GST: The Global Synergy Tax


The passage of the 122nd Constitutional Amendment Bill, 2014 by the Upper House of Parliament is a historic step in steering India towards the most noteworthy indirect tax reform witnessed since Independence. With this notable step, the wait for the government to deliver on its key promise of making India a unified, integrated and single market for goods and services should be finally over. The Goods and Services Tax (GST) would be an instrumental force in driving colossal changes to the existing indirect tax regime afflicted with a plethora of issues.

The current indirect tax system weighed down by myriad levies at the central and state level, complex tax rate structures, onerous compliances, inherent tax inefficiencies, bottlenecks in movement of goods across states and lack of a single interface with tax authorities often acts as a deterrent to investors seeking to set up businesses in India.

The GST regime is envisaged to be a panacea for the beleaguered tax regime by bringing about a cohesive tax structure which will subsume the current multiple indirect taxes and allow a seamless flow of credits at the central and state level. Simplified compliance obligations, uniform tax rates, enhancement of credit base, better administration of taxes, which are being endorsed as the major advantages of GST would further aid in resolving various issues presently plaguing the tax environment in India.

Significant recent developments around GST include addressing of concerted demands of the industry for dropping levy of 1 percent additional tax on inter-state supplies. Undoubtedly, this will ensure seamless flow of taxes and credits across states.  The removal of barriers of state boundaries for inter-state trade under GST would go a long way in creation of a buoyant economy with an environment conducive to overall growth and economic development. Hence, GST is likely to further contribute to the success of the ‘Make in India’ and ‘Ease of doing business in India’ campaigns.

While the hopes from GST are high, this vision of a simple, effective and robust tax regime can become a reality only when some key aspects which form the foundation of this regime are concrete right from the inception itself. One of the most critical facets of this would be to implement rational GST rates.  In this regard, the statements of the finance minister that moderate GST rates would be worked out after detailed deliberation with the GST Council are reassuring. The developments with respect to the GST rates will be watched with bated breath in the run-up to GST. Albeit the state governments continue to show their resistance, the business community widely hopes that the GST rate should proximate the standard rate of 18 percent suggested by the Chief Economic Advisor. Interesting to note is that the global average of GST rate is also close to 18 percent.

What also still remains a mystery to all is the extent to which the current levies will ultimately get subsumed in GST. The most recent statement made by the finance minister in Parliament regarding octroi not getting subsumed in GST creates further doubts in this regard. Similarly, the fate of various recently introduced cesses such as infrastructure cess on automobiles, Swachh Bharat Cess and Krishi Kalyan Cess also remains unknown. The GST Council while deciding on these aspects should strongly consider the fact that the ultimate success of GST lies in its ability to become an all-encompassing tax system replacing the maximum indirect tax levies presently applicable in India.

Equally important would be the fate of dispute resolution mechanism that is put into place in the GST regime in India.  India’s image as being one of the most tax aggressive countries in the world is certainly detrimental to the growth of its economy. Onset of GST could be instrumental in putting the state of ‘tax terrorism’ in India (existence of which is not denied by even by the law and policy makers) to an end. The strength of GST framework would depend strongly in the ability of the government to install a mechanism to prevent disputes from arising under the new regime. This can be ensured by introducing GST laws after in-depth discussions and debate with various stakeholders. Further, during the journey of GST, systems must be put in place to provide suitable clarifications and guidance to minimise the areas of disputes between taxpayers and revenue. Last but not least, a quick and speedy dispute resolution mechanism needs to be guaranteed to give assurance of a business friendly environment to companies under the upcoming regime.

Today, the GST or VAT system of taxation is already in place in around 160 countries and a dozen other countries are in the process of implementing the same. It is about time that India embraces this globally accepted tax practice and the passage of the GST Bill is definitely a right step in this direction. With this, India has the capability to reinforce itself as a strong economy steadily accelerating towards growth. It is important that the Indian government remembers at all times during this momentous journey that the global business community is keenly watching the developments around GST, whether positive or negative.

– By Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP with inputs from Poonam Harjani and Nimisha Chaudhary

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