Dr Ashwani Mahajan
Overcoming political barriers in the path of Goods and Service Tax (GST), government is presenting its introduction as a major economic reform. After a long lasting exercise for the over 8 years, GST is just a step away from implementation. Although efforts to implement GST had started at the time of Congress-led UPA Government, but after the formation of the NDA Government, Congress wanted the same on to its own terms. The Congress wanted that it should be included in the GST Act that the rate of GST would not be more than 18 percent in any case. However, this was not acceptable to the Narendra Modi Government. Later, the Congress party gave up its stance, and after that the stage was set for GST. Today not only has the GST bill become a law, but GST Council has prepared the GST tax structure also. Agricultural goods and exports have been kept in the category of zero tax and apart from zero, 4 types of rates have been proposed. Five percent tax on general consumption goods, whereas luxury and non merit goods, such as tobacco have been slated to attract a high rate of 28 percent. The remaining items are supposed to be taxed at 12 percent and 18 percent.
What is GST?
At present, India’s indirect tax structure is extremely complicated. Different types of indirect taxes are imposed on the goods and services by the Central and State Governments. In the Constitution, the economic powers have been divided between the Center and the States, according to which the Central Government has the right to collect custom duty and impose excise duty on products, except a few such as liquor, toiletries etc. Apart from this, the Central Government has been imposing service tax for almost 23 years. On the other hand, the State Governments have the right to impose sales tax, entertainment tax, stamp duty, tax on electricity consumption, tax on transport of goods and passengers etc. After GST is implemented, barring a few exceptions, all other types of indirect taxes will be subsumed with GST.
GST is a consumption-based tax and imposed on the point of final sale. However, GST is imposed and collected at each level of value addition and at every point of purchase credit is paid on the next point of sale. On the last point of sale, that is consumer, full tax is collected and deposited with the exchequer.
When will it be implemented?
The Government says that they want to implement GST from July 01, 2017. Preparations are on for the same. However, in the meanwhile, West Bengal Finance Minister Amit Mitra has expressed serious apprehensions about preparedness for implementing GST; as such, it may be difficult to implement GST from July 1st. His opposition is also to the imposition of 28 percent GST on leather, regional cinemas and books. He also opines that the GST Network (GSTN) is not fully prepared. There are many who share his opinion about lack of preparedness for GST. There is a general feeling that industry and business are not fully prepared for this big tax change, and in the event of the implementation of GST, there may be lot of confusion and disruption.
Multiple rates to reduce efficiency
It is being said that GST is a globally accepted system, but we must keep in mind that in 140 countries, where GST or VAT tax system is there in some form or the other, there is generally single rate of GST. However, in India, apart from zero, four more rates of GST have been approved. Not only this, whereas same rate applies to hotels, restaurants, transport etc. across the world, tax rate has been fixed in India based on hotel tariffs and turnover etc.
Small industry and business is frightened
As the date of implementation of GST is approaching, the heartbeats of small entrepreneurs and small traders are increasing. Although big companies are a happier lot with GST taking over, small enterprises feel that GST may cause huge loss to them. Significantly, currently there is a provision for exemption in excise duty for production of up to Rs 1.5 crore in small scale industries. However, according to the provisions of GST, any entity whose business is rupees 20 lakh or more, must register itself for GST in the state where it carries its business. In the special category states, this limit is only 10 lakh rupees.
Apparently, India’s small entrepreneurs will be subject to discrimination and confusion. Worldwide, we find exemptions for Small Scale Industries. Though in Canada SSIs are exempted up to 30,000 Canadian dollars (Rs 15.6 lakh), this limit is 48 million rupees in Singapore and rupees 7.5 million in Malaysia, however it’s only Rs 2.0 million in India. With small industries presently exempted up to rupees 15 million, GST does a gross injustice to SSI.
Apart from this, we know that for big industries it is relatively easy to get tax-paid bills. Therefore, tax credits can be easily taken by large businesses. In large-scale business and MNCs, transactions are mostly between their branches, due to which they have no difficulty in their accounting and tax credits.
Will it be less inflationary?
Wherever GST was implemented worldwide, rate of GST was less than the previous tax rate, and due to this, the traders and industries also benefited. However, this benefit of lower tax in GST regime was not passed on to consumers. Today, when GST is being implemented in India and its rate is also higher than the present tax rate, there is no guarantee that inflation will actually decrease.
GST is a big tax reform, its being claimed that the tax system will become simple. However, it does not appear to be, as every businessman and industry will have to make multiple registrations and fill out various types of returns. In addition to this, the complexities of GST will increase further due to the multiple tax rates. Therefore, whether GST will actually be beneficial or not, the prices will fall or not, the taxpayers’ problems will decrease or increase or the revenue of the Government will increase or decrease, all these issues carry big question mark. The ability and willpower of the Central and State Governments to deal with the difficulties arising from time to time and also the efficiency of the GSTN would decide the success of the GST.
(The author is Associate Professor, PGDAV College, University of Delhi)
Dr Ashwani Mahajan