Goods and Services Tax (GST)

Oct 22, 2013 No Comments by

We have been hearing alot about GST for a past few years. Every few months this term pops up and we see some news being flashed regarding this. So, let’s first understand what this GST is.

At present on each and every item two types of taxes are levied – central excise tax and state sales tax. Moreover, the items are divided into two categories of goods and services with different taxation rules. This creates a lot of confusion as a single firm manufacturing a product has to divide its revenue into two separate categories of goods and services. This leads to unnecessary confusion. The firms many times try to manipulate the system to benefit them. Also taxes have to be collected at different points. The more number of points leads to high chances of tax mismanagement and corruption.

To reduce all this confusion, the government has decided to remove this tax structure and impose a single mechanism of tax known as Goods and Services Tax (GST). Under this, both goods and services will be taxed at the same rate. Tax has to be paid only at one point that is at the final point of consumption. Central Excise duty, additional excise duty, Service Tax, and additional duty of customs (equivalent to excise), State VAT, entertainment tax, taxes on lotteries, betting and gambling and entry tax (not levied by local bodies) would be subsumed within GST.

All over the world, about 150 countries have applied GST. India is very late in reacting to this tax regime. Europe is using GST for past 50 years. Currently there are about 40 models of GST applied all over the world. For example – Singapore and New Zealand has only 1 flat tax rate while Indonesia has 5 different rates.

The other point in favour of GST is the improved compliance. The process is less ambiguous and there is only one point of tax collection. This will reduce corruption and bring transparency in tax collection which will increase the efficiency of the system. When GST was applied in New Zealand in 1987, it yielded revenues which were 45% higher than expected.

India has opted for a dual GST system – Central (CGST) and State (SGST). Brazil and Canada follow this dual system. These will be applicable for all the goods except those which fall under the exemption category. The Empowered Committee (EC) has decided to opt for different rates – a lower rate for goods of basic importance whiles a standard rate for all other goods. It is also thinking of applying special rates for precious metals. EC is in thinking of adopting the European model of a floor and ceiling rate. This will allow the states to have a high or low rate. However, nothing is confirmed yet. The panel has also suggested threshold revenue to impose GST to exempt small traders. GST is expected to be around 14%-16%. Once this is decided then CGST and SGST will be decide. At present, tax on services is 10% while most goods are taxed around 20%.

The government believes that GST will boost exports and reduce the cost of imported goods. GST would reduce the tax burden. These benefits are expected to be passed to the consumer. This will reduce the cost of goods leading to low inflation. This in turn will boost the GDP by 1.5%-2%.

EC is thinking of including petroleum, petroleum products as well as alcohol under GST. Several states are opposing this. Taxes on petroleum account for 13% of centre’s tax revenues while 30%-40% of states’ revenues. So, the states don’t want to part with this major chunk.

Government is trying hard to bring GST. It all started in 2007 and still we don’t have a clear view of when this can be implemented. The Empowered Committee, headed by BJP leader Yashwant Sinha, is responsible for implementing GST. The states are worried that they will lose out on their state taxes and in turn less revenue. EC is also thinking as whether to make it mandatory for all the states or whether to give an option to the states to opt out of it. But if such an option is given it will create dual standards in the country. Some unified code has to be applied. The government is planning to give incentive to states in the form of compensation who agree to apply GST. It is facing maximum resistance from the states which have BJP led government. The government has set 2015 as the target to implement GST.

On paper it looks that GST will be good for the country but implementation is the real key here. Next year we have elections. If the government changes their might be some modifications in GST. So, lets see when we can actually see GST being implemented.



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