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GST to boost growth rate by 1.5 percentage points
May, 08th 2015

The goods and services tax (GST), which will create a national market for goods and services moved a step closer to April 2016 rollout with the Lower House of Parliament approving the constitutional amendment bill. A single rate GST, akin to a value-added tax will replace a plethora of taxes.

These include central excise, service tax, state-level VAT as well as entertainment, octroi, entry, luxury and purchase tax. The government has promised to compensate states for any revenue loss. In the Parliament, Finance Minister Arun Jaitley assured members that the new uniform indirect tax rate will be much less than the 27% recommended by an expert panel. "In our view, this is the first step in making India a single market. In terms of providing incentive to industry, this is the most extensive and far-reaching reform in the tax domain, which would encourage industry to grow significantly," CII director general Chandrajit Banerjee said. The constitution amendment bill was required to empower the Centre to tax goods at the retail level and states to levy tax on services. The bill proposes to create a GST Council with the Union Finance Minister as its chairman, two third of its members from the states and one third from the Centre. All decisions would need a three-fourth majority in the council.

To reach the three-fourth point, both the Centre and states would have to work together, Jaitley said, adding that the model proposed was in line with the concept of "cooperative federalism" promote by Prime Minister Narendra Modi. The Centre would provide 100% compensation for lost revenues to states for the first three years, 75% for the fourth year and 50% for the fifth year. He said concerns of manufacturing states like Maharashtra, Tamil Nadu and Gujarat, and other consuming states have been taken into account with provision for an additional levy of 1%. "GST can change the way people do business. If it is properly administered it will increase the GDP rate by 1 to 1.5%, Tax-GDP ratio up to 2% and reduce the cost of indigenous goods up to 10%.Investors need to take note of this mega tax reform while making any investment in India as the cost of doing business in India will change significantly.

GST will change the way enterprises do business in India. It will lead to consolidation of manufacturing to get economy of scale without any tax disadvantage and efficiency in supply chain. In the short term, the transition to GST will need to be managed efficiently to ensure tax compliance and to protect unutilised tax credits while ensuring continuity of business without hiccups," said Nihal Kothari, executive director, Khaitan & Co. The idea of moving towards GST was first mooted by the then finance minister P Chidambaram in the 2006-07 budget and was proposed to be rolled out from April 1, 2010. But this could not be achieved due to lack of consensus.

Experts say industry would need time to prepare for the new tax. "GST is a good opportunity to re-define supply chains covering manufacturing, sourcing, contracting and distribution," P S Easwaran, senior director, Deloitte Touche Tohmatsu India Private Limited. "The industry would get very less time to prepare for this major transformation in the indirect tax regime," said Pratik Jain, partner, KPMG.

 
 
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