The following is a part of a paper which i submitted for internal assessment at my college.
Goods
and Services Tax (and
its implications) in India
The law ministry has
cleared the goods and services tax (GST) bill that was brought to it
for legal consultation and now the finance ministry will take the
proposed constitutional amendment to the Cabinet in the coming week
for its approval before it is tabled in the winter session of
Parliament.
Here is an analysis of the
proposed GST.
Some terms used in this
passage are:
1. End user is a
person that actually uses the product.
2. Retail is the
sale of goods and services from businesses or individuals to end
users. A retailer purchases products in large quantities from
manufacturers and then sells smaller quantities to consumers.
3. Sales tax is
a kind of tax imposed by the government at the point of sale on
retail goods and services. It is based on the selling price of goods
and services.It is set by the state.
4. Value added to a
product by a business is the sale price charged to its customer,
minus the cost of materials and other taxable inputs.
5. VAT:
Vat is like a sales tax
in that ultimately only the end consumer is taxed. It differs from
the sales tax in that, with the latter, tax is collected and remitted
to the government only once, at the point of purchase by the end
consumer. With VAT, collections, remittances to the governemnt, and
credits for taxes already paid occur each time a business in the
supply chain purchases products.
VAT was formally introduced as
an indirect tax into the Indian tax system on April 1, 2005. Why
was it introduced?
Value added tax (VAT) in
theory avoids the cascade effect of sales tax by taxing only
the value added at each stage of production. For this reason,
throughout the world, VAT has been gaining favour over traditional
sales taxes. In principle, VAT applies to all provisions of goods and
services. VAT is assessed and collected on the value of goods or
services that have been provided every time there is a transaction
(sale/purchase). The seller charges VAT to the buyer, and the seller
pays this VAT to the government. If, however, the purchaser is not an
end user, but the goods or services purchased are costs to its
business, the tax it has paid for such purchases can be deducted from
the tax it charges to its customers. The government only receives the
difference; in other words, it is paid tax on the gross margin of
each transaction, by each participant in the sales chain.
In theory, sales
tax is normally charged on end users (consumers). The VAT mechanism
means that the end-user tax is the same as it would be with a sales
tax. The main difference is the extra accounting required by those in
the middle of the supply chain; this disadvantage of VAT is balanced
by application of the same tax to each member of the production chain
regardless of its position in it and the position of its customers,
reducing the effort required to check and certify their status..
A general economic idea
is that if sales taxes exceed 10%, people start engaging in
widespread tax evading activity (like buying over the Internet,
pretending to be a business, buying at wholesale, buying products
through an employer etc.) On the other hand, total VAT rates can rise
above 10% without widespread evasion because of the novel collection
mechanism.
And it is not as evil as
thought although when VAT was implemented .
Prices did rise but that was
because then more goods which were illegally escaping tax were
brought into its net and thus Black money was also controlled.
So, why GST is being
considered?
At present, a consumer in
India is taxed more than once. First, he/she has to pay the CST or
Central Sale Tax and next comes the state's sales tax, thus leading
to a double burden. Besides the CST, 36 states and union territories
of India levy a sales tax on sale and purchase of goods. But the
sales tax levied is not uniform in nature and varies from state to
state. Most states also levy tax on entry of goods. The list of
taxable goods, classifications and rates are neither uniform, nor
standardised.
Compliance to all these
complicated taxes is burdensome, time-wasting and leads to
corruption. Most businesses face commercial and legal hassles in
this regard. The end result is that goods cost more and customers
naturally seek cheaper alternatives. India already faces competition
from other growing economies, such as China. And we are effectively
pricing ourselves out.
Difference between VAT
and GST
GST is a further improvement
over VAT.
Vat
is applied only on tangible goods while GST is applied on both goods
and services.Through a tax
credit mechanism, this tax is collected on value-added goods and
services at each stage of sale or purchase in the supply chain.
GST in India
In India, the proposed
GST regime will have dual tax structure where one will be the
central component levied by the Centre, called the central GST,
and the other to be levied by the states, called the state GST.
