By Shubhra Agrawal
The much-awaited Goods and Services Tax (GST) is set to be rolled out from the first of July in what seems to be a historic move for the country’s tax system. With the GST Council finalising tax rates on 80-90 percent of goods and services under the four-slab structure, it is heartening to note that essential items of daily use are being kept in the lowest bracket of five per cent.
India’s tax structure
The multi-tier tax system is being followed in India since independence. The taxes levied on individuals are broadly classified as direct and indirect taxes. When both the liability to pay the tax, and the burden of the tax falls on the same person, it is classified under the direct tax. For example, the income tax is a direct tax because the taxed individual directly pays the tax to the government and bears the entire burden of the tax himself.
Indirect taxes are those taxes that are imposed on consumption, sales, shipping, or production, and not directly on the property or the income of the consumer. Indirect taxes are generally included in the price of goods and services, and are, therefore, less obvious to the consumers paying the taxes. These taxes include sales tax, customs duty, and Value Added Tax (VAT). Previously, these taxes were not mutually exclusive. For example, if the good was manufactured and sold by the manufacturer, then Central Excise, as well as VAT, was applicable.
In order to avoid the cascading effect of different types of duties, the government has introduced the Goods and Service Taxes (GST). The GST would widen the tax base, thus giving way to lower tax rates. It would also lead to better coordination between the Centre and State tax administrations, in turn reducing duplication and compliance costs.
Tax Slabs for the GST
The rates under the GST were finalised by the mutual consent of the Union Finance Minister Arun Jaitley and other state finance ministers last Thursday. These tax rates have been structured to avoid tax increments in any of the goods. Rates that are close to the present incidence of excise duty plus VAT or service tax have been considered to be the rate under the GST.
While more than 80 percent of the goods are being taxed below 18 percent, the rate for luxury goods was fixed at 28 percent. However, the GST does not cover all goods. The exemption of taxes on items like silk yarn, puja material, and handicraft items, are being sought to encourage local trade and indigenous practices. No common consensus could be reached on gold either.
Does the future seem bright?
A recent study by National Council of Applied Economic Research (NCAER) explored the impact on growth rate due to the reduction in direct cost and cost reduction on capital inputs. It has predicted a 2 to 2.5 percent improvement in growth rates after the implementation of the GST.
Although the growth rates can show significant improvement in the long run, adverse effects are also anticipated after the initial rollout of the GST bill. This is due to a typical tendency to stock things up if taxes are expected to increase. Since the tax on services accounts for around 60 per cent of the GST and most services are non-discretionary, the output could contract slightly following the roll-out.
However, in the long run, the GST will increase the tax base. It will set up a system of taking credit for taxes on inputs only if it has been declared and paid by the input manufacturer. This, in turn, will set up a system of self-policing as it is in the interest of the producers to ensure that they source goods only from tax-compliant suppliers. Thus, many tax-avoiding companies in the unorganised sector are expected to fall within the tax net.
In a population of 125 crore, only 1.9 crore pay the income tax. The implementation of the GST will not only bring in more revenue for the government but will also decrease the tax levied on goods, by eliminating the cascading taxes phenomenon. In conclusion, the GST bill is expected to bring a positive change in the economy of the country despite some initial setbacks.
Featured Image Source: Live Mint
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