CC CLASSROOM : GST now a reality

The easier tax structure along with broader tax base with fewer exemptions, and taxing all goods and services would help to increase revenue collections for the Government

Cheers to Modi Sarkar as the long and impending Goods and Services Tax (GST) will finally see light of the day with the Rajya Sabha finally passing the GST Constitutional Amendment Act. GST is the biggest tax reform in India that would foster a common and seamless Indian market by harmonizing different taxes under one head. The GST’s enactment would potentially be the most resilient tax reform in recent years as it would do away with the complexities of a multilayer and differential tax system for various good and services across different states.

As a transaction-based tax, GST is set to impact not only the tax function, but would also lead to a significant transformation in the way businesses are run, cutting across various business functions such as tax, finance, supply chain, IT and sales and marketing.

What does the move mean for the common man?

GST is an indirect tax for the whole nation, which will make India one unified common market. GST is a single tax levied on the supply of goods and services, right from the manufacturer to the consumer. The final consumer will thus bear only the GST charged by the last dealer in the supply chain with set-off benefits at all the previous stages. Due to seamless allowance of credits, people are going to insist on asking for bills, as a result of which unaccounted or black money in the system money will be reduced. Further to this, scope for manipulation and corruption will also come down. There will be more transparency as all indirect taxes will cut down to one tax, which will be good for common man to understand and to follow. The biggest advantage would be the reduction in the overall tax burden on goods and services. Introduction of GST would also make Indian products competitive in the domestic and international markets. In some or the other way, once the rates are fixed, your phone bills could get expensive, eating out may also get costly, buying a vehicle could get cheaper and buying things online could also pinch you.

How will GST help?

GST would subsume other forms of indirect taxation, making it easier for businesses to comply with the tax regime. Being a multistage tax, GST provides for an input tax credit mechanism to claim set-offs for tax paid in the prior stages of production or distribution, which is expected to encourage better invoicing and voluntary compliance.

How does the government benefit?

The easier tax structure along with broader tax base with fewer exemptions, and taxing all goods and services would help to increase revenue collections for the government. Also, as more and more firms, mainly the ones in the unorganised sector, come under the tax purview, there would be enhanced tax revenue collection by the government in the medium to long term.

The final rate of GST will be decided upon by the end of the year and coherence among various political parties on the bill suggests at its smooth enforcement going ahead. The Revenue Neutral Committee, headed by the Chief Economic Adviser Dr Arvind Subramanian, appointed by the Government of India had suggested a revenue neutral rate of 15-15.5 percent, with the highest rate of 40 percent on the demerit goods, a lower rate of 12 percent on essential goods. The standard rate has been recommended at 16.9-18.9 percent.

The GST entails two components namely the Central GST (CGST), which will be levied and collected by the Central Government where the CGST will replace the central excise duty, service tax, and additional custom duties and the State GST (SGST), which will be levied and collected by the State Government. The SGST will replace the VAT, entertainment tax, luxury tax, lottery tax and electricity duty.

The impact of the GST’s implementation would be diverse with several sectors getting favourably impacted while there would be some to get negatively impacted as well. The two key themes that shall evolve post the GST’s enactment would be a gradual shift of trade from unorganised to organised players and seamless inter-state flow of goods.

By Mahalakshmi Hariharan