In the most important indirect tax reform since Independence, the political parties of India showed rare unanimity in the Rajya Sabha to pass the long-awaited Goods and Services Tax (GST) Bill. With this, India joined 160 countries in the world that have implemented GST.
The introduction of GST is expected to not only make the tax system simpler but also help increase tax compliance, boost tax revenues, reduce the tax outflow in the hands of the consumers and make exports competitive.
Constitutional amendments that affect the tax regime have been notoriously difficult to pass in the legislature, especially in federal countries where state governments fiercely defend their autonomy. This is one of the main reasons why even a developed country like USA is yet to implement GST. In India, the most prominent hurdle in introducing GST has been the ongoing tussle between the states and the Centre on the loss of revenue.
It has taken almost 16 years, from the inception of the idea and formation of a task force, to a historic multi-party consensus-building exercise that led to the passage of the GST bill in Parliament.
Keeping this in mind, the successful introduction and passage of the GST Bill in the Indian Parliament is a noteworthy achievement for a large democracy like India. Interestingly, Indian software giant Infosys is building a state-of-the art electronic infrastructure for a GST tech portal where taxpayers can register, pay their taxes and file returns.
Why is GST important ?
The Goods and Service Tax is a value added tax that will be levied on both goods and services (except for a list of exempted goods and services), at both the Central and state levels (Central GST and State GST respectively). In other words, the single GST will replace multiple taxes like CENVAT, central sales tax, state sales tax, and octroi tax.
As GST can raise tax revenues in the most transparent and neutral manner, it has become a preferred global standard in indirect taxation. More than 150 countries (including all OECD countries except US) around the world follow this taxation structure.
Why does India need GST ?
Currently in India there are parallel systems of indirect taxation at the state and Central levels. There are multiple points of taxation and a cascading of taxes, that is, tax on tax. Interstate commerce has also been hampered due to the dead-weight burden of Central sales tax and entry taxes.
By minimising the cascading effect of multiple taxes, not only is GST expected to iron out the wrinkles in the existing tax system, it is hoped that it will spur much needed growth in the Indian economy.
What makes GST India’s most important indirect tax reform till date ?
1. A Simpler Tax System
As multiple taxation will be eliminated and replaced by a single tax, the tax structure is expected to be much easier to understand. Paperwork will become simpler and there will be a reduction in accounting complexities for businesses. A simple taxation regime will also enhance the ease of doing business, making the manufacturing sector more competitive and saving both money and time. Experts opine that the implementation of GST would push up the GDP by 1%-2%.
2. Increased Tax Revenue
GST’s tax structure will bring about greater tax buoyancy as it creates interlocking incentives for compliance between vendor and customer. This will increase the number of tax payers and in turn tax revenues for the government. A recent report by CRISIL states that GST is the country’s best bet to achieving fiscal consolidation. Also, there is not much scope to reduce the government’s fiscal expenditure; increasing tax revenues is the best alternative to improve the fiscal health of the Government.
3. Competitive Pricing
As GST eliminates all other forms of indirect taxing, taxes paid by the final consumer will come down in most cases. Lower prices will help in boosting consumption and demand, which will, in turn, be beneficial to companies. The biggest positive is that goods and services will be taxed on a common basis.
4. Boost to Exports
With production costs falling in the domestic market, Indian goods and services will become more price-competitive in foreign markets. This will help exporters, who will now be able to compete with manufacturers abroad.
5. Cooperative Federalism
Adoption of GST is an iconic example of cooperative federalism. While the states have agreed to give up their right to impose sales tax on goods (VAT), the Centre has given up its right to impose excise and services tax. In exchange, each of them will get a share of the unified GST collected nationally.
6. An Unfragmented National Market for Goods and Services
By eliminating barriers such as entry taxes, GST will result in a unified national market for goods and services that will be accessible to the smallest entrepreneur. It could potentially make sourcing, distribution and warehousing of goods easier and faster between the Indian states. Also, as companies will no longer need to pay interstate taxes, implementation of GST will free up capital that they can now use in their business.
Though GST is not the solution to all the problems of India’s economy, it is nevertheless a revolutionary and long-pending reform. It is hoped that GST will boost economic growth and jobs, the ease of doing business, and higher tax collection. Even though it may be mostly beneficial, the implementation of GST will pose some challenges in the near-term. We hope that such challenges and hurdles, if any, will be soon sorted out as GST is finally rolled out in India.
As Economist Vivek Dehejia said in an interview to the BBC,
“The perfect ought not become the enemy of the good, especially as a less-than-perfect GST which can be improved down the road will be better than our current patchwork quilt of taxes, which prevents India from being stitched into a single market.”