Prof. M.K. Bhat
Union Cabinet, by giving assent to constitution amendment bill to make Goods and Services Tax (GST), a reality has created a history in the fiscal reforms of India . The bill to facilitate the levy was presented in the parliament by Finance Minister and is likely to be accepted provided the Parliament is allowed to work. It can pave the way for making GST a reality by April 1st 2016 after due approval from parliament.The constitution will be amended to allow states to tax services and center to tax goods at the retail level.The bill needs to be ratified by 2/3rd majority in parliament and at least by 15 state assembelies.The state assemblies too may have to ratify it.The efforts of the central government to accomodate states needs appreciation beyond any doubt. Discussion on reforming the tax system was too tough as it demanded the involvement of both center and states. The loss of revenue to states had to be compensated as their big sources of revenue were getting out of their hands and they required assurance against compensation .
No economic reform can be successful with a cumbersome tax system which kills the business initiative by burdening the manufacturer /tax payer and generates less revenues. High tax rate leads to tax avoidance and low revenue collection. Arthur Laffer rightly pointed out the need for low tax rate with a large tax base for a high tax revenue. Since economic liberalization a need for proper structuring of tax system was being badly felt. The removal of state sales tax by vat in 2005 encouraged Government to streamline the tax structure and lead to the formation of empowered committee of state Finance Ministers in Nov., 2007 to take the form of dual goods and service tax to be levied by the center and the state.
With the changing business environment, the application of GST to replace the existing multilayer tax structure of state and central taxes is highly required. The multi layer taxation of goods and services lead to greater complexities, administration and compliance costs. Integration of various taxes into a GST system would make it possible to lower tax rate . GST, being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions and will help in the development of a common national market.
Goods and Service Tax is a comprehensive tax levy on manufacture, sale and consumption of goods and service at national level. It is a tax on goods and services with value addition at each stage having comprehensive and continuous chain of set-of benefits from the producer’s/ service provider’s point up to the retailer’s level, where only the final consumer should bear the tax. It would be applicable to all transactions of goods and service. It is to be paid to the accounts of the Centre and the States separately. The rules for taking and utilization of credit for the Central GST and the State GST would be aligned.
Although there was no difference of opinion on the application of goods and services tax, yet it has consumed more than seven years for reaching to a logical conclusion.The stalemate regarding goods and services tax has reached its logical conclusion with states admitting to subsuming entry tax proposed in the new setup. The states will be compensated for the revenue loss due to subsuming of indirect tax in the GST. The petroleum products have been included in GST but will be taxed at zero rate for three years implying that the states will be able to tax these products for that period.Tobacco and Alchohol will not be a part of GST, they are a major source of revenue to the states.
The consensus developed on GST will pave the way for single tax in the country by replacing indirect taxes levied by the center, state and local bodies with one unifying tax. It may create a new history by erasing tax barriers between the states and may lead to a big market. There is likely to be 2% growth in GDP due to GST. The barrier less market can lead to economies of scale and may help the consumer to get the things at a low price, the demand will escalate so will be the growth and employment.
GST is not a new experiment, but many countries enjoy the benefits of single tax system. Almost 140 countries have implemented GST, France was the first to introduce it in 1954 . India being a fedral country opts for dual GST one as per centre goods and services tax and the other will be state GST. In Newzeland, GST was introduced in 2013, it yielded 45% higher revenue than anticipated due to improved compliance. In Canada, GST replaced Fedral manufacturer sales tax. It resulted in increase in potential GDP by 24% consisting 12.4% increase in the National income. All this highlights the success of this tax procedure across the Globe.
GST will abolish taxes such as octri, central sales tax ,State sales tax,stamp duty, Vat, luxury tax, entertainment tax, entry tax, Telecom license fee, turnover tax ,tax on consumption or sale of electricity,taxes on transportation of goods and services etc., thus it will avoid multiple layer taxation currently available in the country. The tax rate will come down ,the number of assessees will increase 5to 6 times and tax collection will increase.
It will remove the multiple layers of tax and will integrate India through uniform tax rate, GST will be levied only at the destination point and not at various points (from manufacturer to retail outlets). Currently manufacturer pays the tax ex factory and again the product is taxed at the retail level.This curtails the demand of the product and influences the business adversely. It not only reduces domestic demand, but exports too get influenced by high price. Under GST, dealers may pass on the benefit of lower tax rate to people . This may lead to the lowering of tax content and thereby prices will decrease. Lower prices will lead to more consumption and may thereby help companies. The reduction of price may promote exports , raise employment, boost growth and India is expected to gain nearly $15 bn per year.
GST will be a step towards developing proper environment for the industrial growth of the country. It will give a sharp edge to our low performing manufacturing sector in terms of being cost effective . The growth of industries will lead to more employment and out put. It can help in controlling inflation in the market and may instill confidence in investors both domestic and foreign .
It may be held that GST can go a long way in improving the working of the manufacturing and other sectors of economy.
(The author is Deputy Director (MAIMS) Guru Gobind Singh Indraprastha University- Delhi)
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