The GST Bill: Benefits, Shortcomings, and Ways Forward
18 Aug, 2016 · 5110
Prerana Priyadarshi elaborates on how the GST is an important reform and what its implementation means for India
Prerana Priyadarshi
Senior Researcher, Centre for Internal and Regional Security (IReS), and Manager, Operations and Outreach
The Constitution Amendment Bill for Goods and Services Tax (GST) was passed by the Rajya Sabha on 3 August 2016. New Delhi appears committed to replace all indirect taxes levied on goods and services by the Centre and States with the GST, by April 2017. Why is the GST India's biggest tax reform? How can the country benefit from it?
GST in a Nutshell
In India’s federal system of governance, taxes are imposed by both the central and state governments. The GST would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India which will replace all taxes levied by the Central and State governments. The GST will be a dual one, levied concurrently by the Centre (CGST) and the States (SGST). Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the Destination State).
Unlike the current indirect tax structure, the GST will make the tax system simpler and more compliance rich; lead to reduction in tax outflow from the consumers; boost in tax revenues; and more competitive exports. Now that the amendment bill has been passed by the Rajya Sabha and ratified by the Lok Sabha, it is also important to look into the sticking points that held the passage of the bill despite it being such a critical reform.
Reasons for Delay and the Final Deal Struck
Though the incumbent National Democratic Alliance (NDA) government managed to get the GST amendment bill passed in the Lok Sabha in 2015 and all the small regional opposition parties had in principle agreed to support GST, the main opposition party, the Indian National Congress, had three points of dispute with the Bill, which had stalled its passage in the Rajya Sabha. They were:
GST in a Nutshell
In India’s federal system of governance, taxes are imposed by both the central and state governments. The GST would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India which will replace all taxes levied by the Central and State governments. The GST will be a dual one, levied concurrently by the Centre (CGST) and the States (SGST). Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the Destination State).
Unlike the current indirect tax structure, the GST will make the tax system simpler and more compliance rich; lead to reduction in tax outflow from the consumers; boost in tax revenues; and more competitive exports. Now that the amendment bill has been passed by the Rajya Sabha and ratified by the Lok Sabha, it is also important to look into the sticking points that held the passage of the bill despite it being such a critical reform.
Reasons for Delay and the Final Deal Struck
Though the incumbent National Democratic Alliance (NDA) government managed to get the GST amendment bill passed in the Lok Sabha in 2015 and all the small regional opposition parties had in principle agreed to support GST, the main opposition party, the Indian National Congress, had three points of dispute with the Bill, which had stalled its passage in the Rajya Sabha. They were:
1. To mention the upper cap of tax, i.e. 18 per cent, explicitly in the constitution
2. To expand the powers of the GST Council comprising of representatives of the State and the Centre to resolve disputes on revenue-sharing between federal units and to establish a dispute resolution body and mechanism
3. To abolish the additional levy of 1 per cent on inter-state trade as it undermines the basic attribute of GST, whose purpose is to unify and simplify indirect tax regime
A consensus on the points 2 and 3 two points has been reached but for the point 1, the government has assured that a GST Council will take the decision regarding the tax rate cap. However, it is illogical to include a rate in the constitution as any further change in rate will need another amendment in the constitution and will also reduce the flexibility of the government.
The opposition parties have also unanimously demanded that the CGST and IGST Bill be brought as financial bills instead of as a money bill to which government has assured compliance of the constitution.
Key manufacturing states, especially Tamil Nadu, Gujarat and Maharashtra were concerned about the impact of GST on revenue collection. The Centre has agreed to compensate the States for the transitional revenue loss in the new tax regime for the initial five years. Additionally, the rising share of the services sector in the GDP from 41 per cent in 1990-91 to 66 per cent in 2015-16 will compensate a large portion of the anticipated revenue loss by the manufacturing states.
