Conceptually, GST is unique as it combines a plethora of taxes and levies currently in vogue, like central excise, service tax, CST, VAT, entertainment tax, luxury tax, octroi, electricity duty and SAD/CVD under customs, and would make the tax procedures more fair, transparent and efficient
The government faces a stiff challenge in pushing through a few critical economic reform measures in the coming session of the Parliament. The MMDR and land reform Bills have passed through ordinance route before being placed in both Houses of Parliament. The Goods and Services Tax has been announced to be made effective from April 1, 2016 and the time to reach a consensus on the tax rates, the ways of compensating the states for the loss of revenue from indirect taxes, is also getting closer.
It is pertinent to mention that the growth and health of manufacturing sector would crucially depend on passing of these Bills and a convergence of differing views would simply facilitate the implementation of these Acts for the benefit of the industry. As per reports, GST is likely to contribute to India’s GDP between 0.9-1.7%.
The process of enacting GST has been long and complicated as it affects all the states and nearly all the industrial and service segments within the states. The indirect taxes comprise a significant component, particularly in a country where the direct tax element is lower than its counterparts in the globe. Conceptually, GST is unique as it combines a plethora of taxes and levies currently in vogue like central excise (CENVAT), service tax, central sales tax, VAT, entertainment tax, luxury tax, octroi, electricity duty, SAD under customs and CVD under customs and would make the tax procedures more fair, transparent and efficient.
GST has two hats: CGST (for the Centre) and SGST (for states) and also integrated GST (IGST) for inter-state movement, which is destination-based against the erstwhile origin-based CST. The Centre would also compensate the states for the resultant loss of revenue for a period of up to five years. The likely rate of GST may be within 12-15% against the current average rate of indirect tax at 20%. It would, therefore, reduce production cost. However, some of the states are demanding a much higher rate of GST to generate funds and for adequate compensation.
As GST is applied on actual sales transaction, the manufacturing state is deprived of the levy if the goods move out of the state and are sold there. It is proposed to impose up to 1% levy of the cost of the product as additional tax on inter-state movement of goods. The levy of this tax would be independent of value addition. Given the large number of inter-state movements that take place particularly with respect to various food and other essential items, it would have a cascading effect on overall input costs as it would be cumulative each time it crosses the boundary of a state. For steel stock transferred at say, Chennai stockyard from the manufacturing plant at Jharkhand, the cost would be that much higher, each time it crosses a state.
Also the manufacturing sector adopts a region centred value chain based on availability of mineral and other inputs, skilled labour and clustered consumption points. The purpose of tax administration is to leverage these strengths and opportunities. The GST with cascading cost implications should not force the manufacturing sector to redesign their value chains.
If withdrawal of 1% levy negates the very conceptual base of GST of being the tax at sales and not at supply, a separate state-specific credit account may be made for additional GST on inter-state goods supply. It would provide input tax credits in transactions with states that have already charged additional tax earlier in the value chain for the same product. For steel industry plaguing with a rising threat of imports, GST rates on imports should be at the same level as for domestic supply.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.