The Proposed Goods & Services Tax Law Is A Game-Changer
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.)