GST – Sorting the Myths from the Facts

I did not expect Goods and Service Tax (GST) to be discussed by public at large, given its vastly technical nature. But people are quite interested in this “elixir” to Indian economy, and quite a few pieces on GST have been written, some accurate, some speculative. As a Chartered Accountant, I couldn’t possibly comment on the economic effect of GST, which is for trained economists to comment on, but I can definitely throw light on some of the technical issues.

First of all what is GST? Think of it as a super-all-inclusive tax, which will eliminate most other Indirect taxes. Its aim is to standardise taxation across the country and remove cascading effect of taxes i.e. Tax on tax egs: VAT is charged on Excise too. It is expected to increase ease of doing business in India greatly. GST is already in place in over 160 countries world wide, so India is late to the party. Experts say, GST could increase GDP by 1-2% and reduce costs of inputs by around 10%.

Taxes expected to be subsumed are:

- Advertisement - - Article resumes -

Untitled

 

Although this is quite a long list of taxes which will be unified, thus simplifying many processes, there are some taxes which will continue like: Basic Customs Duty, Road Tax, Property Tax etc. The main contention of many GST nay-sayers is the fact that taxes on Alcohol, Petroleum and Tobacco will be kept out of GST. They argue that this makes GST imperfect and such an imperfect system could be worse than the current system.

Firstly, we must understand an Ideal GST would cover all products, but we do not live in an ideal world. Waiting for an “Ideal GST” in order to start implementation is basically saying goodbye to GST forever. Getting into specifics, Alcohol and Tobacco are generally not raw materials for any process, so the cascading effect of taxes will be minimal. Petroleum too is generally not traded at as many levels as other goods, it generally is sold from the Petroleum company to your petrol bunk in maximum of 3 levels. So cascading is not a real issue.

Here we must also know why these goods are kept out of GST. Again, we go back to concept of GST. By eliminating state taxes like VAT, what GST says to states is “Hmm so you were earning good money on goods sold by your state. From now stop that, Centre will collect all taxes and give you pocket money.” Yes, GST directly affects a state’s power to earn revenue (thus being an attack on federal structure). Hence many states for the longest time were anti GST. It took some hard bargaining to convince states to come under GST, and keeping products like petroleum out of GST was part of this deal. States will still have an avenue to earn some tax revenue via these products. So again its a trade-off, do you want to wait for the “Ideal GST” or get on with a near perfect GST and tinker it later.

Even in the case of VAT implementation, which is basically State-level GST, All Indian states did not come on board at once, thus making VAT in India “Imperfect”. VAT roll out began in 2003, after a huge push by the then NDA Government and only in 2014, did all states comply with VAT. Point is, its foolish to wait for a perfect GST in an imperfect World.

Another imperfection in GST is an additional 1% non-creditable tax which will be levied by states. It is exactly opposite to what GST stands for, but it is a necessary evil, and a short-term evil. Why necessary? This was part of the sweetener (along with petroleum etc) given to states to convince them to get on board. Why short-term? This 1% is proposed to be withdrawn after a few years. Also, is this 1% worth the noise? Currently CST is 2% and is fully non-creditable. For traders, the Non-creditable portion includes other taxes such as excise too. Keep excise aside, isn’t 1% non-creditable better than 2%, that too considering other benefits of GST?

Next, some people have proclaimed that Real Estate sector will be out of GST and this will kill GST. First of all, there is no credible information to support the claim that Real Estate sector will be out. On the contrary, the background material from ICAI on GST, says:

The 13th Finance Commission, has suggested that activities like housing, construction and railways should be included in the proposed goods and services tax (GST)

Commenting on this aspect now is pure speculation since the GST Act itself has not been framed yet. What was passed in the Lok Sabha on 6th May was only an amendment to the Constitution empowering both the centre and the states to tax the sale or supply of goods and services, not the actual GST Act.

