Dr. D. Mukhopadhyay
India is a country with federal structure of Government where the Central Government and the State Governments both have been empowered by the Indian Constitution to levy and collect taxes and in certain cases only Central Government is empowered to levy and collect taxes like, Central Excise, Customs, Income Tax and certain taxes like, Sales Tax, Octroi, etc. are exclusively levied and collected by the State Governments . This generates a lot of fiscal administration problem. In simplicity, Central Government is empowered to tax services and goods up to production stage and State Governments are empowered to tax sale of goods. The Central Government does not have constitutional authority to levy and collect tax on sale of goods. Again, the State Governments do not have power to levy and collect tax on supply of services. More than 165 countries across the globe have introduced Goods and Services Tax so far . Canada, France United Kingdom, Singapore, New Zealand, Hong Kong, European Union , United States of America etc. are the forerunners in practice of Goods and Services Tax(GST)).
In India, indirect taxes are levied and collected at multi points under the governance of multiple fiscal legislations and consequently there is for obvious reason tax on tax phenomenon. Under this circumstances, cascading effect needs to be neutralized through the process of simplification of tax system. In India, the idea of GST was contemplated in 2004 by the Task Force on implementation of the Fiscal Responsibility and Budget Management Act, 2003, named Kelkar Committee. The Kelkar Committee was convinced that a dual GST system shall be able to tax almost all the goods and services and the Indian economy shall be able to have wider market of tax base, improve revenue collection through levying and collection of indirect tax and more pragmatic approach of efficient resource allocation. Under the Goods and Service Tax mechanism, every person shall be liable to pay tax on output and shall be entitled to enjoy credit on input tax paid and tax shall be only on the amount of value added . The principal aim of GST is to eliminate cascading effect i.e. tax on tax and it will lead to bringing about cost competitiveness of the products and services both at the national and international market. GST System is built on integration of different taxes and is likely to give full credit for input taxes. GST is a comprehensive model of levying and collection of indirect tax in India and it would replace taxes levied both by the Central and State Governments. GST would be levied and collected at each stage of sale or purchase of goods or services based on input tax credit method. Under this system, GST-registered commercial houses shall be entitled to claim credit of the tax they paid on purchase of goods and services as a part of their day to day businesses.
Taxable goods and services shall be taxed at a single rate in the supply chain till the goods and services reach the final consumers and that is why it is also known as destination based tax. In order to introduce GST, it is necessary to amend the Constitution and ‘’ the Constitution (122nd Amendment) Bill, 2014 is lying in the Rajya Sabha which has duly been passed by the Lok Sabha on 6th May, 2015 and the NDA Government is not in a position to pass the said Bill owing to not having majority in Rajya Sabha. GST system is expected to be simple, more transparent and efficient in making it operational as it is proved with the implementation in more than 165 countries around the globe. In GST, there shall be two-rates structure-a rate for the necessary items and another rate for other than those covered under the bracket of necessaries. A special rate may also be there for precious metals and a list of exempted items too. As of now, Government of India thinks that GST rate shall be in between 20% to 23% which is definitely more than the global average rate. The global average rate is 20%. The prevailing rate of GST in Australia is 10%, France-19.6%, China-17%, Canada-5%, New Zealand-15%, Singapore-7%, USA-11.725%, United Kingdom-20% and so on. The GST shall be of two versions and one is Central GST and other State GST.
The rates of both the GSTs shall depend upon the necessity of garnering of revenue by the Government of the country. In order to bring about efficient administration and functioning of GST, it needs expert professional services and Chartered Accountants (CAs) and Cost & Management Accountants (CMAs) are the experts in the domain of Taxation and they can be of great assistance to the Central and State Governments. The society in general does expect that tax rate should be in the bracket of low to moderate and it should not be regressive but progressive. It is possible to be progressive only when tax base is widened and more revenue can be garnered from wider tax base with low tax rate. Moreover, it has to ensure stability in prices of the tradable goods and services. Tax payers’ compliance, early and faster grievance redressal mechanism and uniformity in the tax structure are some of the common expectations of society from much awaited GST system. If the tax system is simple and tax payers’ friendly, government shall be able to garner more revenue since people shall not try to practice tax evasion and tax avoidance. Moreover, construction and housing sector should be covered by GST since it can contribute significant amount revenue to the Government.
