GST
Goods and Services Tax (GST) is a part of the proposed tax reforms that center round evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the central and state levels. Each of the systems needs to be reformed to eventually harmonize them.
In the Union Budget for the year 2006-2007, Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared between the Centre and the States. He proposed to set April 1, 2010 as the date for introducing GST.
World over, goods and services attract the same rate of tax. That is the foundation of a GST.
The first step towards introducing GST is to progressively converge the service tax rate and the CENVAT rate. The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level.
Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of manufacturing and service sector.
The introduction of goods and services tax will lead to the abolition of taxes such as octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, and eliminate the cascading effects of multiple layers of taxation.
GST will facilitate seamless credit across the entire supply chain and across all states under a common tax base.
In 1954, GST was introduced for the first time in France. Today this tax has spread across 140 countries.
Benefits of GST
Many indirect taxes in state and central level subsumed by GST, need to pay a single GST instead of all.
Uniformity of tax rates across the states.
Ensure better compliance due to aggregate tax rate reduces.
By reducing the tax burden the competitiveness of Indian products in international market is expected to increase and there by development of the nation.
Prices of goods are expected to reduce in the long run as the benefits of less tax burden would be passed on to the consumer.
Overall tax compliance cost will reduce for government and can concentrate on GST.
Indirect taxes subsumed under GST
The following indirect taxes from state and central level is going to integrated with GST
State taxes; VAT/Sales tax; Entertainment Tax ( unless it is levied by local bodies); Luxury tax; Taxes on lottery, betting and gambling; State cesses and surcharges in so far as they relate to supply of goods and services; Entry tax not on in lieu of octri; Purchase tax ( This is not sure still under discussion ); Central Taxes; Central Excise Duty; Additional Excise Duty; The Excise Duty levied under the medical and Toiletries Preparation Act; Service Tax; Additional Customs Duty, commonly known as countervailing Duty ( CVD); Special Additional duty of custums-4% ( SAD); Surcharges; Cesses.
The above taxes dissolve under GST; instead only CGST & SGST exists.
The GST model in India
Many countries are following single GST. But it is proposed that dual CST is suitable for federal country like India.
Dual GST
Dual GST means, the proposed model will have two component called
CGST – Central goods and service tax levied by central Govt.
SGST – State goods and service tax levied by state Govt.
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Implement it at the central level
THOSE who cannot remember the past are condemned to repeat it, said philosopher George Santayana. The goods and services tax reform, like the value-added tax reform that took over 10 years to complete, is stalled like a bullock cart stuck in mud. Restarting the reform is a challenge but an opportunity for the finance minister to secure a place in history as a statesman.
A two pronged strategy is needed to re-start the reform process. First, the FM can simply implement GST at the manufacturing stage at the central level in the forthcoming Budget itself and this does not require a constitutional amendment. It only requires the Centre to revisit the exemption list, unify the Cenvat rates and extend the tax to all services. With a common threshold and rate on both goods and services, the GST at the manufacturing stage becomes a reality. The threshold for both goods and services could be fixed at . 50 lakh of the manufacturing turnover and sales turnover respectively, and the tax may be levied at a uniform rate of 10%. A separate sumptuary tax can be levied on cigarettes.
The second strategy comprises motivating the states to restart the reform process. This implies making compromises on the design and implementation. In fact, even some bad features may be included in the design to get the reform process moving. Thus, the states could tax at two rates instead of one and levy the tax at floor rates instead of fixed rates. Broadly, they may start with the floor rates of 5% and 10%, which is broadly the revenue-neutral rate. On sumptuary items, tobacco products, motor spirit, high speed diesel and a few items of luxury consumption, in addition to GST, the states may levy a special excise at the floor rates decided collectively.
The Centre should fully compensate any shortfall in revenue estimated at the floor rates, including revenue from central sales tax, for the first three years. The reform could be implemented from April 2012. The progress in revenue collections should be monitored and in 2015, the rate structure could be realigned, if necessary.
THOSE who cannot remember the past are condemned to repeat it, said philosopher George Santayana. The goods and services tax reform, like the value-added tax reform that took over 10 years to complete, is stalled like a bullock cart stuck in mud. Restarting the reform is a challenge but an opportunity for the finance minister to secure a place in history as a statesman.
