The Goods and Service Tax Bill that has been recently passed by the Indian Parliament is seen as a welcome change and touted to be “the greatest economic reform since 1991.” The Bill proposes a uniform tax for a single good or service, across the producer, supplier and customer according to the value addition in the supply chain. The tax will subsume major Central and State taxes and also reduce the burden of CENVAT (Central VAT) imposed on the states, on the producer. Therefore, this bill is seen to be beneficial particularly for the manufacturing sector and big businesses.
The need for GST was recognised in light of the multiplicity and complexity of indirect taxes implemented in India. The Central Government is authorized to levy excise and service tax on the manufacture and sale of goods along with the State governments impose sales and value added taxes on during various steps of the production and sale process. Moreover, there are several inter-state tax, CST, levied by the government contributes to the convoluted “tax on tax” regime. Therefore this Bill under the slogan of “one India, one tax, one market” heralds hopes to simplify the system.
GST absorbs the cascading effect of CENVAT on the manufacturers by subsuming the Central and Additional Excise duty on goods and service tax as well as several important state taxes such as VAT, Entertainment tax and Luxury tax. Consequently, GST will be imposed as CGST (Central GST) and SGST (State GST), a dual taxation model.
A commonly used example cited by the Finance Ministry and other analysts of how producing goods have become cheaper due to the producer experiencing the effect of net GST, which is the difference between GST on output and Input tax credit. Therefore, it is the effect a tax only on value addition and a set-off on tax credit from the supplier’s point of view. This will result in a relatively lower tax paid to the government, a raise in the supply of money causing real interest rates to fall. This will incentivize investment, resulting in fostering a favourable business environment as mandated by the government.
The Bill might be a tall order to actually fulfill. With a deadline of April 1, 2017, the government has their work cut out for them, with the GST council comprising of central and state finance ministers, will have to decide the new tax rates for different goods and services. Each state will have their own suggestion on exemptions on taxes for certain goods. This will lead to different tax bands for different goods and services across different states. The states will also have to compensate for the loss of forgone revenue.
Critics of the reform have also suggested that the GST would make the tax on goods and services directly a consumption tax, thus resembling income tax. As evidence shows that the rich can avoid paying their income tax dues, the inherent flaws of a warped system of taxation are revealed as the burden of the indirect tax will fall on the poor and middle class salaried workers, who consume essential goods.
In conclusion, though GST is seen as an impressive tax reform with the mammoth task of steady implementation falling on the state. The state needs to remove any glitches in its own administration and come to a common consensus on tax regime to make this work.
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