Minister Wang Jun, also Commissioner, State Administration of Taxation, China, spoke in a recent interview about the importance of taking care of the pond if you want good quality fish. The GST in India is one such effort to streamline, and make attractive, the indirect taxation system to encourage productive industry and trade. The questions and answers below are a consequence of collecting the questions asked most commonly of the tax by laymen, posing them to experts and practitioners and distilling the answers to present them as simply as possible.
So what is GST?
GST, stands for Goods & Services Tax. In the Indian context, it is an indirect tax (like Sales or Service Tax, unlike the Income Tax) that, if implemented, will be levied by both the Centre and the State Governments on the supply of goods and services.
It will subsume the existing indirect taxes, like Central Excise and Service Tax, from the Centre’s side, and State VAT on sales and some other State indirect taxes like Entertainment Tax, Luxury Tax, Entry Tax etc. These taxes sometimes number up to around 10 in some States.
The GST is paid at every stage of the supply of the goods and/or services, which can then be reclaimed through the input tax credit (ITC) where the tax is collected only on the value added at each stage. The full burden of this tax is borne by the final consumer.
Hang on a minute, isn’t that Value Added Tax (VAT)? What’s the difference between VAT and GST?
Not much at all. Internationally, VAT and GST are just two names for the same tax— a tax on the supply of goods and services. VAT is the name prevalent in countries belonging to the European Union, whereas, in countries like Canada, Australia, New Zealand, Singapore and Malaysia, the tax is known as the Goods and Services Tax.
In the Indian context, broadly speaking, VAT collected by the States on the sale of goods is known as State VAT, while the tax collected by the Centre on the manufacture of goods and sale of services is known as the Central Excise Duty (this duty is also referred to as CENVAT, or Central VAT) and Service Tax.
The name‘Goods and Services Tax’ makes it amply clear that the tax is applicable on both goods and services.
This is confusing. So why does India need to levy GST when there is already a VAT in place in every state.
The present indirect taxation system in India can be seen as a two tiered system, which broadly covers the Central Excise Duty (CENVAT) and Service Tax – levied by the Central Government – and taxes such as the State VAT, Luxury Tax, Entertainment Tax etc., levied by the State Governments.
This system has certain deficiencies. First, the same goods are being taxed by two governments (the Centre and the State Governments) in their chain of movement in the course of manufacture and sale. Hence the cascading of taxes isn’t completely done away with.
For example, the Central Excise Duty and Service Tax levied on a particular good are not credited when the State Government levies State VAT on it. Therefore, what the State Government ends up doing is ‘taxing the tax’ and the cascading of taxes ensues. This leads to an unjustified increase in price.
Secondly, this multitude of taxes, collected by multiple agencies, lead to multiple compliance costs for those selling the goods and providing services and so these costs are recovered by adding them to the price of the goods and services as well— causing them to rise. To these compliance costs, add the possible cost of corruption as the present indirect tax system allows for various points of contact between the tax enforcers and the tax payers thus increasing the chances of corruption at each point. With the GST, and a significant decrease in points of contact, some experts predict a decrease in corruption as well.
Thirdly, different States have different VAT rates and this often leads to a VAT rate war to attract industries. Or, a State simply increases its VAT rate to enhance its revenue collection. Consequently, there is no common economic market in the country.
Fourthly, barriers at each State border for the collection of Entry Tax and Central Sales Tax levied on the interstate movement of goods create hurdles in the free movement of goods and increase the compliance costs.
All these deficiencies will be broadly eliminated in the GST regime where Input Tax Credit (ITC) will be avoidable at each point of the flow of supply of goods and services, from the raw material stage to the point of availability of the final product to the consumer. Instead of multiple taxes there will be one tax (GST) split into two, i.e. Central GST (CGST) and State GST (SGST) collected by two agencies, i.e. Central and State Governments. Further, the GST rate will be the same in all the States and there will be no physical barriers in cross-border movement across the States. This will also help India become a Common Economic Market.
Also, the collection of taxes is expected to become more efficient, which will reduce unnecessaryrevenue loss to the central and state governments.
According to the Empowered Committee of State Finance Ministers, Govt. Of India set-up on GST:
“… both the CENVAT and the State VAT have certain incompleteness. The incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive 30 trade below the stage of production. It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/ dealers. The introduction of GST will not only include comprehensively more indi Central taxes and integrate goods and services taxes for set-off relief, but also capture certain value addition in the distributive trade… Thus GST is not simply VAT plus service tax, but a major improvement over the previous system of VAT and disjointed services tax – a justified step forward.”
Okay. Well, in that case, have all countries adopted the GST?
No, France was the first country to do so in 1954 though it’s still commonly referred to as VAT there. Australia adopted the GST in 2000 and Malaysia has just levied it this year. These countries have the single GST system, some countries like Brazil and Canada levy the dual GST, as India too proposes to do.
There are about 150 countries around the world that have gone with GST.
However, there are also countries that haven’t, most importantly, USA and China. In the USA, the federal government has not yet ventured into what state and local governments believe is their sole territory.
China levies a business tax and a VAT, which they are in the process of streamlining, termed B2V.
Is this the best option India has?
It is one of the best options because the GST proposes to tackle the big problems of indirect tax collection. It is structured more around efficient tax collection, reduction in corruption and easy inter-state movement of goods.
At present India, at 17.7% has one of the lowest rate percentage of tax revenue as GDP in the world. In European countries it amounts to over 40%, US close to 30%, Canada 32%, Brazil 34 % and China 22%.
