For the Narendra Modi-led National Democratic Alliance (NDA), passing the goods and services tax (GST) bill will be top priority in the monsoon session of Parliament to bring a law for a common market across the country, a step to push Prime Minister Modi’s reforms agenda amid growing doubts about his government’s ability to deliver.
The GST is a long pending indirect tax reform which India has been waiting for, and which is hoped to iron out the wrinkles in the existing tax system.
According to a CNBC-TV 18 report, the Centre reviewed the Bill clause by clause and reached consensus on most issues like inclusion of section for providing compensation to states for up to five years but not less than five years.
The Centre has indicated its willingness to amend Section 19 to get all state governments on board and the select panel is unanimous in this decision. Government plans to retain the one per cent additional manufacturing tax despite strong resistance from Congress.
The GST will have two rates — merit rate for public services and a standard rate for other services. Traders with Rs 75 lakh annual turnover will be excluded from the GST.
Globally, the average GST rate is 16.4 per cent. It is 8.5 per cent in Southeast Asia, 19.5 per cent in the European Union, 10.8 per cent in the Asia-Pacific and 14.2 per cent in Latin America. “If goods and service rates are high, people won’t accept it. Especially, the government cannot make service tax more than 20 per cent which is 14 per cent at present, as the sector would collapse,” Sumit Dutt Majumdar, former chairman of Central Board of Exercise and Customs former chairman, told Deccan Chronicle.
The GST Bill has been passed by Lok Sabha and was referred to the Select Committee by Rajya Sabha, where the ruling NDA government does not enjoy majority. While Congress is in favour of the proposed indirect tax regime, it wants a ceiling of 18 per cent on the GST tax rate. It is also against granting of power to states to levy 1 per cent additional tax as it would have a cascading effect and cause market disruptions.
However, if the Congress is absent and does not participate in voting, it would be a cakewalk for the government to push the Bill through. The case would be similar if the Congress members are present in the House and press the “abstain” button.
The Congress, along with the AIADMK and the Left, are opposed to the Bill on various counts. The proposed GST regime, intended to be introduced from 1 April 2016, also emphasised in this year’s Union budget, is said to be a watershed reform in India’s tax landscape. In the words of finance minister Arun Jaitley in December 2014, it is the “single most important tax reform after 1947”.
The GST will basically wipe the indirect tax slate clean, replacing around a dozen indirect taxes and duties levied by the Centre and state.
A report prepared by the World Bank said bureaucracy related to tax collection at state borders is a big reason why India’s long-distance truckers are parked 60 per cent of the time.
The introduction of VAT at the beginning of the last decade had seen the economy growing at a faster rate along with state tax revenues. For instance, West Bengal’s revenue had risen 31.3 per cent after implementing VAT; Haryana’s revenue rose 17.9 per cent; while that of Himachal Pradesh grew 28 per cent.
According to several reports, India’s tax base is a meagre 10 per cent of its gross domestic product. In a country of more than 1.2 billion people, only about 35 million pay income tax. One of the best ways to raise this figure is to lower taxes to persuade more people to come clean rather than intimidate them into becoming evaders by raising taxes.
Already, the hike in the service tax rate in the budget to 14 per cent from 12.36 per cent is threatening a situation where the authorities may fail to meet the targets from this segment. If it is raised further because of high GST, it could hit the service sector, which contributes about 57 per cent to GDP. While growth in service tax collections stood at over 30 per cent in 2014-15, it was just above 15 per cent in the year gone by.