Another wide spread bogey raised is the “rumoured GST rate of 27%”. Firstly, this is only a rate recommended by a panel set up by states. NIPFP, has recommended a rate in the band of 12-20%, 13th Finance Commission Task Force has said it should be around 12%, Kelkar committee has said it should be around 14%. Background material issued by ICAI says:

The GST rates in India are expected to be 12% to 20% for the 1st year, 12% to 18% for the 2nd year and 16% for the 3rd Year and onwards

Most importantly, Finance Minister himself has said 27% is way too high, and that the rate will be “much more diluted”. He also mentioned the 13th Finance Commission’s recommendation of 18% as a possible rate of GST. As of now it is fair to say, the rate will definitely not be as high as 27%, and it is too early to conclusively claim the rate will be so-and-so.

Continuing on GST rate, there won’t be one fixed rate for all products. Even under current state VAT regime, multiple rates are applied for different classes of goods. As per background material by ICAI, what we can expect is something like this:

1. Merit rate for essential goods and services
2. Standard rate for goods and services in general
3. Special rate for precious metals
4. NIL rate
5. Floor rate with a small band of rates for standard rated goods or services

The 27% or 22% we are talking about is the peak rate, and the lowest rate will be zero for essential commodities.

But all will not be hunky-dory under GST. Contrary to popular belief, GST will not be “one single tax”. It will have 3 components, State GST, Central GST and the addition of both which will be Integrated GST. This is another “imperfection” but a necessary one. Also a caveat, most information about GST is still in “proposed” or “expected” zone, even some of the information above, because the act is still not framed, so one must exercise caution in making assertions.

In the larger scheme of things, one must realise this is an incremental reform. We cannot change the entire system in one shot. And even this incremental change has many hurdles. It is a transitionary process, which would take a few years to manifest completely, during which finer points can be tinkered with, to move towards the Ideal GST. Another key take-away from how GST has been handled by the Modi Government is that it is overwhelmingly wanting to make states an equal stakeholder in the nation building process and this is one of the many threads they have started to ensure states participate and become accountable. This must be appreciated.

co-founder, OpIndia.com

Share and Support:
Support OpIndia by paying for content

Most read articles recently

Congress friendly journalist wishes death upon BJP Delhi spokesperson Tajinder Bagga

During the run-up to Gujarat assembly elections last year, Trivedi was caught spreading morphed images with Amit Shah's fake quotes on Patidars

BJP has lost the digital and social media edge, but it is not too late to recover

Talented supporters are BJP's key asset. If things start moving now BJP will be able to recover the edge lost by 'IT cell'. The time to act is now.
Modi government vindicated, SC says Rafale Deal clean

SC verdict on Rafale deal: Read scathing comments made by Court while dismissing petitions for inquiry

Supreme Court dismissed petitions for an enquiry into Rafale deal pricing, offset partner selection and procurement procedure. Read scathing observations

For all his angst against Adani, Rahul Gandhi chose Kamal Nath who rallied behind Adani for power plant in Chhindwara

Kamal Nath is believed to be close to Gautam Adani, whom Rahul Gandhi has frequently accused of being a 'crony capitalist'

‘Will not develop areas which did not vote for me’: Rajasthan Congress MLA shortly after winning

Rajender Singh Bidhuri fought and won a close battle against BJP MLA Suresh Dhakad with a margin of 1661 votes.

Pro-Congress troll resumes fake news website, makes outlandish claims on Rafale targeting Modi

Abhishek Mishra has been associated with the website which spreads fake news and Islamist propaganda

Arun Jaitley rejects JPC demand on Rafale, says “deaf will never receive an answer, they can’t hear it”

Arun Jaitley called for an apology from Rahul Gandhi for his lies on Rafale deal

Double whammy for Congress in court: After Rafale verdict, Rakesh Asthana’s appointment as CBI special director upheld by SC

The Supreme Court's verdict is being seen as the second major embarrassment for both the Congress party and Prashant Bhushan, as the Supreme Court had earlier rejected a plea on the issue of a probe concerning the Rafale deal.

Concerns for Congress to conspiracy theories: The liberal meltdown after Rafale verdict

The SC today dismissed all the petitions over the Rafale deal.

Mumbai Police teaches a lesson in humility to ‘special’ Sonam Kapoor

Actor Dulquer Salman clarified that he and Sonam were sitting inside a car that was rigged to a truck and hence were not breaking traffic rules.

Latest articles

Connect with us

125,655FansLike
97,923FollowersFollow
6,106SubscribersSubscribe

Don't miss these