In the dual tax structure the Centre and states would have concurrent
jurisdiction and both the rates of state GST and the Central GST
is likely to be in the range of 10% to 12% each,keeping the overall
rate about 22% .While the basic features of the law would
remain uniform, the dual model would be implemented through multiple
statutes.
All goods and services,
barring a few exceptions, will be brought into the GST base.
There will be no distinction between goods and services.
Despite the expected
differences between state, they have come to the following
conclusions:
Two-part levy: Central
GST and State GST.
Common threshold for the
levy of GST: All businesses with annual turnover of more than Rs
10 lakh (US $16,480) for general states and Rs 5 lakh (US$8,240) for
special-category and north-eastern states.
Harmonize GST exemption
lists nationwide: 96 items exempted by States and 243 items by
the Center.
Implications of
implementing GST
Benefits Under GST,
exports are suppose to be zero rated and taxes on imports are same as
on domestic goods and services. Experts believe that implementation
of GST will contribute as much as 1.5 per cent to the GDP and Current
Account Deficit(CAD) can also be narrowed. GST rates are typically
between 16 per cent and 20 per cent world over and in India it is
also likely to be the same.
The GST is expected to
increase the tax base by increasing the number of taxable goods and
services. The biggest benefit is that multiple taxes that
currently exist will no longer remain in the picture. This means that
taxes like octroi, CENVAT, central sales tax, state sales tax, entry
tax, license fees, turnover tax etc will no longer be present and all
that will be brought under the GST. Businesses thus will not have to
deal with multiple taxes but will be able to undertake the tax
compliance in an easy manner. This will also help in reducing
transaction cost.
So do we as consumers get
goods at a cheaper price? Probably
not, and it is here that the GST has been attacked by the opposition.
Since taxes are distributed across the chain, the consumer prices are
likely to rise to maintain the current tax revenue levels. The
government has justified this by saying it would provide tax cuts
across various brackets. This isn't entirely satisfactory. First, the
tax paying population isn't too significant a number to begin with
and second, the tax payer is likely to get a meager tax cut for the
GST he would pay for all the goods or services he purchases.
GST is clearly a long term
strategy, it would lead to a higher output, more employment
opportunities, and economic inclusion. Initially however, it is
likely cause high inflation rates, administrative costs, and face
stiff oppositions from states due to loss of autonomy.
States are opposing GST.
Why? More industrialized
states, such as Gujarat, Maharashtra and Tamil Nadu, which derive 70
to 80 percent of their revenue from state taxes, are most concerned
about the potential change in tax base with the GST. By shifting
taxation from production to consumption, industrialized states which
currently export most of their products to other states around the
nation will face significant losses in tax revenue, since the levies
will instead go to states where the products are sold.
This issue is addressed by
Finance Minister Arun Jaitley ,
who said that the Center would compensate their loss in CST revenue
of about Rs. 34,000 crore (about US$5.6 billion) over a three-year
period, appeasing some of the concerns.
IT
Infrastructure: The
Government needs to develop/set up proper infrastructure to
implement
GST, especially IT infrastructure.
Design
and Structure:
No less significant is the issue of an appropriate design and
structure
of GST. For instance, how the issue of inter-state movement of goods
and
services
may be addressed. The phasing out of CST may go a long way in
addressing
the issue of inter-state trade and commerce in goods but the crucial
issue
regarding
services originating in one state and being consumed in other state
still
remains.
Sharing
of resources:
Another contentious issue that is bound to crop up in this
regard
is the manner of sharing of resources between the Centre and the
states and
among
the states as also the basis of their devolution. Taking away the
powers of
taxation
of goods by the States will not be favoured by them.
Efficient
administration
: Apart from all these, there has to be robust and integrated
machinery
dedicated to the task of tracking flow of goods and services across
the
country
and rendering accurate accounting of levies associated with such flow
of
goods
and services. No meaningful risk management system can work without
efficient
tax administration software.
Taxation
issues:
The contentious issue of taxing financial services and e-commerce is
to
be appropriately addressed and integrated.
Confidence:
Some states that are in
favour of GST, fear the state saying
“ We
are in favor of this Act...The problem is when the central government
receives any type of tax from people, for years, they don't want to
transfer it (state''s share) to state governments. It is obvious the
share of state government should be immediately passed to it
