Note4Students/Syllabus Mapping: GS3

The GST is undoubtedly one of the single biggest historic tax reform ever since independence so much so that it aims to alter the dynamics of the current indirect taxation system and render it a single, unified, modern, transparent and uniform structure nationwide. This article will look into the nuances of this tax reform from various perspectives. Though a few questions have been asked earlier but its final rollout on July 1 2017 with its multiplier implications and impediments in implementation makes it a hot topic for analysis in this year CSE Mains.

 

What is GST—One nation one tax!

1. GST is a simpler, modern and more transparent taxation system that will do away with 500 different taxes levied across the country’s 29 States and seven Union Territories.
2. GST is essentially a consumption tax and is levied at the final consumption point.
3. It would comprise of two components, a central GST and a state GST.
4. It is levied on the value addition and thus avoids the cascading effect or tax on tax which increases the tax burden on the end consumer
5. It is collected on goods and services at each point of sale in the supply line
6. The GST that a merchant pays to procure goods or services can be claimed as input tax credit later against the tax applicable on supply of goods and services

Key Provisions of GST:

1. The GST with principle of One Nation and One Tax, and a unified market could make the movement of goods freer across the country.
2. GST was implemented through Constitution (One Hundred and First Amendment) Act, 2016, following the passage of Constitution 122nd Amendment Bill.
3. GST will be taxed at 0.25%, 5%, 12%, 18% and 28%. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. The implementation has been complex, as it has a five layered taxation slab for various commodities.
4. Transactions made within a single state will be levied with central GST (CGST) by the central government and State GST (SGST) by the state government.
5. For interstate transactions imported goods or services, an integrated GST (IGST) is levied by the central government.
6. GST is a consumption based tax, so taxes are paid to the state where the goods or services are consumed and not in the state in which they are produced.
7. As a parallel development, a Goods and Services Tax Network (GSTN), a nonprofit organization has been formed to create a platform for all the stakeholders, government, tax payers to collaborate on a single portal.
8. GST tax of 28% on luxury goods is the highest in the world. Even UK and USA don’t have GST higher than 17%.
9. Most economists forecast inflation to come down as GST rates for most goods have been fixed at a lower rate.
10. GST laws focus on anti-profiteering measures-the benefits of the reduction in the tax rate and input credit shall be passed on by a commensurate reduction in prices.

One Nation- One Tax but Multiplier Benefits:

1. End of Cascading of Taxes: It seeks to eliminate inefficiencies in the tax system which results in ‘tax on tax’.
2. A Destination-based Tax on consumption, as per which the state’s share of taxes on inter-state commerce goes to the one that is home to the final consumer, rather than to the exporting state.
3. The central and state governments will witness tax buoyancy and the tax collection costs will reduce significantly.
4. Exports will become competitive.
5. Make in India programme will get a major fillip due to increased ease of doing business and protection from cheap imports.
6. All these benefits will add to the GDP growth of India in the medium and long run.
7. The Prime minister added that its introduction was not just a tax or economic reform, but a social reform that would nudge people on the path to honesty and benefit the poor the most.
8. The practice of giving out kachcha (informal) bills would become history as the GST presented an opportunity to stop black money and corruption, and give people a chance to do honest business
9. It would end the spectre of tax terrorism and Inspector Raj, as the technological backing for the GST would do away with grey areas and reduce the discretion enjoyed by the bureaucracy over tax matters
10. GST will also lead to economic integration of the country
11. The GST could make the movement of goods freer across the country.
12. GST seeks to align the Indian taxation system with the global standards and norms particularly with USA and Europe.

What is in the kitty of GST? Which Indirect taxes get subsumed and which are not?

SIMPLE WORKING OF GST:

GST – How does it impact various sectors?

 

For Business and Industry	For Central and State governments	For the consumer	Disadvantages of GST
Easy compliance	Simple and easy to administer- easier tax governance	Single and transparent tax proportionate to the value of goods and services	Services are expected to become costlier as the expected GST rate would be higher than the existing service tax rate of 15%.
Uniformity of tax rates and structures	Better controls on leakage and reduced corruption	Relief in overall tax burden	Supply of certain category of goods may come down depending on the effective rate of indirect taxes.
Removal of cascading	Higher revenue efficiency		Problems of anti-profiteering clause
Improved competitiveness	Will boost GDP on the longer run		Regressivity inherent in GST would result in hurting poor the more
Gain to manufacturers and exporters	Balances fiscal federal relations – cooperative federalism
Ease of doing business enhanced	Facilitate Make in India

Apprehensions/ challenges in Implementation:

IT Preparedness and Infrastructure

1. It cannot be assured whether all the States and Union Territories in India are currently equipped with infrastructure and requisite manpower.
2. Except few states like Karnataka, Maharashtra and Gujarat, who have pioneered the E-Governance model, we have not heard about this trend in other States and Union Territories.

