Over
the years, the Indian economy has become increasingly complex. This has made it
necessary to upgrade obsolete institutions, systems and structures while
simultaneously introducing new tools and instruments for economic management –
both at micro and macro levels. Moreover, unlike China, Japan, South Korea and
Singapore, ours has never been an exports driven economy. Earlier, there was
little effort to make commodities competitive in terms of quality and cost. Ever
since we opted for integration with the global economy our goods and services
have been exposed to foreign competition. Now exports are gaining importance in
determining the Indian economy’s health. Therefore, it is imperative that
quality of our goods and services meet the highest international standards.
The
much neglected taxation system has come into sharp focus as the government
attempts to synchronise various structures and systems with emerging economic
realities. The vast and complex web of taxes, cesses and duties at Central, State
and Local Government levels has been rendering free movement of goods and
services impossible. Administrative procedures need to be simplified for
enabling efficient implementation of state-of-the-art indirect tax regime. Although
technological sophistication, labour productivity and quality of inputs and raw
materials determine a product’s excellence, it is indirect taxation that plays
a vital role in determining its competitiveness in the market. Therefore, in
2007-08, the government came up with the proposal to implement the Goods &
Services Tax or GST, which aims at replacing the complex and multi-layered indirect
tax system with a single unified one.
The
proposal also moots a national common market for all goods and services after
removing the barriers that have so far been obstructing their free flow from
one part of the country to another. Such bottlenecks add to inefficiencies in
logistics and transportation. For example, while transporting goods from one
part of the country to another, truckers lose about six hours daily on an
average in activities related to tax compliance at various entry points. The
GST aims at drastically slashing the industries’ logistic costs by radically
reducing the number of entry points as well as related formalities and
paperwork, and also decreasing the incidence of taxation from more than 26
percent to 15 percent or even less. Consequently, the cost of production will
fall and profitability will increase, thus making the product competitive in
international markets. Moreover, on the domestic front, efficiency will
facilitate economies of scale, leading to a better control of inflation.
Recently,
the government has come up with three drafts comprising the model GST law, the
IGST law and the Compensation law. The purpose is to have a better law that
does not ignore the common man’s interests while making the GST friendlier to
Indian industries. The government has also proposed an anti-profiteering clause
to ensure that business houses pass on any benefit of reduction in tax rates to
consumers, a move aimed at checking any spike in prices of commodities as a
result of the rollout of the ambitious tax reform measure. The government may
set up an authority or entrust an existing authority to examine whether input
tax credits, or the reduction in the prices on account of any reduction in the
tax rate, have actually resulted in a proportionate reduction in the prices of
the goods or services. According to the draft, the authority will have the
power to impose penalty in cases where it finds that the price being charged
has not been reduced. Further, the definition of "goods" excludes
securities, which means that no GST needs to be paid on sale and purchase of securities.
This would dispel the concerns of the stock market, brokers, mutual funds and
banks as the definition of "goods" in the previous draft included
securities.
However,
several issues still need to be addressed.
Unlike
in other countries having a comparable indirect tax regime, India’s proposed
GST law, even in its simplified form, is quite complex. Instead of applying one
tax for specific goods or services throughout the country, each state will have
the right to apply its own version of the tax. So, apart from Central GST there
is going to be Intra-State GST too. Further, states are empowered to levy sales
tax on petrol, diesel, aviation fuel and drinkable alcohol. The Centre too can
levy excise duty on all these products as well as on tobacco and tobacco
products. The complexities in our federal and economic structures are such that
it is impossible to have a single rate of tax for all goods and services. Therefore,
the layered structure may comprise zero percent for essential commodities, 2 to
4 percent for gold jewellery, 12 percent for what have been designated as merit
items, 18 percent or more as the standard rate and 40 percent for luxury
products. There are also special provisions for the North-Eastern States, Jammu
and Kashmir, Himachal Pradesh and Uttarakhand. This poses several challenges to
the government’s attempts at ensuring that imported goods do not become cheaper
than domestic goods after the GST is implemented. Problems like double taxation
on e-commerce, multiple and overlapping taxes also need to be sorted out.
Compliance costs too should be slashed through nil or reduced paperwork.
Then
there are matters concerning resolution of disputes that might crop up within a
State, between two or more States or between the Centre and a State. Will there
be one Central Tribunal or will each State have its own GST Tribunal to
adjudicate on such disputes? These concerns need to be addressed proactively in
order to enable the GST regime to work efficiently. Since several States are
reluctant to let go of their powers under Article 246A to levy additional taxes
and surcharges, the Centre is trying to bring all of them on-board for making
GST as uniform as possible, without harming the States’ financial interests.
However,
despite the concerns and some outstanding issues that are still being sorted
out, it cannot be gainsaid that the benefits of GST are immense. Manufacturing
costs of domestic products will be substantially reduced. With the removal of the
cascading effect of indirect taxes movement of goods and services will become cheaper
and more efficient, further improving their competitiveness both in domestic
and international markets. The consequent eco-system will give a great boost to
the government’s drive towards making India the global hub for manufacturing
through its ‘Make in India’ program. A favourable environment for supply
chains, seamless movement of goods between States and improved efficiency will
foster higher growth rates.
Indeed,
the Goods and Services Tax law is being looked upon as a game-changer as far as
the functioning of Indian economy is concerned. On the one hand it will greatly
strengthen the government’s ‘Make in India’ plan and, on the other hand, it
will speed up realisation of the ‘Making One India’ dream.
broadcasted this on December 08 2016 (IST 1600, 1720, and 0000 hrs.)
and 09 2016 (IST 0340 & 0500 hrs.)
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