The Goods and Services Tax is one of the crucial tax reforms which the Narendra Modi led Central government wishes to introduce for the Indian Economy. Officially known as the Constitution (One Hundred and Twenty-Second Amendment) Bill 2014, it is a Value Added Tax which is planned to be implemented by April 2016.
Under this Bill, a GST Council will be established to task with optimizing tax collection for goods and services by the State and Centre. The Council will consist of the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government. The Goods and Services Tax will subsume various Central indirect taxes, including the Central Excise Duty, Countervailing Duty, Service Tax, etc. It also subsumes State Value Added Tax (VAT), Octroi and Entry tax, Luxury tax, etc.
Let’s say a truck is moving goods from Chandigarh to Chennai. It will pass through about 8 states. During that time, it will pay a variety of taxes – Octroi, VAT, excise duties and so on. Each source of tax collection is a source of confusion, corruption and delay. By the time the truck arrives at a destination in a couple of weeks, a huge amount of cost is indirectly added to the consumer. Instead of India being a common economy, we are a patchwork of dozens of economies making growth slow, business impossible and corruption high.
This bill aims at removing those Middlemen, Babus and Police, who are used to collecting random taxes & bribes from these businesses. Many businesses are built and even thrive because of these connections. The middleman is the ultimate power in India – whether it be kiranas blocking retail reforms or blocking GST through a variety of hidden tactics, these illegal channels need to be blocked, for the economy to prosper.
This problem has been recognized by the developed economies- Sweden, Denmark, Germany, Switzerland, Japan – have moved to a common GST (Goods and Service Tax) to provide a one common window for tax collection. With just one place of collecting taxes, there won’t be much delays and corruption. When delays and corruption decreases, economy prospers. The single place for tax collection will drastically improve amount of revenues collected [since it will be much easier to verify who didn’t pay] and at the same time help businesses grow.
Further, the Centre will levy an additional one per cent tax on the supply of goods in the course of inter-state trade, which will go to the States for two years or till when the GST Council decides. The Parliament can decide on compensating States for up to a five-year period if States incur losses by implementation of GST. It is because concerns have mounted over potential losses to states due to subsuming of state levies into GST. States have raised concerns of revenue loss due to the phase out of the CST, which they have pegged at Rs 34,000 crore. On a theoretical level, *Revenue Neutral Rate (RNR)* for GST would ensure that there are no losses to either the state or the Centre. Indirect tax collections are in fact expected to go up on the back of better tax compliance under the regime. However, the Finance Minister has promised Rs 15,000 crore to states as Central Sales Tax compensation in this fiscal.
With cascading taxes gone, over a period of time the lower tax burden would translate into lower prices for goods, which is of course, dependent on what the GST rate would be. With the disruptions in Parliament in the Monsoon session, one can hope that the Bill gets passed as soon as possible, for this would be an important cog in the development of Indian Economy.
*Revenue Neutral Rate: The rate that allows the Centre and states to sustain the current revenues from tax collections and, therefore, takes within its ambit, amongst others, any tax losses because of taxes subsumed and/or phased out, grant of input tax credits as well as sharing of the tax base, i.e. taxation of goods and services. It is expected to be 26.68% (comprising of CGST of 12.77% and SGST of 13.91%)