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The Proposal
GST stands for Goods and Services Tax. The distinguishing feature of the proposed tax is: GST would be applicable on 'supply' of goods and services as against manufacture or sale of goods, or provision of services, as at present. GST would be a destination based tax in contrast to the origin based taxation currently being followed. GST will be a uniform rate applied across the country, and will substitute a host of state and central taxes that are currently in force. GST's aim is to create a single national market for goods and services, improve productivity by decluttering the tax administration structure across the country, and promote inclusive growth across the country, rather than growth that gets distorted by temporary tax sops offered by different states.
The idea of a single GST was mooted first in 2007, but sadly has not yet been implemented - 8 years on. Here is an extract from a 2009 address of Vijay Kelkar, the then Chairman of the 13th Finance Commission, in an address to FICCI, where he spelt out how GST can be a huge growth driver for the economy.
"The GST will bring about a qualitative change in the tax system by redistributing the burden of taxation equitably between manufacturing and services. The Finance Commission had commissioned a study by NCAER to assess its impact on GDP growth and exports. The study explores the impact of GST on growth through direct cost reduction as well as cost reduction of capital inputs. Preliminary results indicate that the growth in GDP can be between 2-2.5% with the implementation of a well-designed GST. The increase in exports can be between 10-14%. It is indeed a staggering impact and demands an energetic action to usher in a well-designed GST at an early date.
There appears to be agreement that the best option would be a bare minimum number of rates-at best two, preferably one. A single rate will ensure low compliance costs, obviate classification disputes, and ensure uniformity of approach amongst all players. But to be attractive, a single rate cannot be too high. At the same time, the rate must be high enough to address the concerns of states on revenue neutrality.
For GST to be successful, all states and the Centre should implement it in a similar fashion. Only then will it bring about the national common market. The GST will perhaps be the single most important reform stimulus since 1991-92. Even a 2% reduction in costs increases profits by over 20%. This will attract investments. As tax cascading disappears, the industry will move to the lagging regions because of lower costs and thus bring these into the growth dynamics."
All that he said 5 years ago continues to be valid even today - which underlines the urgency of the issue and explains the market's despondency over the repeated delay in passing the legislation.
How will GST work?
It would be a dual system with both the Centre and the States, levying tax on a common base; the Central GST and the State GST. Further there would be an Integrated GST or IGST, which would be levied on inter-state supply of goods (like stock transfers) and services. This would be collected by the central government. Import of goods and services would be treated as inter-State supplies, while exports would be zero rated. CGST, SGST and IGST rates would be decided based on the recommendations of the GST Council, where the Centre and all the States are members. The central government has also agreed to bear revenue losses, if any, faced by the states, for five years after introduction of the tax.
Taxes that will be replaced
The GST aims to subsume the following varied taxes and imposts:
a) Central Excise duty
b) Duties of Excise (Medicinal and Toilet Preparations)
c) Additional Duties of Excise (Goods of Special Importance)
d) Additional Duties of Excise (Textiles and Textile Products)
e) Additional Duties of Customs (commonly known as CVD)
f) Special Additional Duty of Customs (SAD)
g) Service Tax
h) Cesses and surcharges insofar as they relate to supply of goods or services
State taxes that would be subsumed within the GST are:
a) State VAT
b) Central Sales Tax
c) Purchase Tax
d) Luxury Tax
e) Entry Tax (All forms)
f) Entertainment Tax (not levied by the local bodies)
g) Taxes on advertisements
h) Taxes on lotteries, betting and gambling
i) State cesses and surcharges insofar as they relate to supply of goods or services
Legal framework
The GST would be applicable on all goods except alcohol meant for human consumption, electricity and real estate. GST on petroleum products would kick in from a date to be decided by the GST Council. The threshold for levying of tax would be uniform for CGST and SGST. Input credits on CGST and SGST can be used to pay off the liabilities of the respective taxes only. Small operators would have the option of paying a flat rate, though without input credits.
Accounts between the centre and the states would be settled periodically to share the revenues properly. The laws, procedures and regulations would be harmonized between the centre and states, as much as possible. Since taxation powers are shared between the Centre and the States according to the Constitution, for the GST to become a reality, a Constitution amendment bill becomes necessary. The bill must be passed by a two-third majority in both houses of Parliament and then ratified by at least half of the State Legislatures. The act has been passed by the Lok Sabha on 6/5/2015. The matter is now in the Rajya Sabha, where a select committee is examining issues raised by various parties.
