GST a tax that will cover all levies at Centre, state levels
May, 11th 2015
What is goods and services tax (GST)?
The proposed levy will be a single tax that will cover all levies at the Centre and state level, including entry tax. It is a value-added tax, which means a levy at each stage of production, sale or consumption will be set off against taxes paid in the previous stage. Through a system of tax credits, those who are in the intermediate stages of a chain of production will get credits or refunds for whatever levies they have paid. This avoids cascading of taxes for the end consumer. Unlike the existing VAT, which is levied only on manufactured goods, GST will also include services.
When was GST conceived and when will it be implemented?
Although the plan has been discussed for years, a formal announcement was made in the 2006 Budget by P Chidambaram, the then finance minister. Since then, it has missed several deadlines. The government is now hoping for its nationwide roll-out from April 2016.
Why was it held up?
When the system was first discussed, there was great enthusiasm. But, slowly states started raising objections. One reason is that finance ministers would lose control over the taxation system and be unable to give discretionary concessions. The other area of concern is potential loss of revenue from cash cows such as petroleum, which makes up for almost half the revenue for some states. There was also an element of bargaining in the states' objections.
What's the current status?
The Lok Sabha has approved a Bill to amend the Constitution so that the Centre can levy the tax. However, its fate remains uncertain due to the NDA's lack of majority in the Upper house, but the government is confident that it will be able to secure the Rajya Sabha's approval. The Centre has assured states that it will compensate them for revenue loss due to GST roll-out, besides providing flexibility on entry tax and taxing oil products. Once the Constitution is amended, several other gaps need to be filled, including the rate of tax, which may be in the region of 11-12% for basic necessities.
How will GST impact households?
Ultimately, it should result in a lower burden on consumers as the levy will be at the point of sale and central and the state taxes will be merged into one levy.
How does the corporate sector gain?
The incidence of tax in sectors such as real estate is expected to come down by 25% since companies will be able to claim credits or set-offs for taxes they pay on goods and services. In addition, the refund mechanism for taxes paid across the country is expected to be more efficient, thanks to the proposed IT backbone. Currently, industry complains that refunds and credits are tough to claim and even more difficult to get.
How does the government and the economy gain?
The tax system is expected to become more efficient, which should help boost the economy and hence revenue collections. Some estimates say the impact on the GDP growth rate could be between 0.9 and 1.7 percentage points.