Why Goods and Service Tax ( GST) is an important indirect tax reform measure for India ?

There has been quite a buzz about Goods and Service Tax ( GST). What is GST ? Quite simply, GST is a proposed tax reform which will replace all the existing indirect taxes, namely, excise, service tax, octroi and VAT. Under GST, there is no differentiation between goods and service produced in India or imported. Exports will not attract GST. The centre and states will tax goods and services at an identical rate and the revenue will be shared between the centre and state. Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected by introduction of GST.  download (6)

Now, how is the implementation of GST beneficial for our country? If you can recall, GST will replace all the existing indirect taxes, which will undoubtedly simplify the tax structure, broaden the tax base, and create a common market across states and federally administered districts.

Currently, there is cascading effect of taxes. Say, a manufacturer sells a can of coke to a wholesaler. In this case, excise duty is charged on manufacture and CST or VAT is charged on sale. Now, if the wholesaler sells the same can to a distributor, he again charges sales tax. Now, if you consume this same drink in a restaurant, you will be charged with service tax on top of other taxes. So, the same drink has become quite expensive due to levy of taxes at various stages and the ultimate consumer has to bear the brunt of it. So, with the introduction of GST, all the indirect taxes will be abolished and only GST will be levied. Moreover the tax paid on inputs will be allowed to be set off. In this manner, GST is quite transparent and will eliminate the double taxes and will replace it with one single consumption tax.

As per the report of New Delhi-based economic think-tank the National Council of Applied Economic Research, implementation of GST would lift India’s economy of over $1 trillion by between 0.9% to 1.7% in addition to whatever growth is otherwise achieved.

According to the First Discussion Paper on Goods and Services Tax in India by the Empowered Committee of State Finance Ministers, the five key features of the proposed plan of the Goods and Services Tax for the Indian economy, approved by the Government of India and Empowered Committee of State Finance Ministers comprises:

1) There will be two components of GST, namely state GST and Central GST.

2) All transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST would be subjected to central and state GST.

3) There would be a two-rate structure -a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items

4) GST will also be levied on import of goods and services into the country.

5) The Central GST would be administered by the Centre and State GST would be administered by the States. This would enable to reduce unhealthy competition between the centre and the state and would promote harmony.

The interesting thing  under GST is that if the manufacturers, suppliers or traders do not pass on their cost savings to the customers then action can be taken against them under the Price Control and Anti-Profiteering Act which was introduced in April 2011.The most interesting thing is that essential food items and key services will not be affected as they would be exempt from GST.

So we come to a crucial question, when will GST be implemented? GST can be implemented out only when Parliament passes the Constitution Amendment Bill, which has been pending in Parliament since March 2011. In addition, it is important to have a robust country-wide IT network and infrastructure so that the implementation of GST is seamless. And most importantly, state government fears that GST could rob them of discretionary fiscal power. Also, they will suffer heavy revenue losses with its introduction. So, the question arises that if the states will suffer revenue losses, how will they be compensated? In this regard, the discussions are on to work out an independent mechanism to compensate states.

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