Goods and Services Tax Bill(GST): Truth vs Hype
GST or the goods and services tax bill is also known as the Constitution’s (122nd Amendment) (GST) Bill.
Currently the central and state governments levy a host of indirect taxes like excise duty, sales tax, value added tax (VAT) etc. To simplify procedures so that a single tax could be levied the concept of GST was proposed during the Vajpayee’s government. However the bill in its current form excludes four key state level taxes: tax on petroleum products, electricity duties, excise duty on alcohol, and stamp duty on immovable property.
If and when implemented the GST will have two components i.e. central GST or (CGST) and state GST or (SGST), both of which would be levied on goods or services supplied in a state. The CGST component will go to the center while the SGST would be the state’s share.
So what is the contention?
The GST will be collected by the state where the goods are sold. Hence tax collection will shift from the origin state to the destination state and most producing states anticipate a sharp drop in their revenue collections under the GST regime. Hence the states want high revenue-generating sources such as petroleum and alcohol to be kept outside the ambit of GST which has been done. State governments also want some guarantee from the center for potential revenue loss in the initial years of GST implementation.
To address the fears of the manufacturing states on the potential drop in revenue collections, the central government proposed to levy a non-creditable 1% additional tax on inter-state sale of goods for the initial two years of GST implementation. This additional tax will go to the coffers of the origin state. However this proposed levy is not only against the spirit of GST it would also lead to tax arbitrage between local and inter-state supply of goods and entail incremental taxes in the supply chain having a multiplier cascading impact.
The other contentious issue is the fixing of the revenue neutral rate (RNR). As many taxes (each with their own rate of taxation) are being incorporated into the GST there is a need to arrive at a GST rate which will yield the same revenue as before. (Like the marks normalization done when results are declared by multiple education boards).
The RNR as proposed by the National Institute of Public Finance and Policy initially was 26.68% but this rate many predicted would have made India a non commercially feasible market for many industries such as IT, food processing and the service sector. Recently a committee led by chief economic adviser proposed 15–15.5% RNR making the standard GST rate between 17–18 per cent.
Lessons from Outside India
Canada introduced GST in 1991. Besides micro economic factors it was found that Canada’s GDP growth rate actually dropped from 2.4 percent in 1989 to 2.1 percent in 1991. Given that number of exemptions proposed in the Indian GST bill it is estimated that like Canada, GST will likely to have a negative impact on growth in India.
Also the need for dealers to register in each and every state separately could create a nightmarish situation for tax compliance.
The Road ahead?
After the RNR, the GST rate and the various issues like 1% levy is ironed out and the Rajya Sabha passes the GST bill, it has to be ratified by the legislatures of at least 15 states (more than half of the total 29), following which it will reach the President for approval.
Once the President approves the bill a GST Council will be constituted (with representatives from the state and centre) which will lay out a detailed plan for implementation of GST.
Hence the GST is not a one stop solution to India’s Indirect taxation problems as the government’s media spin seems to indicate and there is many a mile to go before one can talk about the GST impacting economy in a positive way.
Sources:
http://www.newslaundry.com/2016/07/22/all-you-need-to-know-about-the-gst/
http://qz.com/572857/why-indias-most-important-tax-reform-is-still-stuck-in-parliament/
