With the Centre and states finally reaching a consensus on the contours of the Goods and Services Tax (GST), India is all set to roll out the largest indirect tax reform since the introduction of the value-added tax in 2005. Finance minister Arun Jaitley is expected to table the Constitution Amendment Bill in the current session of Parliament to meet the deadline of April 1, 2016, for its introduction. Surabhi explains the structure and benefits of the tax.
What is GST? What does it replace?
As the name suggests, the GST will be levied both on goods (manufacturing) and services. It will convert the country into unified market, replacing most indirect taxes with one tax. It would have a dual structure — a Central component levied and collected by the Centre and a state component administered by states.
At the Central level, it will subsume Central excise duty, service tax and additional customs duties while at the state level it will include value-added tax, entertainment tax, luxury tax, lottery taxes and electricity duty. Central sales tax (CST) will be completely phased out. Entry tax or octroi would be subsumed from the start. But state taxes on petroleum products will continue for a few years after GST is introduced, as per the deal brokered between the Centre and states on Monday. State taxes on alcohol and tobacco, too, would remain.
As with VAT, the tax will be charged on each stage of value addition. At each stage, a supplier can off-set the levy through a tax credit mechanism. This means, the consumer pays GST added on by only the last dealer in the supply chain.
The rate for GST is as yet undecided, but it would be in a range that would make exports competitive. A sub-committee of the Empowered Committee of state finance ministers had proposed revenue-neutral rates (RNR) for the Central and state components at 12.77 per cent and 13.91 per cent, respectively, taking the effective GST rate to 26.88 per cent. This is much stiffer than the 14-16 per cent in most countries as well as the recommendation of a taskforce of the Thirteenth Finance Commission of 12 per cent (7 per cent for state GST and 5 per cent for central GST).
Why do states fear they will lose revenue? How much do the states expect to lose?
For instance, states earn nearly 50 per cent of revenues from levies on petroleum products. Concerns have mounted over potential losses 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, 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.
But as a sweetener, the Centre has agreed to include a provision on compensation for a period of three years on losses arising out of GST to states in the Constitution amendment Bill. Jaitley has also promised Rs 11,000 crore to states as CST compensation in this fiscal. Further, to give fiscal autonomy to states, the Centre will collect taxes from traders having a turnover of over Rs 1.5 crore while the states will tax those having a turnover between Rs 25 lakh and Rs 1.5 crore.
Will states not charge octroi after GST is introduced?
All entry taxes, including octroi will be subsumed in GST from the start as they have a cascading impact. However, since it is estimated to account for nearly 14 per cent of the total tax collections by states of Rs 3,50,000 crore, the Centre has agreed for a special dispensation allowing states to levy an additional 1 per cent tax in lieu of entry tax.
How does the economy and the corporate sector in particular benefit from GST?
The rationale behind GST is that it simplifies the indirect tax regime with a single tax. A study by the National Council of Applied Economic Research estimated that roll out of the tax would boost the GDP growth by anywhere between 0.9-1.7 per cent. A Crisil report had also said GST was the best way to mobilise revenue and reduce the fiscal deficit. Removal of cascading taxes makes the manufacturing sector more competitive and cut down on the tax compliance burden.
What does it mean for the consumer?
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.