GST (Goods & Service Tax) – A Single Taxation System

The following post has been submitted by two of our interns, Danish Alam and Twinkle Rai (Amity University, Noida)

India is overt for its complex tax system. For new businesses and start-ups, it becomes impossible to navigate through various taxes like direct and indirect. Constant changes to taxes like Service Tax are making things rout. But now, the things are set to change with new Goods and service tax – commonly known as GST. It is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. 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.

WHY GST….??

The main purpose of GST is to eradicate the dispute of whether a transaction is sale of goods or services (Example: sale of SIM Card, Software etc.). GST is expected to eradicate all such disputes because all transactions shall be taxed at the same rate and no nicety is made between goods and services.

GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business. Also, a system of seamless tax-credits throughout the value- chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.

What’s it like in today’s mixed scenario?

Currently, we have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off against other central taxes such as additional excise duty and surcharge.

Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, octroi, etc.

Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components: a central GST and a state GST.

This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value addition at each stage, with the producer/seller at every stage able to set off his taxes against the central/state GST paid on his purchases. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

The Pros & Cons

Pros

Benefits of GST: An efficient tax system can help an economy in two ways – by capital deepening or by better resource allocation. The former implies lower prices of capital goods, which, assuming negative price elasticity, suggests higher investment demand, and thus, GDP growth. When GST was implemented in Canada, GDP increased by some 2 percentage points (pp), of which one-fourth (~0.5pp) was due to capital deepening and the rest was because of better resource allocation. In the absence of clarity on the latter in India, it is assumed that the entire GDP gain will be due to capital deepening.

For the Centre and the States:

According to experts, by implementing the GST, India will gain $15 billion a year. This is because; it will promote more exports, create more employment opportunities and boost growth. It will divide the burden of tax between manufacturing and services.

For individuals and companies:

In the GST system, taxes for both Centre and State will be collected at the point of sale. Both will be charged on the manufacturing cost. Individuals will be benefited by this as prices are likely to come down and lower prices mean more consumption, and more consumption means more production, thereby helping in the growth of the companies.

Cons

The main benefit that the new GST regime promises is a reduction of multiple taxes. But the truth is just the opposite. Article 246A now confers power on Parliament and every state legislature to levy goods and service tax. Thus, we are likely to have one parliamentary law and about 28 state laws that levy GST. And there is no constitutional requirement that all the state laws be uniform. The GST Council can only “recommend” a model law but nothing prevents each state from going its own way. The VAT experience is testimony to this. Such multiple levies by Parliament and the states, if not in harmony, will have disastrous consequences.

Conclusion

GST will give more relief to industry, trade and agriculture through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several Central and State taxes in the GST and phasing out of CST. The transparent and complete chain of set-offs which will result in widening of tax base and better tax compliance may also lead to lowering of tax burden on an average dealer in industry, trade and agriculture. The subsuming of major Central and State taxes in GST, complete and comprehensive setoff of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This is likely to increase the competitiveness of Indian goods and services in the international market and to boost Indian exports.