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The Goods and Services Tax (GST) bill, was passed by the parliament on the 3rd of August 2016, as the One Hundred and Twenty Second, Constitutional Amendment Bill. The bill is said to bring in a new tax regime, which will be more simple, transparent and efficient. Around 130 nations in the world have adopted the GST system of taxation. Now, India has taken its first major step towards creating a GST system by getting the bill passed.
GST becomes a reality after three decades
In the year 2000, the first concrete step to switch to a Value Added Tax Model was made by the Vajpayee Government. Dr.APJ Abdul Kalam opined that although India has set itself on a path to VAT since 1986, it still needs a better comprehensive Goods and Services Tax Model based on VAT. Subsequently, in the year 2006, then Finance Minister P. Chidambaram of the UPA government, which was at the center, initiated the process of preparing a roadmap to introduce the GST by April 2010. A Joint Working Group of Empowered Committee of State Finance Ministers and Central Government, after much deliberation and discussions, tabled a final report on GST in the year 2008. Later during December 2014, the GST bill was introduced by the Union Finance Minister Arun Jaitley, after the NDA Government took charge. After relay attempts, the central government was eventually able to bring in a consensus among all opposition parties and state governments to get the bill passed, except for the AIADMK MPs representing Tamil Nadu, who staged a walk out during the session.
An overview of the GST bill
In India, we have a number of indirect taxes levied on a product, from procurement of inventory to manufacturing of a product, till it reaches the end customer. These taxes are collected at the national, state and even municipal levels in the form of Sales/Service tax, Excise duty, VAT, interstate levies, local body taxes, etc. The GST will merge all these different indirect taxes to become a single uniform tax that will be levied on all goods and services sold to consumers across the country.
Although it is stated that GST will be levied at every point of sale or purchase, it would be more precise to say that GST will be levied 'every time a purchase is made'. The reason is, the concept of GST is focused on consumption, unlike the sales tax which is focussed on income earned. That's why states with higher manufacturing revenue like Tamil Nadu and Maharashtra fear that they may face a revenue loss. But then, with higher state population, better per capita income and consumption, the state governments may also earn from GST on goods they don't produce. Again with the union government, willing to compensate any loss incurred by the states, GST should not be a cause for concern for the states, at least at this stage. Since GST is a tax on consumption, the union government is expected to follow up the GST with visible direct tax reforms and direct transfer of subsidies to people, in order to promote consumption.
The GST system includes an input credit system for the industry, which is said to prevent the cascading addition of taxes that add up to the price of an end product. As per the system, when an industrial buyer purchases goods as an inventory for further production, the tax paid at every point of purchase will be treated as input credits or temporary tax paid to the government, which the buyer would be able to redeem later. The GST registration is also expected to bring in transparency and curb tax evasion.
The wider ambit of GST system
In many countries, GST is not only used to merge all indirect taxes, but also to eventually do away with direct taxes like income tax. In principle, when the burden of direct taxes - reduce or do not exist - people will save a considerable portion of their income they otherwise part with in the form of direct taxes. The surplus disposable income will increase their purchasing power, thereby promoting consumption and investment. But what if GST rises the cost of certain end-products? In countries like Singapore, the government provides pre-tax rebates in the form of direct fund transfer, to ensure that any rise in price owing to GST do not affect people from the lower income groups.
As for now, GST in India is all about the merger of indirect taxes alone and is not debated as a total alternative to direct taxation as well. It might take a while for India to move to a single taxation method, but before that there is more to be done now, from getting the GST bill ratified by the states to meticulously looking through the implementation of the bill.
With both hopes and concerns over the bill, will GST bring in an economic transformation?
Follow us in this space. We will share with you what experts have to say about the bill, in what way it will benefit and affect both the industry and the common man, and how states will stand to gain and lose with the new taxation system.
GST becomes a reality after three decades
In the year 2000, the first concrete step to switch to a Value Added Tax Model was made by the Vajpayee Government. Dr.APJ Abdul Kalam opined that although India has set itself on a path to VAT since 1986, it still needs a better comprehensive Goods and Services Tax Model based on VAT. Subsequently, in the year 2006, then Finance Minister P. Chidambaram of the UPA government, which was at the center, initiated the process of preparing a roadmap to introduce the GST by April 2010. A Joint Working Group of Empowered Committee of State Finance Ministers and Central Government, after much deliberation and discussions, tabled a final report on GST in the year 2008. Later during December 2014, the GST bill was introduced by the Union Finance Minister Arun Jaitley, after the NDA Government took charge. After relay attempts, the central government was eventually able to bring in a consensus among all opposition parties and state governments to get the bill passed, except for the AIADMK MPs representing Tamil Nadu, who staged a walk out during the session.
An overview of the GST bill
In India, we have a number of indirect taxes levied on a product, from procurement of inventory to manufacturing of a product, till it reaches the end customer. These taxes are collected at the national, state and even municipal levels in the form of Sales/Service tax, Excise duty, VAT, interstate levies, local body taxes, etc. The GST will merge all these different indirect taxes to become a single uniform tax that will be levied on all goods and services sold to consumers across the country.
Although it is stated that GST will be levied at every point of sale or purchase, it would be more precise to say that GST will be levied 'every time a purchase is made'. The reason is, the concept of GST is focused on consumption, unlike the sales tax which is focussed on income earned. That's why states with higher manufacturing revenue like Tamil Nadu and Maharashtra fear that they may face a revenue loss. But then, with higher state population, better per capita income and consumption, the state governments may also earn from GST on goods they don't produce. Again with the union government, willing to compensate any loss incurred by the states, GST should not be a cause for concern for the states, at least at this stage. Since GST is a tax on consumption, the union government is expected to follow up the GST with visible direct tax reforms and direct transfer of subsidies to people, in order to promote consumption.
The GST system includes an input credit system for the industry, which is said to prevent the cascading addition of taxes that add up to the price of an end product. As per the system, when an industrial buyer purchases goods as an inventory for further production, the tax paid at every point of purchase will be treated as input credits or temporary tax paid to the government, which the buyer would be able to redeem later. The GST registration is also expected to bring in transparency and curb tax evasion.
The wider ambit of GST system
In many countries, GST is not only used to merge all indirect taxes, but also to eventually do away with direct taxes like income tax. In principle, when the burden of direct taxes - reduce or do not exist - people will save a considerable portion of their income they otherwise part with in the form of direct taxes. The surplus disposable income will increase their purchasing power, thereby promoting consumption and investment. But what if GST rises the cost of certain end-products? In countries like Singapore, the government provides pre-tax rebates in the form of direct fund transfer, to ensure that any rise in price owing to GST do not affect people from the lower income groups.
As for now, GST in India is all about the merger of indirect taxes alone and is not debated as a total alternative to direct taxation as well. It might take a while for India to move to a single taxation method, but before that there is more to be done now, from getting the GST bill ratified by the states to meticulously looking through the implementation of the bill.
With both hopes and concerns over the bill, will GST bring in an economic transformation?
Follow us in this space. We will share with you what experts have to say about the bill, in what way it will benefit and affect both the industry and the common man, and how states will stand to gain and lose with the new taxation system.