Currently, due to corruption and the high administrative costs of tax collection, India is estimated to bear a consolidated tax burden on the Indian economy of over 30%compared to the OECD average of lessthan 20%. The GST will help reduce this burden and boost tax.
Will the GST make goods and services cheaper?
Because of an elimination of cascading of taxes, a drastic reduction in the multiplicity of taxes and doing away with physical barriers at the borders, both the compliance costs as well as the incidence of corruption are expected to come down and that should make goods cheaper. As for services, the GST rate on services, which is not yet known, will be the deciding factor. There will have to be oversight through rules and regulations so that the benefits of lower tax rates and lower compliance costs are passed on to the consumers by pricing the goods and services at cheaper rates.
This is something the Government will have to watch out for. Some experts claim that one of the reasons the USA has not gone in for GST is that it may put a higher tax burden on the consumer and if this happens the poorer sections of society will be the most affected.
Why can’t India adopt a single GST system?
Our Constitution has provided a certain amount of fiscal autonomy to the States. For instance, the States are the exclusive authority to collect taxes on sales and on the manufacture of alcohol.This basic structure of fiscal power to the States cannot be changed. The States too, naturally are unwilling to part with their fiscal autonomy as they see this as something which will make them weak financially.
Hence it has been decided to go in for the dual GST system where both the Centre and the States collect CGST and SGST respectively on the same set of goods and services from the same set of taxpayers.
The Congress party wants a cap put on GST? Why?
A high GST, as mentioned earlier, hits the consumer the most, which is an important concern for India with a massive consumer base that is poor.
Canada with a dual GST system also has the distinction of being one of the very few developed countries with one of the lowest taxation rates in the world. It levies a GST of less than 10 percent.
Brazil has a high GST rate of 17-25 percent but levies a higher corporate and individual tax than India does.
India levies significantly lower corporate and individual taxes but proposes a high GST, which needs to be better understood, so as not to become anti-poor.
To address this issue, the Empowered Committee has decided to adopt a two-rate structure –a lower rate for necessary items and items of basic importance and a standard rate for goods in general.
There will also be a special rate for precious metals and a list of exempted items. For upholding of special needs of each State as well as a balanced approach to federal flexibility, it is being discussed whether the exempted list under the VAT regime including Goods of Local Importance may be retained in the exempted list under State GST in the initial years. It is also being discussed whether the Government of India may adopt, to begin with, a similar approach towards the exempted list under the CGST.
For CGST relating to goods, the States considered that the Government of India might also have a two-rate structure, with conformity in the levels of rate with the SGST. For taxation of services, there may be a single rate for both CGST and SGST.
The exact value of the SGST and CGST rates, including the rate for services, is still under consideration.
A panel of experts, headed by Chief Economic Adviser Arvind Subramanian has in its recently submitted report on GST rates determined its Revenue Neutral Rate (RNR) to be 15 to 15.5%. The panel has also made the following recommendations:
1. The standard rate to be applicable on most goods and services may be 16.9% to 18.9%.
2. The lower rate may be 12%.
3. The GST rate on precious metals like gold, platinum etc. may be 2%.
4. The highest rate of 40% may be considered for cigarettes, tobacco etc. and certain luxury items.
The Empowered Committee of State Finance Ministers has not yet decided on the various GST rates and on the common exemption list of the Centre and the States. The expert panel while agreeing to the Congress demand of keeping the tax rate below 18% has opined against enshrining a cap on the GST rate in the Constitution. The tax rate is dynamic and it depends on many factors and therefore it would need to be changed from time to time. Enshrining a cap in the Constitution would make it difficult to change the GST rate if necessary.
Will the trucks move without stopping at State borders?
The requirements for trucks to stop at octroi barriers may be significantly reduced, however, the Road Transport Authority (RTO), which has nothing to do with the GST levy will continue to have the power to stop commercial vehicles.
How will the GST system work? Does it involve any new systems/training that will need to be undertaken by Central and State officials to be prepared to levy the GST?
Nandan Nilekani and Viral Shah’s book Rebooting India says that the proposal of starting the process of developing an efficient software network for the GST was approved unanimously by the relevant empowered committee in 2012.
Since the formation of platforms and standards for such a complex country-wide programme, as well as linking it to banks, educating chartered accountants and businessmen is a massive task, which if started after the approval of the GST bill would’ve taken another five years, this process was rolled out under a non-profit company - GSTN (GST Network) - registered in 2013, jointly owned by the Central and State Governments. The Chairman and CEO of the organisation are both former IAS officers.
The organisation has been holding regular meetings with stakeholders for the past two years to promote GST awareness and process readiness.
It seems that if the GST is passed in the Parliament’s winter session, the soonest it can be implemented will be mid-2016, this too will be in different States at different times, depending upon the initiative for compliance.
How will it work in sensitive States like J&K and in the North-East?
According to the Empowered Committee of the State Finance Ministers a uniform State GST threshold across States is desirable and, therefore, the Empowered Committee has recommended that a threshold of gross annual turnover of Rs 10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime.
However, in May this year the J&K Finance Minister, Haseeb Drabu had said,"Jammu and Kashmir is unlikely to implement GST regime as it compromises its special position.... J&K is the only State that has the authority to legislate on all taxes and this will go with the new GST regime.”
If it’s a win-win for all involved then why has it been stalled in Parliament for so many years?
This is partly because there wasn’t sufficient understanding on the subject among the parliamentarians. The trust between Centre and State and across party lines has taken its time to be strengthened and is still in the process of being so. In addition there appears to be a ongoing political tug-of-war between the two leading national parties, the Congress and the BJP, whereby one may be uncomfortable with letting the other take credit for this tax reform.