Mains Paper 3: Indian Economy| Issues relating to planning, mobilization of resources, growth, development and employment.
From UPSC perspective, the following things are important:
Prelims level: GST, GST COUNCIL,GSTN
Mains level: The newscard discusses issues with GST structure , in a brief manner.
- The Indian tryst with indirect tax reform seems to be moving in the opposite direction—from chaos to order. The initial version of the new goods and services tax (GST) was extremely complicated. There are now welcome moves to simplify it.
- Goods and Services Tax (GST) is a comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout India. GST would replace respective taxes levied by the central and state governments.
What is the Principle of GST?
- The Centre will levy and collect the Central GST.
- States will levy and collect the State GST on the supply of goods and services within a state.
- The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services, and apportion the state’s share of tax to the state where the good or service is consumed.
- The 2016 Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST.
GST invisible achievements: Analysis by Economic Survey:
- Economists at the Union finance ministry studied GST data in detail and presented some interesting facts in this year’s Economic Survey.
- First, the Survey showed that India’s formal non-farm payroll is much higher than is commonly believed. The implementation of the GST, which is bringing more businesses into the tax net,will further push formalization of the economy.
- Second, the GST is leading to better tax compliance. The number of unique registrations has now crossed the 10 million mark,which is higher than entities registered in the pre-GST period, though they are not comparable as indirect taxpayers had to register multiple times in the earlier system. The increasing number of taxpayers and better compliance should help raise higher revenue in the medium to long run.
- Third, the GST system is creating a vast repository of data that could be useful in policymaking. For example, it is now possible to know the state-wise distribution of international exports. This information can be used to fine tune policies in particular states to boost exports. Per capita gross state domestic product has a high correlation with exports.
- Further, the way the GST Council has evolved is a notable achievement. All decisions so far have been taken by consensus. It shows the way complex issues can be addressed through cooperation between the Union and state governments. While the council has a specific purpose, perhaps the idea can be used to address policy issues in other areas.
GST vis-à-vis core economic principles
- The integration of the Indian market as well as the rewiring of supply chains because of GST should lower transaction costs and improve economic efficiency.
- A good fiscal system should not tax the production of intermediate goods. That is the logic underlying all value-added taxes such as GST. It is a destination tax that is collected at the point of consumption.
- Indirect taxes tend to be regressive in nature. However, the preferred solution should not be a complicated GST structure with many rates, but a low standard or modal rate with a small list of exemptions.
Issues with GST structure
- The complicated GST structure we began with can partly be explained by the messy federal bargaining in the GST Council and partly by a flawed incentive structure. The cost of the policy failure is obvious.
- GST collections have been weaker than expected while compliance costs for enterprises have increased.
- The two major incentive design flaws during the initial GST negotiations are as follows
- Decisions in the GST Council should be unanimous,the bargaining that followed led to a mess.
- Central govt guaranteed the states that their revenues from GST would grow at 14% a year. Any shortfall would be compensated. The fixed guarantee gave them little incentive to push for a more sensible GST rate structure that would maximize growth.
- A World Bank study said that the Indian GST rate was the second highest among the 115 countries with a national value-added tax. It was also the most complicated, with five main tax rates, several exemptions, a cess and a special rate for gold.
- As GST stabilizes and settles down, the council will need to continuously work on simplifying the structure to enable higher tax collection and economic growth.
- Arbind Modi committee provided 10 key principles for the design of an efficient GST, such as covering all goods and services, including immovable property, a single low rate, destination-based, zero rate on exports, and threshold exemption for small enterprises.
- The Modi committee had recommended a 12% GST rate, of which 5% would go to the Union government, 5% to the state governments and the other 2% to the third tier of government.
- It is a destination-basedtaxation system.
- It has been established by the 101stConstitutional Amendment Act.
- It is an indirect tax for the whole country on the lines of “One Nation One Tax” to make India a unified market.
- It is a single tax on supply of Goods and Services in its entire product cycle or life cycle i.e. from manufacturer to the consumer.
- It is calculated only in the “Value addition” at any stage of a goods or services.
- The final consumer will pay only his part of the tax and not the entire supply chain which was the case earlier.
- There is a provision of GST Council to decide upon any matter related to GST whose chairman in the finance minister of India.
What taxes at center and state level are incorporated into the GST?
At the State Level
- State Value Added Tax/Sales Tax
- Entertainment Tax (Other than the tax levied by the local bodies)
- Octroi and Entry Tax
- Purchase Tax
- Luxury Tax
- Taxes on lottery, betting, and gambling
At the Central level
- Central Excise Duty
- Additional Excise Duty
- Service Tax
- Additional Customs Duty (Countervailing Duty)
- Special Additional Duty of Customs
- It is the 1stFederal Institution of India, as per the Finance minister.
- It will approve all decision related to taxation in the country.
- It consists of Centre, 29 states, Delhi and Puducherry.
- Centre has 1/3rdvoting rights and states have 2/3rd voting rights.
- Decisions are taken after a majority in the council.
- GSTN is registered as a not-for-profit companyunder the companies Act.
- It has been formed to set up and operate the information technology backbone of the GST.
- While the Central (24.5%) and the state (24.5%) governments hold a combined stake of 49%, the remaining 51% stake is divided among five financial institutions—LIC Housing Finance with 11% stake and ICICI Bank, HDFC, HDFC Bank and NSE Strategic Investment Corporation Ltd with 10% stake each.
- GSTN had awarded Infosys Ltd the contract to develop the hardware and software for GST.
- The idea behind GSTN was to set up an entity that is equidistant from both the Central government and the state governments, as it will advise both the Centre and the states on the information technology network.