Due to the structure of this arrangement, VAT is charged on excise duty itself that leads to a cascading effect, which places a burden on the end consumer and multiplies tax levies. The primary cause of cascading effect is that excise duty and service tax are being levied by central government while state level VAT and other local levies are being levied by states. Needless to say, neither is willing to give up on their revenues by providing tax credit for inputs. GST changes this arrangement. All taxes shall be centrally levied under one statute. At each level, taxes paid at the previous stage shall be allowable as input taxes paid, reducing overall tax outlay. In other words, GST may be understood as an extended Value added tax itself.
GST shall be divided into three levies – Central GST, State GST and Integrated GST. For the purpose of administration, GSTN, a private company has been constituted under Section 25 of the Companies Act, 1956 by the Government. Chaired by Navin Kumar, a 1975 batch IAS officer, GSTN would provide front end services like registrations, payments and returns. GSTN has appointed M/s Infosys as a Service Provider for a period of five years. The taxation rates are being considered by empowered committees and defining the rates shall be a critical variant to understand how well the end consumers receive GST. To say whether overall prices would increase is completely dependent on announcements of GST rates. Market expectations point towards keeping a standard GST rate and put forth a reduced rate of taxes for essential commodities.
While the impact on inflation is still to be seen, certainly GST is being welcomed by corporates and is being viewed as a move to further fuel the Make in India campaign. Simplification of Indirect taxes, bringing taxmen to a common platform and an essential leverage of highly intuitive technology to build a common central assesse database are key focus areas of GST. IT infrastructure does involve huge capital costs but expenditures likely to be saved by administrative simplification would lead to long term sustainable results.
References:
Department Letters on CBEC portal: http://www.cbec.gov.in/resources//htdocs-cbec/deptt_offcr/status-gst-12052016.pdf
GST Act, 2016
Financial Express publication on GSTN contract dated 22.09.2016: http://www.financialexpress.com/industry/companies/infosys-bags-rs-1380-crore-gstn-project/139324/
* Deepak is a Chartered Accountant and a taxation enthusiast. He loves discussing financial matters and understanding business models. In his free time, Deepak enjoys playing basketball and reading biographies. You can reach him at deepaknair@live.in.