The author of this piece is Allan George David, a second year student at Rajiv Gandhi National University of Law, Punjab
Goods and Service Tax(GST) is one topic which has been the subject of intense debates both in the parliament and within the Indian public during the last year. Hailed as a “great step by team India” by the PM Narendra Modi, the GST has been promised to revolutionize the Indian economy and make consumer the “king of the market”. This had led to many Indians asking the question: What is the GST and how will it impact an average Indians’ daily life?
The Goods and Services Tax refers to a single indirect tax throughout India which would subsume the various indirect taxes including central excise duty, services tax, additional customs duty, surcharges, state-level value added tax and octroi. It was first implemented by France in 1954 and is currently implemented in 160 countries around the world.
In India, the idea was first put forward by P Chidambaram, the then finance minister in his Union Budget of 2007-08. In the Rajya Sabha it was referred to a Select Committee which submitted its report on 22nd July 2015. The amended bill was passed by the Rajya Sabha on 3 August 2016, the Lok Sabha on 8 August 2016 and finally received Presidential assent on 8 September 2016. India will follow the dual GST system i.e. a system in which GST will be levied by both the Central and State Government. This system will begin from 1st July 2017.
Currently, the fiscal powers between the Center and the State has been clearly laid down in the Constitution. The Center can levy taxes on the manufacture of goods while the state has the power to levy taxes on the sale of goods. Only the Center has the power to levy taxes on services. Most businesses today have to pay and comply with 3 different taxes – excise, VAT, and service tax. Also, different states have different VAT laws. This creates problems with interstate sales. However, the GST system remedies all the drawbacks of the current system.
The concept of GST is not tough to understand. GST is basically a single tax instead of all the various confusing taxes that are levied on everyday goods and services. It remedies the ‘tax on tax’ system currently followed. For e.g. a manufacturer of cotton cloths buys raw materials like cotton, buttons and other equipment that is required to stitch a shirt. This raw material costs the manufacturer Rs 100. This Rs 100 includes a 10% tax of Rs 10. Once the shirt is made, the manufacturer has added his own value to the input material. As a part of this example, if one were to assume that the value added is Rs 40, then the total cost of the shirt is now Rs 140 (Rs 100 + Rs 40). With a 10% tax rate, the tax on this shirt would be Rs 14. However, since the manufacturer has already paid Rs 10 as tax while purchasing raw material, under GST the tax incidence will now be only Rs 4(Rs 14 – Rs 10). Now, the wholesaler would buy the shirt at Rs 140 and would keep a margin on it to make profit. Assuming that the margin is kept at Rs 40, the cost of the shirt now becomes Rs 180. Applying the same 10% principle, the tax would amount to Rs 18. But, out of this Rs 14 is already accounted for from the manufacturer. So, the effective tax incidence for the wholesaler would be Rs 4 (Rs 18 – Rs 14).
The final stage is that of the retailer. Now that the retailer has bought the cloth at Rs 180, he would also keep a profit margin. Say the margin that the retailer decides on is Rs 20. The total cost now becomes Rs 200. Using the 10% rule, the tax would be Rs 20. However, with Rs 18 already accounted for in the earlier two stages, the tax incidence would be Rs 2 (Rs 20 – Rs 18). To sum up, the total GST for the entire chain, from manufacturer to retailer is Rs (10 + 4+ 4+ 2 = 20). This is in stark contrast to the earlier system in which 10% tax would be applied at each stage thus leading to a total tax of Rs 62(10+14+18+20) This system will be followed throughout India with taxes being collected by both the State and Central government.
While it ultimately depends on the retailer whether he passes on the benefits of the reduced tax burden on the consumers, it will surely eliminate the cascading effects of taxes on production and distribution cost of goods and services. More importantly, it will make the process of GST (from registration to filing returns) online thus making the process efficient and less cumbersome. It will also reduce the time required for the transport of goods throughout the country as time is wasted at check posts for checking and receiving octroi payments. It also helps in e-commerce transactions as India is transformed into one whole market with a single tax applicable to all the goods.
Notwithstanding the initial hiccups, the GST is expected to greatly reduce the confusion and compliance requirements of the different taxes while increasing the taxpayer base by including the Small and Medium-sized Enterprises(SMEs) in the taxpayer base. In the words of the FM Arun Jaitley it is expected to increase the pace of India’s economic growth by almost 2%. Hence, the GST amendment truly is India’s biggest tax reform since independence and another step by India towards becoming the biggest economy of the world.