3rd Aug, 2016 was a historic day for the Indian democracy, economy and cooperative federalism. The GST Bill was passed on this day by Rajya Sabha to replace raft of different central, state and local taxes with a single unified value addition taxation system to turn the country into world’s biggest single market. After a 5-hour long debate on the country’s most important tax reform, the GST Bill (The Constitution (One Hundred and Twenty-second Amendment) Bill, 2014) received a nod from Rajya Sabha upon reaching a political consensus across party lines, which was a major hurdle in its way till now. First conceptualised in the year 2003, the bill was passed unanimously by 203 Ayes and zero Noes, in Rajya Sabha. Later on August 8, 2016, Lok Sabha also ratified this GST amendment bill unanimously. This will be the biggest tax reform in India since Independence and is likely to be implemented from 1st April, 2017.
GST is being introduced in the country after a 13 year long journey since it was first discussed in the report ‘Kelkar Task Force on indirect taxes’. In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax based on VAT principle. Previous UPA Govt. also tried to bring this law, but they failed. The 115th Constitutional (Amendment) Bill, 2011, for the introduction of GST introduced in the Lok Sabha in March 2011 lapsed with the dissolution of the 15th Lok Sabha. In June 2014, the draft Constitution Amendment Bill was sent to the Empowered Committee after approval of the new Government.
The NIPFP favoured a standard rate in the range of 23-25% if goods are taxed at three different rates—a special rate for precious metals, a lower merit rate for some important goods as well as a standard rate that will be applicable to most goods. It had also suggested a GST rate of 18-19% in case of a single GST rate—that is all goods are taxed at the same rate. The 13th Finance Commission headed by former finance secretary Vijay Kelkar had suggested 18% as a possible GST rate.
GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
At present there are myriads of Indirect Taxes which will now subsumed into GST. It will further enhance the ease of doing business and also revenue of the government. At the Central level, Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty and Special Additional Duty of Customs will now subsumed into GST.
At the State level, State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling taxes are going to be subsumed into GST.
Under this new system, the states and the Centre will collect identical rates of taxes on goods and services. For example, if 18% is the GST rate on a good across the country, the states and the Centre will get 9% each called the CGST and SGST rates.
Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
GST Rate:
A panel under chief economic adviser Arvind Subramanian has recommended a revenue-neutral rate (a single rate at which there will be no revenue loss to the centre and states in the GST regime) of 15-15.5%, with a standard rate of 17-18% be levied on most goods and all services. The panel has recommended a three-tier rate structure wherein some essential goods will be taxed at a lower rate of 12%; so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40%; and all remaining goods at a standard rate of 17-18%.
The National Institute of Public Finance and Policy (NIPFP) favoured a standard rate in the range of 23-25% if goods are taxed at three different rates—a special rate for precious metals, a lower merit rate for some important goods as well as a standard rate that will be applicable to most goods. It had also suggested a GST rate of 18-19% in case of a single GST rate — that is all goods are taxed at the same rate. The 13th Finance Commission headed by former finance secretary Vijay Kelkar had suggested 18% as a possible GST rate. According to the Bill, passed in the Lok Sabha in May 2015, the rates were to be decided by a GST council headed by the central finance minister with state finance ministers as members.
Now, the bill needs to be approved/ ratified by 50 percent of the state assemblies. Then three pieces of enabling legislation needed to be approved: a). Central GST law (by Parliament); b). State GST law (by state government); c). An integrated goods and services tax law (by Parliament). Thereafter it will require setting up of IT infrastructure, which has already begun with initiation of the Goods and Services Tax Network (GSTN), a non-government private limited company set up on March 28, 2013. The GSTN has received bids from five IT companies, including Microsoft, TCS and Infosys, to build the IT infrastructure for collection of taxes which will further weed out corruption and leakage in Indian indirect taxing system.
(Author is a Research Associate at Dr. Syama Prasad Mookerjee Research Foundation, New Delhi)