The goods and services tax (GST) is seen as the panacea for all ills that come with the prevailing indirect tax regime in the country. GST, if implemented in the true spirit, could end the cascading effect of existing taxation, besides ensuring the free flow of credits across the supply chain. It would also resolve chronic issues, such as overlapping jurisdiction, multiple taxation and tax uncertainty. Moreover, the issue of classification of items into goods/services will also be largely minimised, provided the same rate of tax is maintained for both goods and services.
GST will be a joint effort by the Centre and states, with both central and state GST components levied on the same base, keeping in mind the Constitutional requirement of fiscal federalism. GST is proposed to subsume all central and state indirect taxes, namely excise duty, service tax, central sales tax, value-added tax (VAT), entry tax, luxury tax, entertainment tax, etc, currently applicable on various business transactions. As with VAT, the tax will be charged on each stage of value addition. At each stage, a supplier can offset the levy through a tax credit mechanism—the consumer pays GST on the final price of the last dealer as taxes in the earlier stages of the supply chain are all available as offset. However, there are multiple cesses and surcharges imposed by the Centre and states for various purposes. There is no clarity on whether all or some of them will be subsumed in GST. In the interest of a simple tax regime, the government may consider absorbing these cesses and surcharges in GST.
The rate for GST is as yet undecided, but it should be in a range that would encourage compliance and make our products and services competitive. Recently, a total GST rate of 27% was being discussed. In fact, the recommendation of the task force of the 13th Finance Commission was to keep the GST rate at 12%. The Centre earlier recommended a GST rate of 16%. Considering the fact that countries such as China, Australia and the UK have GST rates less than 20%, India needs to have a lower rate structure.
Implementation of dual GST is important and will help the trade and industry as it is expected to be a simple and transparent tax structure. The result would be reduction in the number of taxes at the central and state levels, cut in effective tax rate for many goods, removal of the current cascading effect of taxes, reduction of transaction costs for taxpayers through simplified tax compliance, and increased tax collections due to wider tax base and better compliance.
Despite all these advantages, the GST roll-out has missed several deadlines due to lack of consensus among states over certain crucial issues on the proposed new tax regime. Consensus and coordination among states and the Centre is required for the GST regime to succeed. Before it can be introduced, the Centre and states have to sort out issues such as agreement on GST rates, Constitutional amendments, taxation of inter-state transactions of goods and services, drafting of central GST and state GST laws, and consultation with all stakeholders including trade and industry associations before finalisation. The administrative preparedness to implement the new tax regime also needs to be assessed. There has been considerable progress on many of these issues in the recent period, but there is still a long way to go.
While the desirability of the reform is no more in doubt, making a transition to GST involves not only considerable work but also formidable challenges. States are wanting more fiscal autonomy by way of power to vary the state GST rates. Manufacturing states are showing apprehensions because of the tax getting accrued to the destination states. There is resistance to absorbing some of the local levies in GST. Though the states’ views should be respected in the interest of cooperative federalism, in the larger interest of having a progressive tax regime, there is a need for states to support a simplified tax structure and help the country have a better version of GST.
The introduction of the Constitutional Amendment Bill is only a stepping stone towards the enormous tasks of transitioning and implementation. After the Bill is enacted, framing of the law, rules and mechanics in order to implement this reform is going to be an arduous task since the law and implementation mechanism must match up with the ever-evolving business dynamics. The government should institute a mechanism for wider consultations with trade and industry before finalising the GST law and also devise special provisions to deal with the exigencies once GST is rolled out.
Undeniably, GST will be pivotal in rationalising indirect tax procedures. GST would surely come with a set of challenges for all the sectors that, if addressed at the right time, can take businesses to new heights.
The author is senior director,Deloitte in India