The matter of rates
A panel headed by the Chief Economic Advisor Arvind Subramaniam has been set up to suggest revenue neutral rates for the GST. A neutral rate is the rate at which there is no revenue loss for the government. However, since the GST will improve the reach of taxes while reducing evasion, the government will likely see increase in revenues. The panel is also likely to suggest rates for the items not covered by GST. Another point is that instead of one GST rate the panel may recommend a merit rate for everyday goods, while a higher non-merit rate will be imposed on other goods.
"They (the panel) have pulled together a lot of data from many different sources, so we have a comprehensive set of numbers. We have finalized parameters that will be necessary to establish the rates. That is now being looked at. We will have something by the first week of December," according to Jayant Sinha Minister of State for Finance.
"The CEA-led panel may give multiple revenue-neutral rates, one of which will be decided upon by the council. There may be three-four options given by the panel. It is a sort of a compromise move since there are numerous stakeholders and just one suggestion may not be to the liking of all," said an official. (Business Standard November 28, 2015)
In its report submitted in the first week of December, the Committee has proposed a revenue neutral rate (RNR) of 15%-15.5%. It has stated that a standard rate of 17% or 18% can be levied on most goods, a 'merit' rate of 12% on goods used for mass consumption and a non-merit or 'sin' rate of 40% for luxury goods, including tobacco products. It also wants precious metals taxed at between 2% to 6%. (The Financial Express on 5 Dec, 2015)
Contrarian views
However not all analysts and specialists working in the field are impressed by the present GST proposal. It may be noted that earlier the Kelkar Committee had proposed a 12% rate. But that included all goods and services in the tax ambit. The exclusion of certain items, like alcohol, electricity, petroleum products and real estate from the purview of the GST will push up the basic rate, experts say.
In the proposed GST Bill there is no guarantee that there will be one law for the whole country, as all the states and the Parliament will be empowered to make laws applicable to their respective jurisdictions. Even a rate of 18% at retail level may provoke large scale evasion at the point of sale. Since the tax is designed as a dual tax system, shared between the Centre and the States, it will be difficult to calculate and give input credits in a coherent and consistent manner. Since many goods hitherto taxed separately by the Centre and states will brought under one umbrella, there is likelihood of confusion regarding the monitoring of assesses under the new tax. Will it be the state tax authorities or the Union government which will track assesses at state and central levels? What will be the respective roles of the Central Excise and service Tax departments and State VAT authorities?
The broad view
GST system is practiced by 160 countries worldwide, including countries like Brazil, China, South Africa as well as the European Union. Yet many State governments have expressed reservations about the tax. They fear not only erosion of authority, but of their tax base as well. Some states, notably Tamil Nadu, are still officially opposed to the tax. In order to allay the apprehensions of the states, the government has taken teams of officials from the states on study trips to various countries. The empowered committee of state finance ministers had gone to Australia to study the system there. Analysts say that the Australian model can be the basis for the Indian system.
Over the years from 2007, when it was first mooted, a grand consensus has emerged on the desirability of the tax. The most important benefit is to the economy as a whole. Eliminations of multiple tax jurisdictions, a plethora of rates and taxes, and a maze of different laws and procedures, will bring down transactions costs thus making for cheaper products and services.
The GST will create a single market across India, where one would have to pay just one rate. Since laws and rates will be harmonized, distortions introduced by state tax concessions will be eliminated. While there are several advantages to a common countrywide levy, the most important would be the reduction in litigations, improvement in collections, a new paradigm for locating of manufacturing plants on a rational commercial basis, rather than just for tax purposes. Above all a sustained 1% to 2% increase in the GDP can be expected.
Market perspective
For a market that is starved for earnings growth and finds itself looking richly valued on tepid earnings numbers, passage of the GST bill will be a huge shot in the arm. Analysts will whip out earnings upgrades for FY 17 onwards, GDP growth forecasts will be revised upwards and a lot of market attention will be focused on businesses that can benefit most from introduction of GST. Markets love to discount an evolving growth story and passage of the GST bill will give the markets a great story to latch on to. The key issue that markets are watching now is whether the Rajya Sabha will function normally to allow passage of this bill or whether it will continue to be held hostage to political drama, at the expense of economic growth.
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