Stage is set for dismantling of over 600 barriers at inter-state boundaries across the country with the consensus among the Centre and the States on the long pending Goods and Services Tax (GST) which is scheduled to be implemented from July 1. The economic and trade reform, touted to be a game changer and one of the most important reforms of its kind since the independence, was held up for over a decade. Though it was the Congress led UPA which had first mooted a constitutional amendment to usher in economic reforms, the delay in the last couple of years is attributed to the stand taken by the party for amendments to the legislation proposed by the BJP led NDA government.
The Constitution (122nd Amendment) Bill, 2014, which sought to introduce a system for uniform taxation across the country, had been pending in the Upper House since 2014. Lok Sabha, where NDA and its allies command majority, had passed the legislation in May 2015 but it was stuck in Rajya Sabha where the NDA is in a minority. The historic reform has now crossed all hurdles and is set for implementation with the tax slabs for various goods and services finalised.
We currently have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. It does not extend to value addition by the distributive trade below the stage of manufacturing. Likewise, state VATs cover only the sales. Once the GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components: a central GST and a state GST. This will ensure a complete and continuous mechanism of tax credits. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The government claims that this would help in reducing tax evasion as well bring down the prices.
The GST would replace a host of taxes including the Central Excise Duty; Duties of Excise (medicinal and toilet preparations); Additional Duties of Excise (goods of special importance); Additional Duties of Excise (textiles and textile products); Additional Duties of Customs (commonly known as CVD); Special Additional Duty of Customs (SAD); Service Tax and Cesses and surcharges in so far as they relate to supply of goods or services.
It would also subsume state taxes like the State VAT; Central Sales Tax; Purchase Tax; Luxury Tax; Entry Tax (all forms); Entertainment Tax (not levied by local bodies); Taxes on advertisements; Taxes on lotteries, betting and gambling and other State cesses and surcharges.
The government says that the biggest benefit of GST would be that it will dis-incentivise tax evasion. This would result in unearthing underground transactions currently taking place. It said that currently there is more tax on fewer items but with GST in place there will be less tax on more items.
No wonder Union Finance Minister Arun Jaitley had said that it was âperhaps the most important tax reformâ since the independence. He had complemented the Congress and other opposition parties for coming on board and had said in Parliament that âIndian democracy and Indian federalism are at their very best in as much as all national political parties and regional parties, state governments have come together to usher a major taxation reformâ.
Ironically Narendra Modi, when he was the Gujarat chief minister, had opposed the implementation of GST but much water has flown down the Ganga since that time. Even five other states, including two run by the Congress, had taken the stand that it impinged on the spirit of federalism. Tamil Nadu under the chief ministership of J Jayalalithaa was the only state which stood its ground in opposing GST. She pointed out in a memorandum to the Centre: âGST impacts the fiscal autonomy of states like Tamil Naduâ.
However with the passage of the Bill in Parliament and its adoption by the requisite number of states, there is now no looking back at the reform. One major issue was resolved at the two day GST Council meeting at Srinagar when it was decided to have four slabs of taxation for services. As. Against the single rate of 15 per cent levied on all taxable services currently, it was decided to have slabs of 5, 12, 18 and 28 per cent. The meeting also finalised the fitment of over 1200 commodities in five slabs.
Government is of the view that most products would get cheaper and that it wonât raise cost of most services. Among the goods that will get cheaper are foodgrains, medicines, consumer durables and items of daily use such as soap, toothpaste, packaged tea and coffee etc. No change is expected in the prices of milk, vegetables and fruit, bread, basmati, atta and pulses while plastic based goods and cosmetics etc would get dearer.
The GST Council has also fixed tax rates for restaurants. There would be no tax for those with annual turnover of upto 20 lakh. The tax structure is 12 per cent for non-AC, 18 per cent for AC with liquor licence and 28 per cent for 5-star hotels.
Based on the tax rates fixed so far, 43 per cent of goods will be taxed at 18 per cent while 17 per cent and 14 per cent of the notified items will fall under the 12 per cent and 5 per cent tax rate slabs, respectively. About 7 per cent of the items, which include essential goods such as milk, fruits, cereals and poultry, have been exempted from all taxes. Almost 20 per cent of goods have been placed under the highest tax slab of 28 per cent.
While the government had to make some compromises to accommodate the demands from states, the creation of slabs is a dilution of the original
idea of one nation, one tax. An opportunity for relief from âtax terrorismâ and simplifying the tax regime has been squandered. This has also given the government the power to pick and choose and grant favours to particular sections of businesses. The multiple tax structure would continue to maintain tax complexity. It was supposed to be a simple tax system but has turned out to be complex for the common man. This is bound to cause administrative confusion which is so loved by the tax department and may open the door slightly for discretion and corruption.
Also there is some disappointment over the earlier expectations that the top tax rate would be capped below 20 per cent. Hopefully the government would keep a check on backdoor additional levies by states and use its own discretion sparingly.
Despite some of these shortcomings, the introduction of GST is a historical and progressive step. It is expected to bring in transparency and result in much fewer complications as compared to the current tax regime.