Goods and ServicesTax

The GST or the Goods and Service Tax is a long pending indirect tax reform which India has been waiting for, is all set to integrate State economies and boost overall growth. The present government has expressed the hope that the GST will be implemented in the current winter session of parliament. The government has proposed to implement it from April 1, 2016. Finance minister of the current regime has even announced the release of RS 11,000 crore to states as compensation for the reduction in central sales tax to bridge the trust issues between Centre and states and get them to support the proposed goods and services tax (GST).

WHAT IS GST?

The GST is a value added tax to be levied on both goods and services (except for a list of exempted goods and services), at both the Centre and state level. This comprehensive tax covers all stages from manufacture to sale. The tax will be levied only on the value added at each stage of the life cycle. The GST, as mentioned above is an indirect tax and will be borne by the customer.

There is a view that GST is likely to improve tax collection and boost India’s economic development by achieving the benefits of a common market without causing any cascading effects at the manufacturing and trading stages. Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold. GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).

The Road Traversed:

India’s tax system relied on Indirect taxes as a source of revenue as majority of population technically falls outside the scope pf direct taxes regime. An Indirect Taxation Enquiry Committee in 1976 headed by L K Jha which submitted its report in 1978 highlighted the distortions in the allocation of resources & cascading effects caused by indirect taxes. He suggested that Indirect Taxes should move towards taxation of final products and a modified form of VAT. The tax reform committee under the chairmanship of Raja J Chelliah in Aug 1991 recommended that excise duty be progressively converted from MODVAT to VAT. Later the Task Force under the chairmanship of Vijay Kelkar was constituted to suggest measures for simplification and rationalization of Indirect Taxes.  States then implemented state sales tax in 2005 which was levied on intra -state trade and does not cover interstate sales transactions. This called for the need to move to a more efficient regime of GST. GST evolved from the recommendations of Task Force on the implementation of FRBMA, 2003 with the objective of common market and tax base widening .The empowered committee of state finance ministers are now working with the central government and would be taken up by the cabinet after meeting of empowered committee in December.

HURDLES:

In India states have the power to raise and spent resources. The concerns of state government is of fiscal autonomy. States demand is to get compensated for the central sales tax loss till 2014-15 & expected revenue loss once the GST is implemented. There is differences among states over the inclusion of items such as petrol, coal out of the ambit. Small states demanding retention of special concessions given to them even after GST.

Sub -committee on GST has suggested revenue neutral rate (RNR) of GST be pegged at around 27 %. It has also suggested states GST at 13.91% and Centre GST at 12.77 % and states are yet to decide on it.

A major challenge is building the capacity of the administration to implement the new tax. The tax administration at both central and state level will have to be augmented to deal with the new tax regime. Preparing the administration would require considerable effort at building capacity in matters such as the accounting system, forms and procedures, assessment, auditing and computerization.

 

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