Morning Brief: GST Special- Everything You Need To Know About The Country’s Biggest Tax Reform

History Made

Yesterday late night, the Rajya Sabha, the house of elders, true to its name, rose above the petty political squabbles and delivered a high-quality debate on the Goods and Services Tax (GST) bill and passed it by an overwhelming majority.

Achieving this feat in a noisy multiparty democracy like India and convincing more than 30 administrations across the country to give up their autonomy to a large extent on taxation is truly remarkable.

The GST is the greatest tax reform ever attempted by India, started by AB Vajpayee, pursued by Manmohan Singh, and now brought to fruition by Narendra Modi.

How GST Works

It subsumes: central excise duties, other excise duties, countervailing duty, service tax, special additional duty of customs, central surcharges and cesses (all levied by the Centre) and entertainment tax, central sales tax (levied by the centre, collected by the states), octroi and entry tax, purchase tax, luxury tax, taxes on lottery, gambling, and betting, state surcharges and cesses.

Exempts: As many as 90-100 common use items like bread, eggs, milk, vegetables, cereals, books and salt may be exempted. Alcoholic liquor for human consumption, Petroleum crude, high-speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel - states will levy taxes on these items separately.

Why GST

• To facilitate ‘Make in India’ by converting the geographical landscape of the country into a single market. Too many taxes in the current system like the Central Sales Tax (CST) on inter-state sales of goods; numerous intra-state taxes; and the extensive nature of countervailing duty exemptions, favour imports over domestic production.
• To obtain Constitutional authority to levy sales tax on both goods & services by both the Union Government and the States.
• To reduce distortions, particularly in logistics costs, and compliance costs arising from distinguishing between goods and services, accentuated by each state levying its own sales tax on goods, and other distortive taxes on goods such as excises, entry tax etc.
• To remain competitive and deepen international linkages by moving from origin to destination-based taxation, with a greater feasibility of exempting exports from GST, and taxing imports for GST.
• To potentially improve accounting standards of businesses (among the major reasons for introducing VAT in Europe during the 1950s and 1960s)
• To improve government databases for improving tax compliance of taxes on Income and profits and on Domestic Taxes on Goods and Services.
• All of the above is to be undertaken in a Federal context, with dual level GST. Few parallels in the world of such an ambitious tax reform undertaking.

Source: Prof. Mukul Asher’s presentation at the Swarajya-Indic Academy ‘India Economic Seminar

IDEAL GST RATE

Wonder why there is a clamour for keeping the rate at 18 percent? Because the average rate of Organisation for Economic Co-operation and Development (OECD) group countries is 18.7 percent and the major reason that India is opting for the GST is to become competitive in the world as far as tax regime is concerned. Pegging the rate above 18 percent would hurt the country’s competitiveness.

IMPLICATIONS

For Businesses:

• Hopefully, lead to the improvements in accounting standards of Indian businesses.
• Many firms will have to tweak their business models. The most important impact will be felt by companies that are vertically integrated, i.e. those who produce everything from inputs to final product under one roof (Reliance) because under the old tax regime, doing so meant only one tax levy: on the final product. But under GST, the tax rate is the same whether you produce the input in-house or purchase it from someone outside. If a vendor is more efficient than you, you should outsource production to improve your margins.
• To gain from GST, manufacturing firms have to ensure all their vendors have paid taxes too otherwise, they won’t be able to benefit from this regime. Earlier they could source from the cheapest vendor. Now they need to balance cheapness and tax setoffs.
• Services will become costly because unlike manufacturing companies, which use many inputs, services companies have fewer input costs to set off against the GST they themselves have to pay.

For Government

The GST will greatly increase the revenues available at the states’ and centre’s disposal by expanding the tax base. More importantly, the resources of the poorer states (or consumer states) like, Uttar Pradesh, Bihar and Madhya Pradesh will increase substantially.

The GST will be administered through an integrated IT network, the GST Network, under which companies will upload nearly three billion invoices every month. These invoices, if competently aggregated, can give the government corporate, sectoral, sales, price and other information instantly.

Crucial to the proper use of this data will be govt’s ability to use big data analytics and timely sharing of information between the tax department and ministries.

Overall GDP

Many op-ed writers in the pink papers have opined that India’s GDP will expand by at least 2 percent if and when the GST comes into effect. This figure is unrealistic.

Mukul Asher, Professorial Fellow at the National University of Singapore, believes that the GDP will surely see an uptick but only after the GST regime stabilises in the next three years. However, the more realistic expansion figure is 0.1 to 0.3 percent and not 2 percent.

Pain before gain.

• There will be major implementation hiccups and heartburn, as states and centre wrangle over who will collect what revenue from whom.
• The IT software for ensuring smooth compliance with the new tax may also throw up some glitches and confusion.
• The initial phases of implementation will surely deliver a cost push, as products not previously taxed, especially services, will face higher taxes. This will boost services inflation and slow down growth making revenue targets difficult to achieve.
• There is no consensus on the final rate. States want higher rate as they fear a loss of revenue. The main opposition party, Congress doesn’t want a rate higher than 18 percent.
• At the hub of GST is the GST IT Network based in Delhi. The new tax requires all taxpayers to file returns, pay taxes and upload invoices electronically. There are more than 6.5 million businesses to be linked. Big or small, all taxpayers have to compulsorily go online. Consider the education and training required.

Road Ahead

Now that the Rajya Sabha has passed the bill with some amendments, it will go back to Lok Sabha. After it also gives its nod, the President has to sign it into law. Then, at least half the states will have to ratify the amendments (which means 16 states); after that, every state and Union territory (UT) will have to pass its own state GST bills – so that’s another 31 bits of legislation for 29 states and two UTs.

The GST Network will have to confirm and issue TINs (taxpayer identification number) to 6.5 million plus businesses and authenticate probably twice as many digital signatures. There are millions of man-hours of software training and preparatory work ahead.

PS: NOT A REGRESSIVE TAX

CPI(M) leader Sitaram Yechury said in the Rajya Sabha yesterday that the GST is a regressive tax and the rates should be kept as low as possible while the focus should be on ramping up the direct tax revenues which are considered progressive.

Indirect taxes are considered regressive because they impact everybody equally, irrespective of the income level.

But the GST in India’s case is not regressive. In fact, it will reduce the regressiveness of the current Indian tax system which is a remnant of our socialist economy and favours goods over services. Until, 1994, our lawmakers didn’t even think of taxing services. Today, service taxes are growing faster than excise collections.

Such nuances of economic theory often escape the communist eminences. But if they didn’t, the communists wouldn’t be communists, now would they?

MUST READ OP-EDS

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The Theology Of Ingratitude [Aravindan Neelakandan]: While downplaying the role of the government in securing the release of the Catholic priests in Afghanistan, official publications of the Catholic diocese in Tamil Nadu were demonising Prime Minister Modi.

SWARAJYA SPECIAL

The Intellectual Bankruptcy Of The Left In India [David Frawley]: This new coming together of the Left is happening out of defeat. It is a desperate alliance of disparate parties, not a visionary inspiration for the future.

We hope you enjoyed reading our morning brief. Have a great day ahead!

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