Benefits of Implementing the GST
The amalgamation of several Central and State taxes into a single tax will mitigate cascading or double taxation, facilitating a common national market. Working on the destination principle (from manufacturing to retail outlets), exports would be zero-rated and imports would attract the tax in the same manner as domestic goods and services. A transparent and corruption-free tax administration along with automation of compliance procedures will reduce errors and increase efficiency. The GST will widen the tax base that would lower tax rates and eliminate classification disputes. This would increase tax revenues, benefitting both the State and the Centre; and the tax paid by the end consumer will reduce in most cases. It is estimated that India will gain USD 15 billion a year by implementing the GST.
The amalgamation of several Central and State taxes into a single tax will mitigate cascading or double taxation, facilitating a common national market. Working on the destination principle (from manufacturing to retail outlets), exports would be zero-rated and imports would attract the tax in the same manner as domestic goods and services. A transparent and corruption-free tax administration along with automation of compliance procedures will reduce errors and increase efficiency. The GST will widen the tax base that would lower tax rates and eliminate classification disputes. This would increase tax revenues, benefitting both the State and the Centre; and the tax paid by the end consumer will reduce in most cases. It is estimated that India will gain USD 15 billion a year by implementing the GST.
Drawbacks of the GST
Service-related sectors, including telecom and consumer staples, which are currently at a tax rate of 15 per cent, might get impacted negatively, as they may have to shell out higher taxes. Furthermore, there is a risk that the GST can be inflationary; but inflationary pressures will depend on how the Revenue Neutral Rate (RNR) decided by the GST Council is split between standard and low rate. The RNR is the rate wherein the States and the Centre do not suffer any revenue losses from moving to a new tax regime. The RNR in the 15-15.5 per cent range with a lower rate of 12 per cent and a standard rate of 18 per cent would have no aggregate inflation impact.
Service-related sectors, including telecom and consumer staples, which are currently at a tax rate of 15 per cent, might get impacted negatively, as they may have to shell out higher taxes. Furthermore, there is a risk that the GST can be inflationary; but inflationary pressures will depend on how the Revenue Neutral Rate (RNR) decided by the GST Council is split between standard and low rate. The RNR is the rate wherein the States and the Centre do not suffer any revenue losses from moving to a new tax regime. The RNR in the 15-15.5 per cent range with a lower rate of 12 per cent and a standard rate of 18 per cent would have no aggregate inflation impact.
Road Ahead for the GST
This landmark legislation still needs to clear some more hurdles before the Bill becomes a Law, enforceable by the 1 April 2017 deadline. For starters, it needs to be passed by at least half the total states, followed by a presidential approval. The next step will be the formation of the GST Council within 60 days of the enactment of the Bill. The Council will work on reaching a consensus regarding a series of contentious issues such as the GST rate, the RNR, and the exclusion list, among others. The passage of the CGST and the IGST in the parliament and the SGST in state assemblies will be the final step. Therefore, ensuring the development and testing of proper IT infrastructure, including the GST Network and training of officials, is extremely crucial.
To make the GST successful, the government must ensure that the end consumer gets their share of benefits. It can be done by including an anti-profiteering clause in the GST that will prevent companies from taking undue advantage of the levy to charge more and make excessive profits.
This landmark legislation still needs to clear some more hurdles before the Bill becomes a Law, enforceable by the 1 April 2017 deadline. For starters, it needs to be passed by at least half the total states, followed by a presidential approval. The next step will be the formation of the GST Council within 60 days of the enactment of the Bill. The Council will work on reaching a consensus regarding a series of contentious issues such as the GST rate, the RNR, and the exclusion list, among others. The passage of the CGST and the IGST in the parliament and the SGST in state assemblies will be the final step. Therefore, ensuring the development and testing of proper IT infrastructure, including the GST Network and training of officials, is extremely crucial.
To make the GST successful, the government must ensure that the end consumer gets their share of benefits. It can be done by including an anti-profiteering clause in the GST that will prevent companies from taking undue advantage of the levy to charge more and make excessive profits.
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