By Harsh Doshi
The Goods and Services Tax (GST) began to take shape in India as early as in 2003, with the Vajpayee Government setting up a task force under Vijay Kelkar. The primary aim of the task force was to look into the tax reforms and it recommended rolling out of a GST. Most of the groundwork for the GST was laid during the 10 year UPA rule when the then Finance Minister P. Chidambaram first mooted the idea of the GST in his 2006 budget speech.
Finally, the GST comes to India
After over a decade of debate and discussion over the merits and demerits of the GST and a year of strategising its implementation, the eve of the 1st of July 2017 witnessed the red carpet entry of the GST into India. The tax will subsume 17 different central and state indirect taxes and unify India into a $2.3 billion market. Economists have predicted a GDP rise of around 2% contributed solely by GST.
India is now one among the 160 countries to have implemented the GST in some form. The advent of GST has also witnessed the registering of 1.6 lakh new businesses under the GST Network (GSTN). However, there are several flaws in the GST system that need to rectified. This can be done by taking cues from the procedures followed by other countries that have implemented it successfully.
Looking at the big picture
The GST, as conceptualised in India, would subsume various indirect taxes, both central and state. This would take away the state’s own tax revenue and put it in the Union Government’s Treasury. This would be then disbursed to the states. What is required is a single rate of tax that would not cause any loss of revenue to both levels of the government. This rate has been termed as the Revenue Neutral Rate and would be applied to most items. A few basic necessities like food and salt would be exempt from tax, and sin goods like cigarettes and luxury cars would be charged a higher rate. The revenue neutral rate further consists of three categories- 5%, 12% and 18%. A majority of the items, however, are to be taxed at 12 and 18%.
Exceptions to the GST
Various commodities like electricity, alcohol, petroleum products, and stamp duty, however, have been left out of the purview of the GST. These commodities are major revenue generators for individual states. State Finance Ministers, hence, did not want to lose more than half of their own tax revenue.
Thus, these items will first attract excise, followed by VAT or service tax as applicable. The tax at every stage will be further taxed in the next stage. Such a cascading effect will decrease the intended effect of the GST. Such undesirable adjustments are obstacles to the proposed ‘One Nation, One Tax’ concept.
Small term disturbances are likely
Certain nuances in the GST law, though beneficial from an economic standpoint, would pose great trouble to businessmen. The GST is an advanced form of the Value Added Tax that avoids the cascading effect of the vintage style sales tax. So an economic agent pays tax only on the value addition made by him. The tax paid to the previous link in the chain can be claimed as an input tax credit. With the GST, however, if the previous link in the chain is a non-registered entity, the agent cannot claim set-off. Not just that, he would also have to pay the GST on behalf of the non-registered entity. This, done with a motive of encouraging formalisation, would entail huge short term loss to honest taxpaying businessmen.
How does India fare compared to others?
Comparing the GST systems in India and other countries unearth various interesting points. At 18%, India is imposing a high rate of tax as compared to the standard rate. Basic services like banking fall in this bracket, up from the previous 15% service tax. Several other countries charge a lower standard rate of tax. Bolivia, for example, charges 15% while Costa Rica taxes at 13%. At an even lower tax bracket, Malaysia and Singapore have set as the standard rate at 7% and 6% respectively. The only countries that charge exorbitantly high rates of GST are the Scandinavian countries like Sweden and Finland at almost 25%.
The Government has also made it mandatory for businesses of all sizes to file tax returns on a monthly, quarterly and annual basis. As compared to this, countries like New Zealand and Singapore have differentiated time of tax return filing according to the size of the business.
A long road ahead
The first country to introduce the idea of a GST was France, way back in 1954. Since then, 160 countries have followed suit, implementing and improving the GST via various amendments. India too has a long way to go. The initial phase will be challenging, with confusion regarding the actual working of the tax system. However, it is expected that India will learn from both its own mistakes and those of other countries and progresses towards one tax throughout the country.
Featured Image Credit: Visual Hunt