Fast Moving Consumers Goods (FMCG) sector after inclusion in GST may be quite useful in fueling the growth of the economy. It is also proposed in GST that there shall be three threshold limits with regard to small enterprises. Basic threshold for both goods and services shall be Rs. 10 lakhs to Rs. 15 lakhs, gross turnover of goods up to Rs. 1.5 Crores may be under the jurisdiction of States, gross turnover of services up to Rs. 1.5 Crores may be under the jurisdiction of the Centre and finally gross turnover of above Rs. 1.5 Crores may be under both Centre and State. It is of utmost importance that consensus may be arrived at among the States and pass the Constitutional Amendment Bill in the Rajya Sabha and two-third of the State Legislative Assemblies. The CMAs and CAs are to play a great role in better GST administration . GST would become the most effective mechanism of garnering fiscal revenue when the Government’s dependence on direct tax shall become secondary. In Singapore, GST came into existence in 1986 and it enables Singapore Government to shift dependence from direct taxes to indirect taxes over the years. GST is a tax on consumption and not income. Generally It encourages savings and investment instead of consumption. It may be opined that GST may be regressive instead of being progressive since low income groups of people pay more as a percentage of their income than the high income group. But in defence of this, it may be asserted that GST may be considered to be a proportional tax if tax payment is expressed as a percentage of lifetime consumption. Savings and investments are subject to deferment of tax and it becomes subject to GST when savings and investments are converted to consumption.
Moreover, ultimate welfare of the society depends upon the redistribution or allocation of revenue that were collected through tax. The broad purpose of introducing GST in India is to harmonize and bringing about unification of multiple indirect taxes. The cost of collection of revenue and cost compliance should be as low as possible.
Cascading and double taxation effects should be neutralized in one hand and on the other, voluntary compliance may be in place when overall tax burden on the business and consumers shall be reduced. According to the OECD Guidelines, the generally accepted principles of taxation policy should be based on the foundation of neutrality, efficiency, certainty, simplicity, effectiveness and fairness and the attention of the decision makers are invited to these issues in order to make the proposed GST progressive one and its success shall be subject to note of interrogation when it becomes regressive. It has been mentioned that Indian polity is somewhat similar to the political system of Canada and the GST rate in Canada is just 5% which is perhaps the least among all the GST practicing countries and Canada is the most successful country in GST implementation and practice and therefore a professional minds become inquisitive to know what are factors behind the success of Canadian GST as it will definitely help us in implementing GST in India. In Canada, GST is levied on goods and services which constitute the major bulk of supplies. The items like groceries, residential rents, medical services and financial services are given different status.
A business that purchases goods and services that are consumed , used or supplied during the course of business dealings or commercial activities is entitled to claim ‘input tax credit’ that it has paid earlier. Necessary documents are to be provided along with the filing of return for claiming the ‘input tax credit’ which takes care of cascading effect. GST if implemented shall perhaps be the most important and path breaking tax reforms in India. All the State Governments’ cooperation and sacrifice of some short term gains or benefits are called for so that the122nd Constitution Amendment Bill is enacted in the Rajya Sabha and much awaited GST sees the light of the day. From the objectives and scope of the proposed GST it can be opined that progressive taxation shall be in practice and there shall be rational and efficient allocation of resources among the States. Moreover the disputes with regard to distribution and division of national income among the States and Centre shall be settled constitutionally.
(The author is Professor of Management, Shri Mata Vaishno Devi University, Katra, Jammu & Kashmir.)
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