Story Of The Week

Goods and Service Tax

Goods and Service Tax is an indirect tax that will lead to the abolition of all other taxes such as central sales tax, state-level sales tax, excise duty, service tax, and value-added tax (VAT). Both the state and the central governments will impose GST on almost all goods and services produced in India or imported into the country.

We currently have 4 major indirect tax laws in India (not including Customs law):

1. State VAT – for sales within the state
2. Central Sales Tax (CST) – for interstate sales
3. Excise Duty – on manufacture
4. Service tax – on all service except exempt services

GST aims to eliminate all four laws. This means convenience for the Government and the taxpayers. A taxpayer to whom all four laws apply has to file four returns to 4 different departments. This new law will be relief to the already tired taxpayer.

GST is not going to cause inflation. In fact, it will curb the cascading effect of the taxes on inputs cutting costs to the consumer and bring relief to the taxpayers. The government is proposing a lower tax on necessary items.

An ideal tax system collects taxes at various stages of production, supply and retail. It is based on the value that the producers, suppliers and retailers individually add to the product. However, the current tax regime is unfairly skewed against most producers. Let’s outline and simplify the current system of taxes to see how it operates:

Assume there is a soap manufacturer that procures raw materials at 500 lakhs per batch. The manufacturer keeps his operating profits at 100 lakhs and encumbers a processing cost of 50 lakhs. The flow would look something like this:

Value of Product

If we calculate the total tax that the producer has to pay in this case, it would be 120 lakhs(50 lakhs on procurement and 70 lakhs on sales). Now if you have a GST framework in place, the total tax that the producer pays is 70 lakhs. How?

The producer had initially paid an input tax of 50 lakhs. Now when he goes on to sell his batch for 700 lakhs, he gets a tax credit of 50 lakhs. Thus, he pays 20 lakhs in the form of taxes for the final transaction. This adds up to just 70 lakhs for the producer. The GST hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants in the supply chain. Reducing such taxes would lower the overall production cost and increase the output of the economy in the long run.

Taxes

That sounds great, but, why GST when we already have VAT? Isn’t the VAT framework similar to that of GST? VAT regulations and rates generally vary across states. There is a tendency, as has been observed, that states may resort to undercutting of rates to attract more investors. This generally leads to a loss of revenue to both the state and centre. GST would introduce uniform taxation laws across states and different sectors. The taxes would be divided between the state and centre, based on a formula that would be acceptable to both. Also, it would be easier to supply goods and services uniformly across the country, as no additional taxes would have to be paid across different states. Currently, no tax credits are provided for interstate transactions.

So do we as consumers get goods at a cheaper price? Probably not, and it is here that the GST has been attacked by the opposition. Since taxes are distributed across the chain, the consumer prices are likely to rise to maintain the current tax revenue levels. The government has justified this by saying it would provide tax cuts across various brackets. This isn’t entirely satisfactory. First, the tax paying population isn’t too significant a number to begin with and second, the tax payer is likely to get a meager tax cut for the GST he would pay for all the goods or services he purchases.

GST is clearly a long term strategy; it would lead to a higher output, more employment opportunities, and economic inclusion. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy.

State governments fear that implementing GST will lower revenue but the central government has promised it will compensate the states and has already set aside 9000 crores for it.

The GST bill has been passed in the Lok Sabha but the government needs the support of opposition to pass the bill in the Rajya Sabha. Also, at least half of the state assemblies will have to ratify it before it finally becomes law. The government is planning to implement it by 1st April 2016.

References:

1) http://www.quora.com/How-will-the-Goods-and-Services-Tax-GST-work-in-India-And-how-is-it-any-different-than-Value-Added-Tax-VAT

2) http://www.hindustantimes.com/business-news/will-india-keep-its-date-with-a-single-national-sales-tax-after-lok-sabha-nod-gst-stares-at-other-hurdles/article1-1344669.aspx

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