GST stands for “Goods and Services Tax”, and is proposed to be a comprehensive indirect tax levy on manufacture, sale andconsumption of goods as well as services at the national level. Its main objective is to consolidates all indirect tax levies into asingle tax, except customs replacing multiple tax levies, overcoming the limitations of existing indirect tax structure, and creatingefficiencies in tax administration. Therefore, GST is a broad based and a single comprehensive tax levied on goods and servicesconsumed in an economy. However, there is a huge opposition against its implementation. The entire nation is apprehensive aboutGST and its implications.Keywords: goods and service tax, Indian economy and value added taxIntroductionSimply put, goods and services tax is a tax levied on goods andservices imposed at each point of sale or rendering of service.
Such GST could be on entire goods and services or there couldbe some exempted class of goods or services or a negative listof goods and services on which GST is not levied. GST is anindirect tax in lieu of tax on goods (excise) and tax on service(service tax). The GST is just like State level VAT which islevied as tax on sale of goods. GST will be a national levelvalue added tax applicable on goods and services.
A major change in administering GST will be that the taxincidence is at the point of sale as against the present system ofpoint of origin. According to the Task Force under the 13thFinance Commission, GST, as a well-designed value added taxon all goods and services, is the most elegant method toeliminate distortions and to tax consumption.One of the reasons to go the GST way is to facilitate seamlesscredit across the entire supply chain and across all States undera common tax base.
It is a tax on goods and services, whichwill be levied at each point of sale or provision of service, inwhich at the time of sale of goods or providing the services theseller or service provider can claim the input credit of tax whichhe has paid while purchasing the goods or procuring theservice. This is because they include GST in the price of thegoods and services they sell and can claim credits for the mostGST included in the price of goods and services they buy. Thecost of GST is borne by the final consumer, who can’t claimGST credits, i.e. input credit of the tax paid.Main BodyNow, let us have a look on the benefits of GST to thegovernment, businesses and individuals.
BenefitsTo the government1. It generates a stable and predictable tax income in bothgood and weak economic environment.2. It is an efficient tax due to the comparatively lower cost ofadministration and collection.3. It allows the Government to lower corporate and personalincome taxes, which in turn encourages more foreign directinvestment.
This leads to overall economic growth.To businesses and individuals1. Most large, established businesses are GST registered –getting your business GST registered is often a signal tocustomers that your business is an established business andhas certain size.2. GST is a fairer tax system. It taxes the self-employed andwage earners only when they spend their money.3.
GST taxes apply only on consumption. Savings andinvestment are not taxed. This will encourage people tosave and invest in productive activities.4. Cost of doing business is reduced, thereby contributing tolower prices. Businesses do not suffer a tax cost due to themulti-stage credit mechanism since the real taxpayer is theend-user.Other benefits of GST1.
Talking about the long-term benefits, it is expected thatGST would not just mean a lower rate of taxes, but alsominimum tax slabs. Countries where the Goods and ServiceTax has helped in reforming the economy, apply only 2 or3 rates – one being the mean rate, a lower rate for essentialcommodities, and a higher tax rate for the luxuriouscommodities.2. The impact of GST on macroeconomic indicators is likelyto be very positive in the medium-term. Inflation would bereduced as the cascading (tax on tax) effect of taxes wouldbe eliminated.
The revenue from the taxes for thegovernment is very likely to increase with an extended taxnet, and the fiscal deficit is expected to remain under thechecks. Moreover, exports would grow, while FDI (ForeignDirect Investment) would also increase. The industryleaders believe that the country would climb several laddersin the ease of doing business with the implementation of themost important tax reform ever in the history of the country.3. GST will remove cascading effect of taxes imbedded incost of production of goods and services and will provideInternational Journal of Commerce and Management Research76seamless credit throughout value chain. This willsignificantly reduce cost of indigenous goods and willpromote ‘Make in India’. The sectors which have longvalue chain from basic goods to final consumption stagewith operation spread in multiple states such as FMCG,pharma, consumer durables, automobiles and engineeringgoods will be the major beneficiaries of GST.4.
