Economic growth is driven by demand and consumption. Consumption and demand are driven by competitiveness and value for money, goods and services. In the existing framework of taxation, multiple taxes are levied by the Centre and states on goods and services at different stages in the supply chain. Rates and administration of tax differ across states.
Such multiplicity makes the tax structure complex and difficult to administer, which further increases the cost of compliance. Complexity discourages tax compliance and results in litigations and tax avoidance. It delays the supply chain and business processes and results in high cost of products due to cascading of taxes, thereby slowing down economic growth.
The GST regime aims at simplicity of tax structure by maintaining only single or dual tax rates. The competitiveness of goods and services is ensured by removing the cascading effect of taxes. GST would increase the tax revenue base as the levy is on all goods and services across the entire supply chain.
Tax compliance becomes convenient through a flawless input-tax credit mechanism. Goods become competitive thereby driving consumption and contributing to economic growth. In a seamless input-tax credit mechanism, it is expected that the production cost would be reduced by 5-10% for several products.
The Direct Taxes Code aims at consolidating and amending laws relating to all direct taxes (income tax, dividend distribution tax, fringe-benefit tax and wealth tax).
The idea is to establish an economically efficient, effective and equitable tax system, which would automatically facilitate voluntary compliance and help increase the tax-GDP ratio. Raising tax slabs for individuals and reducing tax rates for corporates would leave people with more disposable income, thereby driving consumption and investment. Both the DTC and GST are major steps towards the economic growth of the country.
The DTC aims at widening the tax base by reducing tax rates and bringing more people into the net. Several proposals have been made in the DTC like a reduction in tax rates for corporates and widening the tax slabs for individuals, new concepts of anti-tax avoidance rules, thin capitalisation, minimum alternate tax (MAT) based on gross assets.
Reduction in the corporate tax rate from 33% (including surcharge) to 25% will benefit companies across sectors. Business losses will be allowed to be carried forward indefinitely instead of a maximum of the present eight years. The reduction in tax rates is intended to be compensated by a withdrawal of various tax incentives available to sectors such as exports, infrastructure, area-based tax holidays, etc.
Though the DTC aims at lowering the compliance cost, new complex concepts like advance pricing agreements, MAT based on gross assets, etc, it would increase litigation and subsequently the cost of tax compliance. The overall strategy on savings and investments will have to be seen and evaluated in the longer run. The intention seems to be to push savers to a consumption-driven society and the government is willing to sacrifice the high rate of savings that India enjoys.
Around 140-plus countries have so far implemented GST or a national Vat. There are different models with their own peculiarities. Some countries follow taxation at a single rate, while others have more than one rate depending upon the class of goods. A GST model that ensures seamless input tax credit across states and the Centre, as well as subsumes all the taxes on goods and services is optimal for India.
There are, of course, differences between the Centre and states. A balanced approach should be adopted. There should indeed be an effort to maximise taxes on goods and services under GST. Industry would benefit from lower cost of compliance and lower production costs of goods and services.