After a long wait of 10 years, the goods and services tax (GST) is now a reality. Most of the work required for implementation of GST from July 1 has been completed. Trade and industry outreach programmes are in full swing. It is time now to reflect on the possible benefits of this new tax regime to trade and industry, to consumers, to the government and to the entire economy.
The prime benefit of GST is that India will become a common market. One product or service will have a single tax rate in any part of the country. The multiplicity of taxes on the same commodity or service will now go.
No more taxes that are barriers to industry such as octroi or entry tax. This obviously means that trade and industry will have a much lesser compliance burden compared with the current regime in which they have to file different returns with different authorities for different taxes. The consumers also would better understand the total incidence of tax on the product or the service they are buying.
The total incidence of taxation on a product or service is likely to come down for most items. This will happen because of the removal of cascading of taxation, and availability of seamless flow of credit across the value chain. If goods are produced in which services are used, the input tax credit of taxes paid on services will be available and vice versa.
Also, there is a provision in the GST law that, by chance, if taxes paid on the inputs are more than the tax rate of the output liability, refunds will also be given except in certain items such as work contracts. Such a scientific system of taxation removes all hidden taxes and brings down the overall burden of taxes. This will benefit consumers immensely.
Also, while local manufacturers of goods pay full value added tax (VAT) in addition to excise, imported goods attract only 4 per cent special additional duty. This also gave negative protection to domestic manufacturers of goods.
Under the GST regime, all goods that are imported will pay the full rate of central+state GST in the form of integrated or IGST. That will provide a complete level playing field to domestic manufacturers vis-à-vis imported goods. Of course, importers can use this IGST credit to discharge their liability for CGST and SGST when the same goods are sold within the country.
Also, GST is likely to promote exports from India. When goods are exported, the taxes paid on those products within the country are supposed to be fully refunded. While there is a system of duty drawback today by which central taxes paid on exported items are refunded, the same is not true of VAT paid on the inputs of exported items.
There are many states that either do not refund VAT paid on exports or give such refunds after one or two years. Under the new GST regime, the entire refund of CGST or SGST paid on inputs of exported items will be fully paid by a single authority–either the state government or the central government.
It is also decided that 90 per cent of refunds will be given provisionally within seven days of receiving the complete application for online refunds. Also, for special economic zones (SEZs), there is a provision to bring goods from abroad or from domestic tariff area without payment of IGST. This means that as far as SEZs are oncerned, there will be no blockage of working capital. With exports being boosted, Make in India will also get a big lift.
GST, being an end-to-end IT-enabled tax system, is expected to bring buoyancy to government revenue. This will happen because of the attraction of taking input tax credit by purchasing goods from registered dealers, which will incentivise everyone to come into the tax net. Also, there will be a reduction in refund frauds or input tax frauds because of invoice-wise matching of B2B transactions.
A question is raised by many–‘How is it possible that consumers will pay less under GST and the government will also gain?’ They say that if the government is gaining, obviously the consumers will pay more! Let me explain this properly. Today there are dealers who try to remain outside the tax chain and pocket the benefits of taxes not paid while keeping the consumer price the same as tax-paid goods.
These traders are pocketing the benefits of tax evasion while the government is deprived of revenue and consumers are also not benefited.
When this activity of tax theft will go away under GST, both consumers as well as the government will gain. So basically, the extra revenue of the government will not come from the consumers’ pocket but from reduction of tax theft.