Goods and Services Tax (GST) rolled out as soon the clock chimed midnight on Saturday, July 1, 2017, the One Nation – One Tax – One Market, is the biggest tax reform in Indian history that promises to change the way India does business and has potential to add up to 2 percent to India’s GDP. GST that subsumes around 17 central and state indirect taxes looks set to unlock India’s latent growth potential, is expected to boost compliance, curb tax evasion and give the much needed impetus to Indian economy. Tax reforms, which have been 17 years in the making, started by Atal Bihari Vajpayee, pursued by Man Mohan Singh, and now brought to fruition by Narendra Modi, aim to simplify India’s byzantine taxation system by harmonizing country’s state and central government revenue-raising mechanisms. India’s GST is the first value-added tax to work entirely on an information technology and communications infrastructure.
GST is defined as the tax levied when a consumer buys a good or service. It is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services. GST has been commonly accepted by world and more than 140 countries have acknowledged the same. Generally the GST ranges between 15%- 20% in most of the countries
GST was extremely important for economy like India to rid the consumer of cascading tax effect wherein a consumer had to bear the load of tax on tax and inflationary prices. Prior to implementation of GST; Goods in India were taxed by State governments & Central Sales Tax was levied only in the case of inter-state sales, Services were taxed by the Central government which also levied a welter of excise and customs duties, surcharges, and cesses, that bogged business owners down in tedious paperwork and drove them toward black market suppliers to escape the complicated and expensive work of tax compliance. For businesses to trade across 135 crore consumers’ market, fragmented multiple taxation and interstate checkpoints created obstacles and delayed deliveries by many hours besides confiscations due to local tax rules. GST by subsuming multiple indirect taxes including central sales tax, purchase tax, excise duty, luxury tax, entertainment tax, entry tax, taxes on advertisements, lotteries, betting & gambling, service tax, additional customs duty, surcharges, state-level value-added tax and octroi; is expected to hit hard the flourishing informal economy in which less than a crore enterprises – out of more than six crore enterprises paid taxes in India.
GST was also important as it would be difficult to evade tax after its implementation, as till now paying taxes voluntarily was considered an act of stupidity and tax evasion was a normal way of conducting business. Economic greatness of a country cannot be built on such weak moral foundations and unethical business practices. India has underperformed, for decades, in comparison to other developing economies, growing at an average rate of 3.7 percent between 1950 and 1970. Japan and South Korea grew at 10 and 5 times that rate respectively during the same period.
Remedy to multiple taxes and its cascading effect, a burden on common man, is GST. GST has a federal structure with three kinds of taxes namely CGST – Central, SGST – State and one called IGST – integrated GST that will help to tackle inter-state transactions. IGST will be combination of CGST and SGST and the same will be collected by the Centre in the Origin State. Under GST all forms of supply of goods and services like transfer, sale, barter, exchange and rental will have a CGST and SGST. The impact of cascading taxes can be explained with an example: Say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. In this case while B was computing its sales tax liability, it also included the sales tax paid on previous purchase, which is how it becomes a tax on tax. This is where the need for GST arises to do away with the phenomenon.
GST Council decided the rate slabs for the Goods and Services to be taxed under the GST regime. The threshold limit for exemption from levy of GST is Rs 20 lakh for the States, except for the special category where it is Rs 10 Lakh. The Council has adopted a four slab tax rate structure of 5%, 12%, 18% and 28% for GST.
Impact of GST on Indian economy:
According to Ministry of Finance, “GST will make India a common market with common tax rates and procedures and remove economic barriers.” In the GST regime, exports will be zero-rated in entirety. This is unlike the past system where refund of some of the taxes did not take place due to fragmented nature of indirect taxes between the Centre and the States.
Arvind Subramanian, Chief Economic Adviser to the Government of India and Hasmukh Adhia, Revenue Secretary stated on Jul 19, 2016 that the country will benefit immensely in three ways from the GST:
First, the GST will greatly increase the revenues available at the states’ and centre’s disposal by expanding the tax base. More importantly, the resources of the poorer states (or consumer states) like, Uttar Pradesh, Bihar and Madhya Pradesh will increase substantially.
Second, the GST will facilitate ‘Make in India’ by converting the geographical landscape of the country into a single market. Despite being one country, India is a union of 30 or more markets. GST would get rid of the CST and subsume most of the other taxes. And since, it will also be applicable on imports, the major tax factor working against ‘make in India’ will disappear, greatly boosting the production and in turn exports. This will ultimately help bridge the current account deficit.
Third, the GST would improve tax governance in two ways:
According to Confederation of Indian Industry (CII) President Shobana Kamineni GST will make India Inc. more competitive, it will incentivise exports, help expand the tax net, contribute to the ease of doing business and accelerate new business ventures. “Input tax credit will curb inflation by avoiding tax-on-tax. We believe that most businesses would pass on the benefits of input tax credit to consumers so that inflation would be curbed.”
The day after Goods and Services Tax (GST) was rolled out; there was one development which brought cheer to consumers. Firms in sectors such as automobiles, electronics and consumer goods announced a reduction in prices of some products. This is no surprise and very much an anticipated benefit of the roll out. One of the aims of GST was to remove the cascading impact of multiple taxes which was a feature of India’s erstwhile fragmented domestic market. With the creation of a common market, some prices of some products have been marked down as the cascading impact of taxes has been eliminated.
GST is another milestone in India’s reform journey that is undoubtedly India’s biggest piece of economic reforms and has also been the most complex reform to achieve: it called for the Constitution’s division of the tax base between the Centre and the states to be amended, calling for virtual political consensus across the federal divide and the political spectrum. It took a combined effort by India’s political parties to set aside narrow interests in the pursuit of greater common good to bring about this reform. However, switching over to GST should not be seen as an end in itself. Instead it should be seen as the beginning of a process of reform to truly unshackle the Indian economy. India has a long way to go, before poverty and ignorance and disease are banished and people set free to realise their potential.
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