[video & infograph] A Comprehensive History on Goods and Services Tax

Goods and Services Tax: One Country-One Tax-One Market

 What is GST?

  • As the name suggests, the GST will be levied both on goods (manufacturing) and services.
  • A single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc. [ Read :What are direct and indirect taxes? ]
  • This is how it is done in most developed countries.
  • GST was first mooted in the year 2003 by Kelkar Task Force on indirect taxes.

 How does it work?

  • GST 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.

To better understand the working of GST, let’s watch the following video:

 What is the structure of GST?

  • It would have a dual structure, a Central component levied and collected by the Centre and a state component administered by states.
  • The central government will have the exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST).
  • At the Central level, the following taxes are being subsumed:
    • Central Excise Duty,
    • Additional Excise Duty,
    • Service Tax,
    • Additional Customs Duty commonly known as Countervailing Duty, and
    • Special Additional Duty of Customs.
  • At the State level, the following taxes are being subsumed:
    • Subsuming of State Value Added Tax/Sales Tax,
    • Entertainment Tax (other than the tax levied by the local bodies),
    • Central Sales Tax (levied by the Centre and collected by the States),
    • Octroi and Entry tax,
    • Purchase Tax,
    • Luxury tax, and
    • Taxes on lottery, betting and gambling.
  • Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.

Which products are exempted from the purview of GST?

  • Alcohol for human consumption has been exempted.
  • Initially, GST will not apply to:
    • Petroleum crude
    • High speed diesel
    • Motor spirit (petrol)
    • Natural gas
    • Aviation turbine fuel(ATF)

The GST Council will decide when GST will be levied on them.

What is the scope of GST Council?

 The GST Council will consist of –

  • Union Finance Minister (as Chairman)
  • Union Minister of State in charge of Revenue or Finance.
  • Minister in charge of Finance or any other Minister, nominated by each state government.

GST Council will make recommendations on –

  •  Taxes, cesses, and surcharges to be subsumed under the GST
  • Goods and services which may be subject to, or exempt from GST
  • The threshold limit of turnover for application of GST
  • rates of GST
  • Model GST laws [To read more about the model GST law, click here. Also, related reading: E-commerce transactions in GST net]
  • Principles of levy, apportionment of IGST and principles related to place of supply.

The GST Council may decide the mechanism for resolving disputes arising out of its recommendations.

gst-infograph1

gst-infograph2

What are the benefits of GST?

What is GSTN?

  • It is a non-profit entity that is building the information technology backbone for the goods and services tax (GST).
  • It will store all details related to the relevant transactions.
  • Once sufficient amount of data is generated, it will be able to generate analytics based on the requirements of various stakeholders
  • These analytics, based on data filed by millions of taxpayers, will help in plugging leakages. It will also help in identifying economic trends and ensure more focused economic-policy making.

Wonder why there is a clamour for keeping the GST rate at 18%?

Because the average rate of Organisation for Economic Co-operation and Development (OECD) group countries is 18.7%. Pegging the rate above 18 percent would hurt the country’s competitiveness.

Arguments made against GST:

  1. It is feared that GST would erode the fiscal autonomy of the states. As of now, the States have complete autonomy over levy of sales taxes, which, on average, accounts for 80% of their revenue. But in the GST regime, the rates for both, the CGST and the SGST, will be fixed by the GST Council.
  2. Similarly subsuming advertisement tax, betting and gambling tax would have adverse impact on revenues of local bodies.
  3. Taxation powers are also used as a tool to control and restrict the consumption of some goods for social good. For example, Tobacco products generally attract huge tax rates as a measure to control the consumption on health grounds. Here tobacco producing States argue for lesser taxes for maximum sales and the Consumer States will demand for leverage for fixing higher taxes.  Whose interest would be protected in a uniform tax rate regime?
  4. A uniformity of tax rates under the GST will undermine tax competition and result in a greater centralisation of power and decision-making will be concentrated in one place (the GST council) instead of being spread across 29 jurisdictions in the country.
  5. Also, the composition of GST Council is such that it would give 1/3 voting power to the Centre. Thus, the Centre would have a virtual veto power over the States on all the decisions of the GST Council.
  6. Even if it simplifies the tax regime, the GST could potentially lead to greater conflicts between states, and between the states and the centre. With different states having different needs, and regional parties with different political ideologies, we could see far greater friction in the future.
  7. An integrated market — with no border delays and octroi — can be fully achieved with better use of information technology and better State-Centre coordination, and does not require a uniform tax rate in all the states. The European Union is a case in point, which achieved a single, efficient market while still having different value-added tax (VAT) rates for its member states using the VAT Information Exchange System.

Conclusion

There are concerns that the design of GST is flawed, but it needs to be realized that GST is the need of the hour. Also, in complex systems, change is introduced, learning from implementation takes place, leading to further and better change, as  was previously observed in the implementation of the value-added tax by the States.

Moreover the Indian GST regime offers advantages unlike the GST regime in other large federal polities, where the system is either

  1. Too centralized, which deprives sub federal levels of fiscal autonomy, such as in Australia, Germany, Austria
  2. Or, independently administered, which creates too many differences in tax bases and rates that make compliance difficult and also makes inter-state transaction difficult to tax, such as in South Africa

The Indian system establishes a modicum of coordination like in Canada. Common base and common rate will facilitate tax administration and ensure compliance. Reasonable exceptions, as decided by GST Council, will provide a degree of fiscal autonomy to the states.

That’s it for now. Please follow the news story here to keep yourself updated with the latest developments!

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