The constitution of India calls India an indestructible union of destructible states. The new Goods and Services Tax (GST) strengthens this notion of an indestructible union.
The GST is a destination based indirect tax inserted in the concurrent list of Schedule 7 in the constitution, that will replace multiple cascading indirect taxes applied by the centre and the states. It has been added in Article 246A through the 101st constitutional amendment act. The GST will subsume central taxes such as central excise duty, service tax, central surcharges and cesses and state taxes such as state sales tax, state VAT, luxury tax, entry tax, entertainment and amusement tax, taxes on lotteries, gambling and betting and state surcharges and cesses. The revenue from the tax would go to the state where the good originates.
The GST council has come out with a multi-tiered tax structure – 0% on products on consumer price basket including foodgrains, 5% on items of mass consumption like spices and mustard oil, 12% on processed foods, 18% on soaps, oil, toothpaste, refrigerator, smartphones, 28% on white goods, cars and 28% plus cess on luxury cars, pan masala, tobacco and aerated drinks. Fresh meat, milk, eggs and petroleum products, aviation turbine fuel, alcohol for human consumption and electricity have been made exempt from the GST as of now and will continue to remain under state list. Taxes applicable at municipal level have also been kept out of the purview of the GST. Entities with turnover under 20 lakhs, too, have been given exemption from the GST.
Since various taxes will be subsumed into one, the GST will enable the free flow of trade and boost tax receipts. HSBC points out that the GST could bring an 80 bps (basis point) increment in India’s economic growth. It would mean compliance to a single tax structure instead of multiple complex taxes earlier to be paid by manufacturers and service provides but ultimately to be borne by consumers. GST addresses the issue of different taxes such as excise, VAT, and service tax in different states, which created problems for enterprises in doing business in different states.
The GST council, which is the apex institution for making laws on GST, comprising of Union Finance Minister, Minister of State for Revenue, and state finance ministers, announced July 1, 2017, as the day of the rollout of the GST. The Council is to compensate states for up to five years for any loss of revenue during implementation.
India has implemented the Canadian model of GST – a dual GST in which Central GST (CGST) will be collected by the centre and State GST (SGST) will be collected by states. To legislate on GST, both parliament and states will have concurrent powers, except integrated GST (IGST) on the inter-state supply of goods and services and imports.
While currently close to 150 countries have GST laws in some form, the Indian GST is unique in its credit matching concept, according to which a buyer can avail input credit of GST paid if the seller has deposited for the GST received from that buyer. In services, a supplier giving services outside his state of registration will have a different set of regulations. Also, globally, while closely related entities transact at zero rate in groupings, in India separate registrations of the same legal entity as independent tax person brings efficiency in cash flows and compliance. In e-commerce, tax collection at source is applicable. Small businesses with turnovers under 50 lakh can opt for a composition scheme where they will only have to pay 1 or 2% tax on the entire transaction, but without being able to take the credit on input.
While the larger consequences of the implementation of GST are positive, certain loopholes can be pointed out. First, the centre is permitted to levy an additional 1% tax in the course of inter-state movement of goods, the revenue from which will be given to the state where the supply of the good originates. It can be argued that this provision is against the spirit of GST, since the good will be sold cheaper in the state of origin than in any other state, and could result in cascading of taxes.
Second, implementation of GST has been a cause of distress to sectors in FMCG and consumer durables who had to undertake rapid destocking by selling their goods at discounted prices.
Third, as a paperless movement of goods and services was anticipated, the GST laws have mandated e-way bills which may be difficult to comply with for some.
Flaws have also been pointed out in the GST laws such as the multi-tiered tax structure itself, which negates the cause of a unifying GST. Besides, postponing the levy of GST on petro-products could continue the cascading of taxes. GST could also lead to a hike in prices during the initial phase of implementation, but the government has been careful to take anti-profiteering measures against those who do not pass benefits of input credit to customers.
However, GST is an appreciable change from the former indirect tax structure. GST will simplify tax hurdles in the economy by allowing tax credit from procurement of inputs and capital goods, which can be set off against output liability. It will, therefore, benefit both SMEs (Small and Medium Enterprises) and big enterprises. It is going to be the cornerstone of a single market that will enable free movement of goods and services across states. GST is set to benefit both manufacturers due to ease of doing business and consumers due to the reduction in costs of daily goods.
Some other benefits of GST include centralization of storing stocks for ease of transportation and logistics provision. This will benefit the states in the heart of India, such as Madhya Pradesh and Chattisgarh, and generate revenue there. Or it could enable companies to open multiple warehouses in different places and create that many jobs. Needless to say, the logistics industry is going to get a big push.
GST will also boost investment both from indigenous entrepreneurs who can now avail the benefits of an open market, and foreign investors who will be drawn by the free movement of goods and services within India. This could foster a waning capital expenditure. For ‘Make in India’, GST will be a blessing in disguise, as it will make goods more competitive in the international market due to the provision of refunds on the entire amount of tax to exporters.
It will also increase the tax base by formalizing a large part of the untaxed economy, who will register in the new GST tax regime and account for all transactions. Many SMEs which earlier did not report sales and revenue will be included too. The GST Network (GSTN), that has been created with a 49% stake on part of the government to provide technical infrastructure for implementation, has reported 6.6 million enrollments already. GSTN in itself will limit the physical interaction between taxpayer and tax collector, and therefore minimize instances of corruption.
We now need to ensure training provisions and device outreach programs on a continuous basis for all stakeholders. With due diligence given to the implementation of the GST, it is bound to be a boon for India, which will be hosting a barrier-free trade. The GST celebrates the diversity of the Indian union. The onus is now on us, the citizens, to make this monumental tax reform in the history of independent India a success.
A version of this article was previously published on the author’s blog.