GST will facilitate ease of doing business in India.Integration of existing multiple taxes into single GST willsignificantly reduce cost of tax compliance and transactioncost.5. Stable, transparent and predictable tax regime willencourage local and foreign investment in India creatingsignificant job opportunities.
6. Electronic processing of tax returns, refunds and taxpayments through ‘GSTNET’ without human intervention,will reduce corruption and tax evasion. Built-in check onbusiness transactions through seamless credit and returnprocessing will reduce scope for black money generationleading to productive use of capital.7. Significant reduction in product and area-based exemptionsunder GST will widen the tax base with a consequentreduction in revenue neutral rate. This will enable thegovernment to keep GST rates lower which may havefavourable impact on prices of goods in the medium term.The tax rate for services however may go up by 2 to 3%from the present level of 15%. The adverse impact of rateincrease on services will be partially neutralised byavailability of seamless input tax credit.
8. GST will eliminate the scope of double taxation in certainsectors due to tax dispute on whether a particulartransaction is for supply of goods or provision of servicesuch as licensing of intellectual properties like patents andcopyrights, software, e-commerce and leasing.Problems with GST1. While the GST will simplify tax structure, it will increasethe burden of procedural and documentary compliance.Number of returns will increase significantly so also theextent of information. For instance, a real estate developeror contractor will have to file 61 returns in a year comparedto 24 returns at present.
Similarly a taxable personproviding services from several states will have to takeregistration and file return in all such states. Currently asingle centralised registration is required in such cases.2. GST will also have impact on cash flow and workingcapital. Cash flow and working capital of businessorganisations which maintain high inventory of goods indifferent states will be adversely affected as they will haveto pay GST at full rate on stock transfer from one state toanother. Currently CST/VAT is payable on sale and notstock transfers.3. It is also pertinent to note that all indirect taxes will not besubsumed in GST.
Electricity duty, stamp duty, excise dutyand VAT on alcoholic beverages, petroleum products likecrude, natural gas, ETF, petrol and diesel will not besubsumed in GST on its introduction. These taxes will formpart of the cost of these goods when used as inputs indownstream products. Hence those sectors where thesegoods form significant input cost such as plastics andpolymers, fertilisers, metals, telecom, air transport, realestate will not get full benefit of GST.4. Major beneficiary of GST would be sectors like FMCG,Pharma, Consumer Durables and Automobiles andwarehousing and logistic industry.
5. High inflationary impact would be on telecom, banking andfinancial services, air and road transport, construction anddevelopment of real estate,6. While GST is eagerly awaited by the industry, the legalprocess to implement GST in India is quite long andcomplex. After the Constitution Amendment Bill is passedby the Parliament with two-thirds majority, it will have tobe passed by at least 15 states. There after GST council hasto be constituted which will recommend model GST lawand GST rates. On such recommendation, GST Act andRules have to be enacted by the Parliament and each stateassembly.
Then implementation date has to be notified. Itis therefore quite important that the ConstitutionAmendment Bill is passed in the current Monsson Sessionif GST is to be implemented during the tenure of presentParliament which ends during 2019.ConclusionThe proposed GST regime is a half-hearted attempt torationalize indirect tax structure. More than 150 countries haveimplemented GST. The government of India should study theGST regime set up by various countries and also their falloutsbefore implementing it. At the same time, the governmentshould make an attempt to insulate the vast poor population ofIndia against the likely inflation due to implementation of GST.
No doubt, GST will simplify existing indirect tax system andwill help to remove inefficiencies created by the existingcurrent heterogeneous taxation system only if there is a clearconsensus over issues of threshold limit, revenue rate, andinclusion of petroleum products, electricity, liquor and realestate. Until the consensus is reached, the government shouldresist from implementing such regime.