Amidst the global economic scenario and the pressures of populism from within the ruling alliance, the Finance Minister had the unenviable task of pushing for long-awaited tax reforms. In the short term, his proposals to increase rates of both Service Tax and Central Excise to 12 per cent and extend the levy of service tax on all services seem cruel and inflationary. However, the sum total of the proposals clearly indicate a move to simplify the complex indirect tax system and move to a simpler and more tax neutral Goods and Services Tax (GST) regime.
BENEFITS OF GST
GST is the most widely accepted indirect tax system and is prevalent in more than 150 countries. It is a destination-based consumption tax and is applicable on all transactions of goods and services. The Finance Minister has made clear his intention of implementing GST as soon as politically' possible.
India has a complex indirect tax system, with the Central Government levying taxes on manufacture and services and the State Government levying taxes on sale of goods, etc. The tax paid on inputs is not creditable between the Central and State levies. Tax paid to one State on a sale cannot be credited in the State where subsequent sales happen. This leads to an inefficient tax system and distortions in the supply chain. Companies set up depots in different states with the sole objective of making sales in the customer's State so that credit can be passed.
The GST would subsume most indirect taxes (currently levied on both goods and services) under a single umbrella. Major taxes likely to be subsumed are CENVAT, VAT, service tax, etc, on manufacture, sale and consumption of goods as well as services at a national level. This would simplify the tax regime. GST will facilitate seamless credit across the entire supply chain and across all States. It will do away with the need for depots at each State to register local sales and pass on credit.
However, a Constitutional amendment is required to give the States and Centre concurrent powers to tax both goods and services and this Bill is pending in Parliament since March 2011.
The Bill has been sent to the Parliamentary Standing Committee. The main obstacle has been the irrational fear of certain State governments that they would lose revenue and certain powers to the Centre.
The Finance Minister has informed the House in his Budget speech that the drafting of the Central and State GST Legislation is in progress. The GST Network (GSTN) will be operational from August 2012. Cross credit through a common CENVAT Credit Rules for both Excise and Service Tax had already been introduced. In this Budget, the rate of the two levies has also been harmonised at 12 per cent. The GST avoids the cascading effect of tax on tax. It eliminates a parallel economy as all credits are based on bills and an IT system. We hope the Finance Minister is able to win over a recalcitrant opposition.