taxation in India : The way Ahead
Service Tax (GST) was rolled out in India on July 1st 2017, after
several rounds of dead lock in the parliament. Observers have described the
reform as the most meaningful change to India’s tax regima since the country
became independent in 1947. A late night parliament session befitted this
historic moment. Though the prime minister of India Narendra Modi is the
principle driving force behind GST, this epoch making reform reflects the
collective will of 135 crore people represented in the sovereign parliament and
state legislatures. The launch, however, was boycotted by several parties. The
GST was established to subsume various indirect taxes levied at different
levels, with the idea of reducing rep-tape, plugging leakages and paring the
way for a transparent indirect tax regime.
What is GST? The GST is meant to be a unified indirect tax
across the country on products and services. In the current system, tax is
levied at each stage separately by the Union government and the States at
varying rates, on the full value of the goods. But under the GST system, tax
will be levied only on the value added at each stage. It is a single tax
(collected at multiple points) with a full set-off for taxes paid earlier in
the value chain.
Thus, the final consumer will bear only the GST
charged by the last dealer in the supply chain with set-off benefits at all the
previous stages. The GST is classified into two types State GST and Central
What is State GST and Central GST? For transactions
within a State, there will be two components of GST – Central GST (CGST) and
State GST (SGST) – levied on the value of goods and services. Both the Centre
and the States will simultaneously levy GST across the value chain.
In the case of inter-State transactions, the Centre
would levy and collect the Integrated Goods and Services Tax (IGST). The IGST
would be roughly equal to CGST plus SGST.
How will GST help in getting rid of tax evasion? A
comprehensive IT system, GSTN, will a-lot universal GST numbers to all
manufacturers and traders, stockist, wholesalers and retailers. This will
simplify the administration of indirect taxes and plug leakages. The government
also plans to incentivise tax compliance by traders. It gives the country one
uniform tax, and no frequent rate changes. A lower tax burden, one market to
help business and no truck queues at state borders. GDP could raise by 2%. Less
scope for evasion which means higher revenues. Lower taxes to boost exports.
What it means for business? There won’t be any fear
that a state will randomly raise taxes, and there will be transparency in
taxes. Goods and services providers will get the benefit of input tax credit
for the goods used effectively making the real incidence of taxation lower than
the headline taxation rate.
The government has categorised items in five major
slab – 0%, 5%, 12%, 18% and 28%. Here is the updated list of goods and services
taxes under various GST slabs:
No tax (0%): No tax will be imposed on items like jute,
fresh meat, fish, chicken, eggs, milks, curd, natural honey, fresh fruits and
vegetables, flours, basin, bread, salt, stamps, judicial papers, printed books,
newspaper, and bone meat etc.
0.25%: Rough industrial diamonds including unsorted
rough diamonds to face 0.25% instead of 3% GST. 12% Frozen meat products,
butter cheese, ghee, dry fruits in packed form, animal far, sausages, fruit
juice, Ayurveda medicines, tooth powder, ketchup and sauces. On Nov 10, 2017,
these items have been shifted from 18% to12% tax bracket: Condensed milk, refined
sugar and sugar cubes, pasta, curry paste, mayonnaise and salad dressings,
parts of specified agricultural, horticultural, forestry, harvesting or
threshing machinery, specified parts pf sewing machine, spectacles frames,
furniture wholly made of bamboo or cane. On January 18, these items were moved
to 12% GST slab LPG Supply to household domestic consumers by private LPG
distributors Tailoring service, Tamarind Kernel powder, mehndi paste in cones, Scientific
and technical instruments basket ware and wicker work Velvet fabric Cigarette
filter rods services.
All restaurants, restaurants of hotels with room
tariff of less than rs 7,500, Food parcels, Textile job work, transport services
railways, air transport, supply of e-waste. 12% on apparel above rs 1000, frozen
meat products, butter, cheese, ghee, dry fruits in packaged from, animal fat,
sausage, fruits juices medicine, tooth powder, match sticks, colouring books, picture
The government has opted for four slabs for both
goods and services- 5%, 12%, 18% and 28%. In addition, several items face zero
levy, while bullion will attract 3% GST and luxury an sin goods that are in the
top bracket will also attract a cess that will be used to compensate states for
revenue loss. GST will ensure
that indirect tax rates and structures are common across the country, thereby
increasing certainty and ease of doing business. In other words, GST would make
doing business in the country tax neutral, irrespective of the choice of place
of doing business. A system of
seamless tax-credits throughout the value-chain, and across boundaries of
States, would ensure that there is minimal cascading of taxes. This would
reduce hidden costs of doing business.
Advantages of GST: GST will mainly remove the Cascading
effect on the sale of goods and services. Removal of cascading effect will
directly impact the cost of goods. The cost of goods should decrease since tax
on tax is eliminated in the GST regime. GST is also mainly technologically
driven. All activities like registration, return filing, application for refund
and response to notice needs to be done online on the GST Portal. This
will speed up the processes.
What changes has GST brought in? : GST will improve the collection of taxes as well as boost
the development of Indian economy by removing the indirect tax barriers between
states and integrating the country through a uniform tax rate.
The Centre needs to follow through
with pending legislation for the goods and services tax (GST). As the recent
Arvind Subramanian expert committee points out, the lack of reforms in the
indirect tax regime leads to high costs and inefficiencies in myriad ways. For
instance, blocked input taxes or distorting tax-on-tax and cascading rates
could add up to as much as three-fourths of investment in plant and machinery.
needs to follow through with pending legislation for the goods and services tax
(GST). As the recent Arvind Subramanian expert committee points out, the lack
of reforms in the indirect tax regime leads to high costs and inefficiencies in
myriad ways. For instance, blocked input taxes or distorting tax-on-tax and
cascading rates could add up to as much as three-fourths of investment in plant
Hence the pressing need to change
over from the dual value-added tax (VAT) system in the Centre and the states to
an integrated GST, with tax levied only on the value added and input tax
credits seamlessly available across the value chain. It would shore up
transparency and boost tax efficiency.
As the report points out, the GST
Bill does provide a 2% band for the states above the standard GST rate, for tax
flexibility. But varying rates can distort and divert economic activity. The
GST Council needs to work at uniform rates so as to have a truly national
market. It also needs to decide on a date for including key petro-products in
the GST regime.
Such items do provide
disproportionately high tax revenue for both the Centre and the states. But
given the polluting externalities of petro-goods, along with the standard GST
rate, a top-up non-Vatable rate of, say, 24% would make sense. A similar rate
structure can be envisaged for potable alcohol and tobacco. In due course, it
would also make sense to include electricity duty and real estate in GST.
As for the issues flagged by the
Congress, a rigid GST rate in the constitutional amendment is unwarranted. It
also makes sense for the political executive to resolve tax issues via
consensus and, if need be, by setting up an expert committee. With regard to
doing away with the 2% central sales tax, it would make better sense to reduce
it by 1% now and bring it to zero in, say, two years, as the Centre compensates
the states for revenue shortfall, if any, for five years.
Final Verdict: Real estate is a
beneficiary as 16 indirect taxes have been subsumed in a single GST at 12%.
FMCG also benefits as logistics cost reduction will play a big role. If you run a business,
chances are that GST has affected you, positively or negatively! The full
impact of GST will take some time to play out, as companies evaluate the impact
on their supply chains and as consumers and competition react to the price
transmissions. For a comprehensive analysis on GST’s impact on various sectors.