The
Government Amendment Bill for the Goods and Service Tax was introduced in Lok
Sabha on 19 December, 2014. Earlier it had been considered by the Parliamentary
Standing Committee which submitted its report in August 2013. This is one of
the key reform initiatives which commenced during the earlier NDA Government
was pursued during UPA I and UPA II. It continues to be a centre piece of our
tax reforms. The Finance Minister after an introductory statement on 24 April,
2015 requested that the bill be taken up for discussion and enactment. Congress
members and some regional parties objected that the Amendment introduced subsequently
after taking account of earlier recommendations of the Standing Committee
needed further discussion. They wanted it to be resend to the Standing
Committee. This would have delayed this bill for much longer.
In
essence India still remains a fragmented market. The varied rates of taxes
imposed by Centre and States create cascading effect, burden the consumers,
deprive government of tax revenue, add to the onerous of compliance and reduce
the competitiveness of manufacturing.
The
Essence of the Amendment Bill lies in subsuming various Central and State
indirect taxes including central excise duty, service tax, countervailing duty,
state value added tax, octroi, entry tax, luxury tax among others. The Bill
aims at creating a single unified national market for goods and services sans
of tax distortions. A GST Council will also be constituted. The membership of
the council comprises of the Union Finance Minister, the Union Minister of
State incharge of Revenue or Finance and the Minister incharge of Finance and
Taxation or any other nominations by State Governments.
The
functions of the council include making recommendations on taxes, surcharges
and cesses to be levied, goods and services to be included or exempted and so
on. The council will model laws and principles governing GST and decide upon
the turnover below which GST can be exempted. It will also decide floor rates
and bands of GST. It will suggest special rates to raise additional revenues
during natural calamity. The Council would also design special provisions with
respect to 10 states including Jammu and Kashmir, Himachal Pradesh and North
Eastern States.
Implementation
of GST would have some clear advantages for the economy.
First,
a single comprehensive tax benefits all stakeholders. Consumers will benefit by paying one tax in
place of multiple overlapping taxes like VAT, entertainment tax etc., leading
to market distortions. Revenue benefits from the broadened tax base. The
suppliers benefit from the minimal burden of tax levied only on the value added
by them.
Second,
it creates a unified common market. The cascading effect of complex indirect
taxes is mitigated. The transparency and simplification improves compliance.
Third,
a comprehensive tax improves the competitiveness of manufacturing sector. In
the long run, by promoting growth it improves the per capita income. The
purchasing power of the growing middle income population of India is enhanced.
Fourth,
a transparent and rational tax regime improves the Ease of Doing Business. It
boosts investor confidence, encourages capital inflows and gives a fillip to
the Make in India programme.
Multiple
challenges, however, remain unresolved.
One,
states are concerned that a substantial proportion of their indirect tax
revenues are now subsumed in one tax. They are also worried that now the tax
revenue will accrue to the destination states and not the manufacturing states.
Central government’s decision to reimburse the loss in revenue will allay this
fear. In the long run, higher growth would make central support unnecessary.
The transitional fiscal burden on the central government will also be allayed.
Two,
the rate of GST also remains undecided. Tax rates cannot be too low as it will
impact Government’s revenue. On the other hand, high tax rates will affect
compliance. Our tax rates, in the long run, need to be aligned with the rates
in other developing economies.
Three,
issues such as taxing inter-state transactions at 1 percent has caused concern.
It has been decided that such a tax with an upper limit of 1 percent be
collected by the Centre and can be assigned to the States for an initial couple
of years. The GST Council reserves rights to make recommendations in this
context. However, a higher rate of such tax can create production distortions.
Four,
the exclusion of tobacco, alcohol and petroleum and the real estate sector robs
major areas from a unified tax structure. Overtime and given experience, the
GST Council can phase these in.
Analysts
believe that GST is central to our growth strategy. While estimates vary, many
believe that it can add upto 1.5 percent to India’s GDP. It benefits all
stakeholders. The glitches have to be resolved overtime. The Best should not
become the enemy of the Good. An early GST is now an economic necessity.
