One tax: Hailed as India’s biggest tax reform, GST is expected to boost growth, especially in manufacturing
he high point of the 2014 Winter Session of Parliament was the presentation of the Constitutional amendment bill required for introduction of Goods and Services Tax (GST) in India. The industry is hopeful that the ongoing Winter Session would conclude with the passage of the bill in the Rajya Sabha, as it has already been approved by the Lok Sabha.
The GST is a tax which is levied on the consumption of goods and services at a uniform rate. The Constitution empowers both the Central and state governments to levy taxes on varying transactions. Customs duties, central excise duty, service tax is levied by the Central government, while the state governments levy VAT (value added tax), entry tax, octroi, entertainment tax etc.
Due to inconsistency of definitions, taxable event, classification and interpretational differences under several indirect tax laws, there are multiple issues within the current indirect tax environment. For example, certain transactions are taxed as a “sale” as well as a “service”.
Credit is not available across indirect taxes which results in tax-on-tax, also known as “cascading”. There are numerous compliances that need to be fulfilled under several indirect tax regimes which create challenges to businesses. The GST offers an opportunity to mitigate many ills existing in the current tax environment and therefore is necessary.
As India has a federal setup, the GST structure that is being proposed is unique. It is revolutionary as it involves both the Central and state governments to be empowered to levy and administer taxes on the same taxable event which would be the “supply” of all goods and services.
The dual GST model that is being planned will include every transaction, whether goods or services, and shall have a central GST component as well as a state GST component. The GST proposed would shift the tax base from production to consumption, making it a destination-based tax.
The biggest benefit is that multiple taxes will no longer remain. This means that taxes like excise duty, service tax, central sales tax, state VAT, entry tax etc, will all be subsumed within GST. Businesses thus will not have to deal with multiple taxes and tax authorities. To sum up, the GST regime is expected to lead the transition from the existing “complex” tax system to a relatively “simpler and unified” one.
The proposed system would be fully-automated and administered through a common portal requiring minimal interface between the tax payers and the authorities. This may be an area of considerable administrative and compliance cost saving for businesses. In addition, incidence of indirect taxes on businesses and end consumers is expected to reduce in the long term as input taxes paid at each level should be eligible for credit, which would have opportunities to reduce the existing prices of goods and services (that currently have components of non-creditable input taxes). However, it is important to note that a fully-automated environment will require smaller traders/businesses to also migrate to an I-T system of tax compliance.
In a study undertaken by the National Council of Applied Economic Research (NCAER), it has been reported that the implementation of a model GST will bring considerable economic benefits for the country. The study estimates that the introduction of the GST would enhance the country’s GDP by 0.9 per cent to 1.7 per cent in the medium term.It is anticipated that GST will bring economic development, growth in exports, moderation in taxes, stability in prices and more.
It is also expected to encourage voluntary compliance which would urge sectors currently under parallel economy to become part of the mainstream economy.
With the elimination of tax cascading, it appears that GST would be one of the factors that could improve the performance of the manufacturing sector. Further, the simplification of processes and the indirect tax regime could improve India’s ‘ease of doing business’ rankings.
Considering the growth potential with the introduction of GST, the delay has been damaging, both for the economy as well as India’s image.
At a time when there is a dispute between producing and consuming states over GST, how a win-win situation can be achieved? Has the NDA government diluted/changed the GST bill as alleged by the Congress?
Studies by economists have unanimously recommended a GST system over multi-level indirect tax structure. Notwithstanding the economic advantages and benefits, arriving at a consensus between political parties on the legislative initiatives required to introduce GST has been a difficult task. At present, the GST bill is pending approval of the Rajya Sabha on the ground that considerable changes have been carried out in the original GST bill introduced in 2011.
Comparing the GST bill of in 2011 with the one introduced in 2014, it appears that the key points raised by the Opposition are provisions relating to levy of 1 per cent additional tax on inter-state supply of goods to compensate manufacturing states like Tamil Nadu, Maharashtra, Gujarat etc.
Overall, the GST bill introduced in 2014 has maintained the objectives with which the GST structure of indirect taxes was proposed for India. While it is true that the proposed 1 per cent additional tax on inter-state supplies does bring in inconsistencies, it is hoped that the legislators will be able to find a solution.
Recent draft reports on business processes and the report by Chief Economic Advisor Arvind Subramanian on revenue neutral rate and progress on the GST network portal etc, all indicate tremendous efforts of administrators to implement the tax reform. It now remains to be seen whether the April 1, 2016, deadline will be met. Undoubtedly, once implemented, the GST would be a revolutionary tax reform for India.
(Saloni Roy is senior director and Mausumi Saikia, manager, at Deloitte Haskins & Sells LLP, Gurgaon. Views expressed are personal)