Goods and Service tax is one of the biggest indirect tax reform and thus, amongst the most important topics for competitive examination. GST Act was passed by the Parliament on 29th March 2017 and came into effect from 1st July 2017.
What is GST?
It is a comprehensive, multi-stage and destination based tax, levied on every value addition. It is applicable all across the country including Jammu and Kashmir.
It is comprehensive in the sense that it will be applicable on manufacture, sale and consumption of goods and services throughout India and replacing various taxes levied by both centre and state governments.
GST is multi-stage in the sense that it will be applied at every stage of value chain.
In this case we witness that the pink banner shows the cost of the product, the green box shows the rate of tax and the orange box shows the value of Tax. Thus if we add the total tax that was paid in the manufacturing of sandwich from the starting is sum of tax at all points i.e 2 + 1.5 + 1 = 4.5 rupees. However, we see that there is cascading of tax, as instead of paying for the value addition, every point at value chain is paying for the whole value of product irrespective of cost incurred initially for which the supplier had already paid tax. Thus, GST is the solution to solve this cascading of tax at every location.
Now, with GST the tax to be paid will be as follows.
Thus, the total tax to be paid will be 1 + 0.5 + 0.5 = 2 Rupees. Thus, this will lead to solving the problem of cascading of taxes and hence will be helpful for the end consumer.
This, is done through input tax credit method. Input tax credit method reduces the tax on inputs from tax to be paid for outputs.
Benefits of GST:
Harmonisation of tax structure for levying indirect tax.
Foster Cooperative federalism
Ensure better compliance.
Creation of national common market.
Challenges for the Government:
The exclusion of certain critical taxes, notably taxes on petroleum products, electricity, stamp duties on immovable properties and excise duties on alcohol, till a date is notified by the council, leaves a gaping hole in the plan to implement a common indirect tax regime. These tax account for a quarter and a half of the total revenue of the states.
Exclusion of stamp duties for real estate transactions might further motivate the use of black money in transactions relating to land and immovable property which too have a cascading effect.
Harmonization of the tax system across states does not necessarily call for a uniform tax rate, but rather a uniformity in rules, procedures and administrative mechanisms of tax collection. If such uniformity is ensured, it could lead to greater compliance resulting from efficiency of tax administration and a superior information network. In its current form, the GST is in itself no guarantee for better tax compliance.
Quest for a uniform tax rate has successfully diverted attention from the unequal consumption bases of states. High-income states with a relatively developed manufacturing sector have already voiced their reservations about allowing indirect taxes to be subsumed by the GST, whether in the present or in the past. However, the economies of low-income states with low consumption bases are largely informal and agrarian. Such states may not stand to gain much from the imposition of a common GST.
Direct tax contribute meagre 5.47% of India's GDP. As well acknowledged by experts, Indirect taxes are regressive and affect poor more beside being inflationary. Given India’s low tax–GDP ratio, the excessive attention being given to the GST should not be allowed to sidetrack discussions on the much-needed reforms in India’s direct tax regime.
Observations of Economic Survey:
50% increase in number of indirect taxpayers.
GST base among the states is closely linked to the size of their economies i.e. Gross state domestic product. Kerala is an outlier due to its remittances which compensate for its lag in manufacturing. Thus, the fear of large states for losing on their tax revenue is put at rest.
16% is the estimated revenue neutral rate i.e. the rate at which the revenue post GST will be equal to the revenue after application of various central and state taxes which have been subsumed by GST.
Small traders have not largely opted for Composition scheme and have opted for regular registration showing that the motivation for dealers is beyond just supplying to bigger firms. Mostly small firms want to be part of GST because they wish to buy from large firms and thus avail input tax credits which are not available under composition scheme.
The correlation of per capita GSDP with international exports is stronger than with intra-state trade. Thus, states with large exports are more prosperous compared to states with larger intra-state trade.
Nearly 53% of the non-agricultural workforce(240 million) is in the formal sector.
It has opened up a whole new world for research into Indian economy which can help with better policy formulation and better targeting.
The kind of cooperative federalism initiated by the GST Council model can be duplicated in other policies also leading to growth of every state and India as a whole.
Application of technology for GST at every point in the value chain and for filling returns will lead to battle the parallel economy.