Officers Training

1. The unlearning of the old law and learning GST provisions is imperative. GST law heavily banks on Information Technology and hence proper training has to be given to the departmental officers for effective usage and implementation.

New Registrants

1. Transition of existing registered assesses and registration of new assesses and resolving of migration issues is a big challenge.

Pending Cases/ Past Disputes

1. There are many disputes pending in the context of present indirect tax laws (both Centre and State), which are at various stages, viz, adjudication or appellate level. Government should find ways and means to resolve these disputes.
2. A possibility of introducing a dispute settlement scheme on the lines of Kar Vivad Samadhan Scheme needs to be explored which would enable the litigants to resolve pending matters.

Tax Administration

1. With GST, both the centre and state level officers are expected to work under one roof and in tandem by giving up their differences.
2. Cadre differences may arise, as presently in Central Excise and Service Tax, the departments are headed by officers of IRS, whereas in the state commercial departments, the commissioner is from IAS and his subordinates would be from State Administration Service.

Anti- Profiteering Clause

1. The idea of rolling out GST along with an anti-profiteering clause is to prevent the possibility of businesses and traders retaining the benefits of tax reduction to themselves rather than passing them on to the consumers.
2. The steps are being taken to make sure that businesses and traders pass on the benefits to the consumer-such as setting up an anti-profiteering authority and creating awareness among traders and consumers.
3. A National Anti-profiteering Authority (NAA) is to be set up to ensure that the benefits due to reduction in costs are passed on to the consumers.

The anomaly of India’s tax revenue

1. Indirect taxes, now made up chiefly of the nationwide goods and services tax (GST), are inherently regressive. They hurt the poor more than the rich. GST is a consumption tax. For the poor, almost their entire income (or more) is spent on consumption, and is hence subject to the tax.
2. The rich have a big share of their income go into savings, which is not taxed (or even subsidized). With the widening of GST and higher tax slabs, the unfairness of the indirect system becomes more acute. The global average rate for consumption taxes is 16%. Most Asian countries have rates of 10-15%. But India’s modal rate is 18%. This hurts the poor much more.

Operational Difficulties

1. The requirement that taxpayers must register in each jurisdiction in which they operate. If a unit operates in several states, it must register in each state in which it operates, and be taxed in each jurisdiction, and also maintain records that allow the tax paid in each jurisdiction to be audited.

Far from Ideal GST 

1. It is very far from being universal and according to some it excludes 50% of the gross domestic product. Major items such as petroleum, natural gas, alcohol, electricity, and real estate/construction are left out.
2. The second flaw is too many rates: 3% (on gold), 5%, 12%, 18% and 28 %, plus an extra GST cess on some luxury or socially undesirable items. Multiple rates are an invitation to misclassification and disputes/harassment arising from suspicion of misclassification. This reduces the efficiency gains which were expected to generate higher growth.

Way forward:

1. The initial collection figures for GST in India already show higher than expected revenue. The GST Council should set up an expert group that could assess the performance of the system based on results of the first year and work on a revised GST rate structure towards desirability of migrating to fewer rates. A Progressive and universal coverage should be the step ahead. A systematic effort should be launched to correct deficiencies over time through the mechanism of the GST Council. The long answer then is to focus on correcting the unfairness and skew in goods and services tax (GST), with greater redistribution.

Conclusion:

1. Introduction of GST is a very good start. Reforms, however, do not end here. Certain features can be further streamlined. Rolling out GST on 1 July was the result of more than a decade of discussions, tussles among states, and between states and the Union government, instances of give and take, lobbying and compromise.
2. The GST that is being rolled out is far from ideal. The guiding principle was that it is better to have a good GST instead of waiting endlessly for the best one. Despite its imperfections, Policymakers must continue to bet on GST to achieve various economic goals in one stroke. Continued follow up of structural reforms as big as this one definitely needs diligence and reinvention for rich dividends ahead.