Landmark GST Bill Opens India to a Common Market System

Somewhere along the path of errors comes a cumulative benefit. India has passed the much-awaited Goods and Services Tax (GST). The Indian Parliament voted 197 in favour of this bill with none against in the Rajya Sabaha. This bill is being hailed as a landmark tax reform and the biggest since Independence. Under the new bill, the existing system of Value Added Tax (VAT) will be replaced by a comprehensive indirect tax on manufacture that will be identical for both goods and services. The taxes will replace all other indirect taxes levied by the State and Central governments.

GST will be divided into three components – Central GST, State GST and an Integrated GST (which the Central Government will levy on inter-state supply of goods and services). Furthermore, goods and services will be taxed at each stage of sale or purchase. This will be calculated on the input tax credit method, and is aimed at bringing about a single rate of tax in the supply chain. Those who have registered their business for GST will be able to claim tax credits on the amount of GST they have paid in the process. Separate accounting heads for goods and taxation will ensure that indirect taxation remains simple, efficient and transparent.

Need of the Hour

The bugbear of double taxation has been drawing flak from a number of quarters and this bill is the next step in the logical evolution from the central excise duty and state sales tax system. The VAT system was first introduced in 1986, but it was soon evident that more work would need to be done to move the indirect tax policy towards VAT. A comprehensive GST based on the existing VAT model without the double taxation loops that inevitably slip into the procedures for calculating VAT was the need of the hour and when that hour has arrived, the Government has risen satisfactorily to the occasion. After all, more than 120 countries of the world follow the GST principle and to not do so would have mired the Indian economy further.

• The rate of tax is yet to be fixed but in the interim, the Government has outlined the tax policy with certain key recommendations such as:
• A revenue-neutral rate of 15-15.5%, with a standard rate of 17-18% on goods and all services.
• A three-tier rate structure with some essential goods taxed at a lower rate of 12%, demerit goods at a higher rate of 40%; and all other goods at a standard rate of 17-18%.
• A GST rate of 18-19% in case of a single GST rate.
• A PAN-linked taxpayer identification number in line with the prevailing PAN-based system for Income Tax compliance.

The key feature of the GST is that it will demotivate those who are looking for ways to evade tax. Since taxes have to be paid to get an input, credit and goods can only be bought from those who have already paid their end of the tax.

For too long, Indian businesses have been pushing for a single tax rate, especially across state borders. Centrally, GST will absorb excise duty, service tax and additional customs duty. On the state level, VAT/sales tax, purchase tax, luxury tax, entertainment tax and octroi are some of the taxes that will come under the GST purview.

Exports would be zero-rated and imports will enjoy the same tax rates as domestic goods and services. This will greatly facilitate a common market across the country. International exports will also get a fillip and enthusiastic coverage of the GST in Chinese national media indicates that at least our most immediate neighbor is as happy with the bill as we are. HSBC estimates the bill to add 0.8 percentage points to the country’s growth within three to five years.