Critical Analysis of Goods and Service Tax

Context

India’s biggest tax reform since independence, rolled out on 1st July, 2017.

The new good and simple GST (Good and Service Tax) ushers in a ray of hope for the economic pillars of the country.

About GST bill

  • GST will subsume all local and central indirect taxes (except customs duty).
  • GST is a consumption based tax/levy. It is based on the “Destination principle.”
  • GST is applied on goods and services at the place where final/actual consumption happens.
  • GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
  • Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.
  • There are three components of GST:-
  1. Central GST (CGST) – it will be Levied by Centre
  2. State GST (SGST) – It will be levied by State
  3. Integrated GST (IGST) – It will be levied and collected by Central Government on supply of goods and services
  • The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services.
  • In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services.
  • Under current laws only the Centre can impose a tax on services. GST will empower states to collect service taxes
  • Following are the taxes that will be subsumed under GST
  • Central Level Taxes – Central Excise Duty, Additional Excise Duty, Service Tax, Countervailing Duty and special Additional Duty of Customs
  • State Level Taxes – State Value Added Tax or Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase tax, Luxury Tax, Taxes on Lottery, Betting and Gambling
  • All goods and services have been placed under four slab rates 5, 12, 18 and 28 percent, along with a cess on luxury and demerit goods such as tobacco, pan masala and aerated drinks.
  • Most services, except those in the negative list of essential services such as healthcare and education, will come under GST.
  • An ‘anti-profiteering’ clause has been provided in the Centre GST (CGST) and State GST (SGST) laws, to ensure that business passes on the benefit of reduced tax incidence on goods or services to the consumers.

Need for GST

  • Before implementation of GST, taxes used to ‘cascade’, with they levied on several inputs (good or service) that have already been taxed, along with inputs to those inputs.
  • Cascading of tax leads to inefficient tax collection and evasion of taxes.
  • VAT rates and regulations differ from state to state. And it has been observed that states often resort to slashing these rates for attracting investors. This results in loss of revenue for both the Central as well as State government.
  • On the other hand, GST brings in uniform tax laws across all the states spanning across diverse industries. Here, the taxes would be divided between the Central and State government based on a predefined and pre-approved formula.
  • In addition, it would become much easier to offer services and goods uniformly across the nation, since there won’t be any additional state-levied tax.
  • GST will be levied at the place where goods and services are consumed. This can potentially give more revenues to consuming states such as UP, Kerala and West Bengal compared to producing or industrialized states such as Maharashtra, Gujarat or Tamil Nadu.
  • A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes.

Implementation GST

The Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders.

The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/UT governments.

Anti-profiteering features of GST

·         Once implemented, GST is expected to bring down the prices of goods, however it is also expected that the sellers and manufacturers may not pass on the benefits to the consumers.

·         For tackling that the GST Council, chaired by Union Finance Minister Arun Jaitley and comprising state finance ministers as members, approved the anti-profiteering rules.

·         The anti-profiteering clause (Clause 171) aims to prevent and effectively counter such practices.

·         Clause 171 has been inserted in the GST bill which makes it obligatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.

·         Provision provides for the constitution of the National Anti-Profiteering Authority.

·         The National Anti-Profiteering Authority shall have wide ranging powers which includes the ability to:

o    Issue notices to anybody that it feels warrants a “fair probing”, as per the guidelines by the GST Council.

o    Order a reduction in prices of the commodity.

o    Impose a penalty, if deemed necessary

Cancel the registration of a company

 

Benefits of GST

  • GST will reduce the complexity of taxes.
  • It can facilitate seamless movement of goods across states.
  • It will reduce the transaction costs of businesses.
  • The procedure of GST registration would also be made simple, thereby improving the ease of starting a business in India.
  • There are expectations among experts that with GST, we may see 2% jump in GDP growth.
  • GST will plug the leakage of tax. This, in turn, gives more money in the government exchequer.
  • The country might see a significant increase in revenue productivity of income tax as the seeding of PAN in GST registration will make it difficult for businessmen to evade the tax.
  • Companies which are under unorganized sector will come under the tax regime.
  • Number of tax departments will reduce which in turn may lead to less corruption.
  • In the long run, the lower tax burden can decrease the prices of goods and services.

Benefits of GST to Agricultural sector

  • At an all-India level, Food Corporation of India (FCI) may save anywhere from Rs 6,000-8,000 crore, which could show up in a lesser food subsidy bill.
  • The rationalization of mandi taxes and associated cess and levies will be the biggest gain from the GST.
  • Implementation of GST may reduce food inflation, as grain and milk would remain exempted under the new regime that would put in place a single levy instead of multiple taxes.

Challenges

  • Government is facing the implementation challenge. Even after providing a deadline, interface for GST filling is not yet ready.
  • The numbers of returns a business have to file have been increased.
  • There is still lack of clarity on which of the slab will apply on which of good.
  • The GST puts additional burden on administration, increases the compliance cost and the load-bearing capacity of technology needed for providing input tax credit with multiple rates by matching every invoice.
  • The requirement of e-way bills for inter-State movements has also been a cause of concern.
  • India’s industry and its banking system will have to change systems, train personnel and accept the extra workload for the new taxation system.
  • Industries are still struggling to understand which item will fall into which tax slab.
  • According to past experiences from other countries, businesses need to start early with the implementation process to be GST-ready. But it not the case with Indian industry.

Effects on States

  • According to the Reserve Bank of India (RBI), even as the fiscal position at the Centre remains stable (Central budget deficit for 2017-18 pegged at 3.2% of gross domestic product), there has been a marked deterioration in the gross fiscal deficit of states.
  • The figure for 2016-17 is not finalized yet but could be as high as a deficit of 3.4%.
  • Revenue expenditure of the states has risen sharply in recent years with greater financial devolution and increased expenditure.
  • In aggregate, the states spend about 30% more than the Centre. This gap will further increase with GST.
  • The GST is a destination-based tax, and as such is viewed as being to the advantage of the consuming States and to the detriment of the producing States.
  • However the formula for compensating to states for such loss has been devised in GST.

Suggestions and Conclusion

  • It may be worth reconsidering these rates and bringing them down to the 5 per cent slab for stronger linkages between farmers and the food processing industry and creating jobs in rural areas.
  • Since the raw material could be sourced directly from farmers instead of being entirely depending on middlemen in mandis, e-NAM provides this opportunity to graduate to a real pan-India market for agricultural products.
  • GST would ensure that farmers in India, who contribute the most to GDP, will be able to sell their produce for the best available price.
  • A smooth GST regime can break inter-state barriers on movement and facilitate direct linkages between processors and farmers. This can transform the operations of mandis too if other necessary reforms to free up agricultural markets are undertaken.
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