A two pronged strategy is needed to re-start the reform process. First, the FM can simply implement GST at the manufacturing stage at the central level in the forthcoming Budget itself and this does not require a constitutional amendment. It only requires the Centre to revisit the exemption list, unify the Cenvat rates and extend the tax to all services. With a common threshold and rate on both goods and services, the GST at the manufacturing stage becomes a reality. The threshold for both goods and services could be fixed at . 50 lakh of the manufacturing turnover and sales turnover respectively, and the tax may be levied at a uniform rate of 10%. A separate sumptuary tax can be levied on cigarettes.
The second strategy comprises motivating the states to restart the reform process. This implies making compromises on the design and implementation. In fact, even some bad features may be included in the design to get the reform process moving. Thus, the states could tax at two rates instead of one and levy the tax at floor rates instead of fixed rates. Broadly, they may start with the floor rates of 5% and 10%, which is broadly the revenue-neutral rate. On sumptuary items, tobacco products, motor spirit, high speed diesel and a few items of luxury consumption, in addition to GST, the states may levy a special excise at the floor rates decided collectively.
The Centre should fully compensate any shortfall in revenue estimated at the floor rates, including revenue from central sales tax, for the first three years. The reform could be implemented from April 2012. The progress in revenue collections should be monitored and in 2015, the rate structure could be realigned, if necessary.
R SEKAR
Former Jt Secy Ministry of Finance
Continue dialogue with states
ACONSENSUS on the goods and services tax continues to be elusive, despite the first discussion paper on the new regime. But the scope for any incremental change or transitional measures such as a GST at the central level is limited. At present, goods and services are taxed at 10%. Input credit is also available across goods and services. A tax on all services at this stage without any corresponding relief will only increase the tax incidence on goods. Lowering the small-scale threshold exemption from . 1.5 crore will hurt the small scale sector.
The scope for incorporating GST features at the state level has become limited after the implementation of VAT. Many states, though, are agreeable to subsuming a number of state levies and harmonising tax rates and procedures. States may have some psychological comfort to move forward if they have the option to raise the floor rate within an agreed band. A flexible approach on exemptions may also be needed to start with.
What is feasible at this stage is the adoption of procedural changes that are required for a national-level GST. Common registration, electronic filing of returns, e-payment, electronic monitoring of inter-state movement of goods, standard classification and so on should be done in the near term. A consensus is also needed on a common IT platform and the infrastructure should be in place ahead of the transition. The revenue impact of GST also needs to be assessed properly. Definite numbers are a must to convince stakeholders to switch to GST. This exercise has to be done in a transparent way in coordination with states and experts in the field. An assessment of the revenue implications will also be helpful.
The Centre must keep the process of dialogue on with the states and respond to their concerns including apprehensions over the infringement of their autonomy. New Zealand, for instance, announced a relief package for sectors that would be impacted by GST, ahead of its introduction. Identifying and finding agreeable responses to issues through a dialogue is the only way forward.
Continue dialogue with states
ACONSENSUS on the goods and services tax continues to be elusive, despite the first discussion paper on the new regime. But the scope for any incremental change or transitional measures such as a GST at the central level is limited. At present, goods and services are taxed at 10%. Input credit is also available across goods and services. A tax on all services at this stage without any corresponding relief will only increase the tax incidence on goods. Lowering the small-scale threshold exemption from . 1.5 crore will hurt the small scale sector.
The scope for incorporating GST features at the state level has become limited after the implementation of VAT. Many states, though, are agreeable to subsuming a number of state levies and harmonising tax rates and procedures. States may have some psychological comfort to move forward if they have the option to raise the floor rate within an agreed band. A flexible approach on exemptions may also be needed to start with.
What is feasible at this stage is the adoption of procedural changes that are required for a national-level GST. Common registration, electronic filing of returns, e-payment, electronic monitoring of inter-state movement of goods, standard classification and so on should be done in the near term. A consensus is also needed on a common IT platform and the infrastructure should be in place ahead of the transition. The revenue impact of GST also needs to be assessed properly. Definite numbers are a must to convince stakeholders to switch to GST. This exercise has to be done in a transparent way in coordination with states and experts in the field. An assessment of the revenue implications will also be helpful.
The Centre must keep the process of dialogue on with the states and respond to their concerns including apprehensions over the infringement of their autonomy. New Zealand, for instance, announced a relief package for sectors that would be impacted by GST, ahead of its introduction. Identifying and finding agreeable responses to issues through a dialogue is the only way forward.
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