All you need to know about GST

Inception

It all started in the year 2000 when then Prime Minister Atal Bihari Vajpayee set up a committee which was mandated with facilitating the states to switch from sales tax to the value-added tax (VAT) regime. On April 1, 2005, state-level VAT replaced sales tax in many states. Subsequently, the committee was mandated with facilitating states to switch to Goods & Service Tax (GST), in consultation with the Centre. GST works on the exact same principles as VAT, hence in many countries it is in fact called VAT. Under the UPA, successive finance ministers promised GST in successive years, with the deadline being extended year on year without any headway.

Why the delay for so many years?

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GST is a tax which subsumes many state and central taxes. In effect, it reduces the power of states to tax their citizens. Hence it was essential that all the states and the centre were on the same page at every stage of the GST Act. This did not happen during the UPA rule. Expectedly, states were worried that they would lose a big pie of their revenue by getting into GST.

Even till the fag end of 2013, nearing the end of UPA’s tenure, along with BJP states, few Congress states and few other states with Non-Congress Non-BJP Governments, were opposed to certain provisions in the UPA’s version of GST. Till the last discussion of GST under UPA in November 2013, the states had some major demands:

1. Keeping Petroleum out of GST ambit
2. Keeping Alcohol out of GST ambit
3. Keeping Entry Tax out of GST ambit
4. Some sort of guarantee from Centre for potential revenue loss

The UPA could not negotiate with the states on the above demands and hence even after being 10 years in power, GST could not be brought under the UPA rule.

What changed?

The new BJP Government was desperate to get GST rolled out as soon as possible. So, it decided to accept some of the states demands, and give them some comfort, so that they can agree with the centre at other places. Out of the above 4 demands, 3 were accepted, and a bonus benefit was passed on to the state:

1. Petroleum was kept out of GST
2. Alcohol was kept out of GST
3. A proposal was sent to law ministry to work out a “Constitutional Guarantee” to compensate states
4. And the Bonus: The power to states of levying additional 1% tax levy, for maximum 2 years, to help augment state revenues

In exchange for this, the Centre convinced the states to allow Entry Tax to be subsumed into the GST ambit. All this was achieved some time in late 2014, barely 6 months into the tenure of the new Government.

Why the delay now?

With the states on board, the GST bill was passed in the Lok Sabha, where BJP had an absolute majority, in May 2015 itself. At that stage Congress walked out of the house before voting, demanding that the Bill be sent to the standing committee.

Later, although Congress states were on board, the Central leaders of Congress came up with new demands for GST, among which were the demand to scrap the additional 1% tax levy, and to peg the GST rate at 18%, that too in the Constitution Amendment Bill. Next, the bill had to be passed by a two-thirds majority in the Rajya Sabha, where the BJP did not have the numbers.

What has changed now?

For one, the composition of the Rajya Sabha has slightly changed, with BJP having more seats than before. Further, on negotiations with states, it seems the Centre has accepted some of Congress’s demands. It is expected that the 1% additional levy will go, but the 18% cap in the bill itself may not be accepted. Despite this, it appears Congress will back GST.

Why is BJP hurrying with GST so much?

Right from day one, the new BJP Government has shown a lot of intent in getting GST cleared as soon as possible. There maybe 2 reasons for this. GST will be the biggest Indirect Tax Reform since Independence. With so many taxes getting subsumed, doing business in India will become easier. The Government has set itself extremely ambitious targets of moving up in the World Bank’s Ease of Doing Business Rankings, and GST is expected to help in that direction.

Secondly, although GST will bring a lot of cheer for organised industries, it will, in the short run, be a disruptor for the unorganised sector. The GST implementation mechanism is largely network and computer based, and is targetted at minimising tax evasion. This will have a direct impact on all the traders and businessmen who have been avoiding taxes by hook or by crook. Bringing this section into the tax net will definitely harm the political support being received from them, and BJP is traditionally seen as being backed by traders and businessmen. Hence, it would make sense to get GST rolled out much before the 2019 Lok Sabha, so that whatever negativity arising from it, is diluted.

What will change under 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. 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%.

Untitled
taxes to be subsumed

With this, compliance will ease out, free flow of goods over state boundaries will increase. Credits for inputs will be more easily available, paving the way for reduction in costs. A common national market will emerge, where in less developed, but consumer driven states will benefit. Make in India will get a huge push, as also Ease of Doing Business.

So are we set? All is well?

Legally, we still have to wait for the Rajya Sabha to pass the GST Constitution  Amendment Bill, and at least half of the state assemblies will have to pass for the Constitution Amendments. The model GST Act will have to be finalised, along with the allied laws and rules.  Lok Sabha and Rajya Sabha have to pass the GST Bill (which is not the same as Constitution Amendment Bill) and the states have to pass their own GST bills. All of this needs to be done before April 2017 if we are looking at 1st April 2017 as the date for roll-out.

Successful implementation of GST will almost entirely depend on a robust IT system. As per reports, the IT network is ready and undergoing testing. But the proof of the pudding is in the eating and we will have to see how one single system can take the load of assessees from Excise, Service Tax, Sales Tax etc.

The current GST is an improvement over the current scenario but it is not perfect. We still wont see a 100% free flow of credits due to the Dual-GST structure. Further, all goods need to be brought under GST, to reap full benefits, and one expects that after GST rolls out and stabilises, states will agree to bring in goods like Alcohol and Petrol.

The biggest question is obviously the rate of GST. While an average manufacturer pays a combined rate of 25-27% on goods, a Service provider pays only 15%, which itself seems high. Getting the rate right would be crucial, to avoid loss of revenue, as well as to avoid burden on consumers. Whatever the rate might be, there will be different rates for different classes of goods and services, hence the impact will be spread out:

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 for certain goods and services
5. Floor rate with a small band of rates for standard rated goods or services

In the end, we must realise that although GST is a huge reform, the current version is an incremental reform, which shows us the path to the ultimate destination of having a perfect GST. It is hard to say whether Indian can achieve a perfect GST, given the inherent complexities of our structure, but going forward we must hope that we move closer and closer to the target.

co-founder, OpIndia.com

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