GST: A Boost to Indian Economy

INTRODUCTION
GST is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. It is a system of taxation where there is a single tax in the economy for goods as well as services. It is based on a tax-on-value-add concept which avoids duplication of taxes. The GST when introduced can eliminate all the indirect taxes. France is the first country that introduced GST. The assumed rate of GST is about 16%-17% which is much lesser when compared with the current rate of taxation of about 35%-40%.
 
THE NEED FOR GST
In the present system of Indirect Tax, there is ‘cascading effect of taxes’, i.e. ‘taxes on taxes’. For instance, say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. While B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax.
 
 
A few years ago, this was the case with the sales tax where every next stage dealer used to get credit of the tax paid at earlier stage against his tax liability. This reduced an overall liability of many traders and also helped to reduce inflationary impact this had on the prices.
The same concept was introduced for Central Excise Duty where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods. With effect from 2004, this system was extended to Service Tax also and to a huge extent, the problem of cascading effect of taxes is resolved by these measures. However, there are still problems with the system, that is, the credit of VAT is not available against excise and vice versa, i.e. the CENVAT credit is not allowed on the VAT paid on the input raw material. This is a tax on tax.
 
PRESENT SYSTEM OF INDIRECT TAXES
The various indirect taxes that are presently levied by the Central & State Governments:

S. No.	Tax	Levy By	Nature (Levied On)	Can be set-off against	Covered by GST
1.	Central Excise	Centre	Manufacture	1,2	Yes
2.	Service	Centre	Providing Services	1,2	Yes
3.	Customs	Centre	Import	-	No
4.	CVD under Customs	Centre	Additional Import Duty (compensating Excise)	1,2	Yes
5.	SAD under Customs	Centre	Additional Import Duty (Corresponding Sales Tax)	1,2	Yes
6.	CST	Centre	Inter-State Sales	-	Yes
7.	VAT	State	Sales within a State	7	Yes

 
The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST.
 
THE DUAL GST MODEL
The taxes levied on each kind of transaction under the Dual GST Model are shown in the chart below:
The abbreviations used in the chart:
SGST – State GST, collected by the State Govt.
CGST – Central GST, collected by the Central Govt.
IGST –  Integrated GST, collected by the Central Govt.
 

Transaction	New System	Old System	Comments
Sale within the State	SGST and CGST	VAT & Excise /ST	Under the new system, a transaction of sale within the State shall have two taxes, SGST – which goes to the State; and CGST which goes to the centre.
Sale outside the State	IGST	CST & Excise /ST	Under the new system, a transaction of sale from one state to another shall have only one type of tax, the IGST – which goes to the centre.

 
Against IGST, both the input taxes of CGST and SGST are taken as credit. But the SGST never went to the central government, still the credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.
ADVANTAGES OF GST

1. Reduction in Prices : Due to full and seamless credit, manufacturers or traders do not have to include taxes as a part of their cost of production, which is a very big reason to say that we can see a reduction in prices.

 

1. Increase in Government Revenues: The government may wish to introduce GST at a Revenue Neutral Rate of 17-18% for most goods, 12% for merit goods and 40% for demerit items like tobacco products, luxury cars, etc., in which case the revenues might see a significant increase in the long run.

 

1. Less compliance and procedural cost: Instead of maintaining big records, returns and reporting under various different statutes, all assesses will find comfortable under GST as the compliance cost will be reduced. Under this major reform, central and state taxes will get subsumed into GST, which will reduce the multiplicity of taxes, and thus bring down the compliance cost.

 

1. Move towards a Unified GST: Internationally, the GST is always preferred in a unified form (that is, one single GST for the whole nation, instead of the dual GST format). Although India is adopting Dual GST looking into the federal structure, it is still a good move towards a Unified GST which is regarded as the best method of Indirect Taxes.

 
Experts believe that combination of benefits mentioned above will result in higher GDP growth as much as 1-2% above the current growth rate.
BAD SIDE OF GST
 

1. Critics have argued that the GST is a regressive tax, which has a more pronounced effect on lower income earners, meaning that the tax consumes a higher proportion of their income, compared to those earning large incomes.

 

1. It was argued that the introduction of the GST would negatively impact the real estate market as it would add up to 8 percent to the cost of new homes and reduce demand by about 12 percent.

 

1. India has opted for a dual-GST model. Critics claim that CGST, SGST and IGST are nothing but new names for Central Excise/Service Tax, VAT and CST and hence GST brings nothing new to the table. The concept of value-add has never been utilised in the levy of service while under Central Excise the focus is on defining and refining the definition of manufacture instead of focusing on value additions.

 

1. The GST is a destination based tax, not the origin one. In such circumstances, it should be clearly identifiable as to where the goods are going. This shall be difficult in case of services, because it is not easy to identify where a service is provided.

 
 
IMPACT ON INDIAN COMPANIES
Implications of GST for some of India’s leading firms are listed below:
 

1. Dish TV: The DTH industry is unlikely to get any relief on tax front, but may benefit indirectly once GST is implemented. Tax evasion in the cable industry will come down forcing operators to raise tariffs. This will allow DTH operators to raise prices.

 

1. Godrej Consumer Products: GST rate should be tax neutral for most FMCG players. However, FMCG firms will benefit from lower warehouse cost, more efficient supply- chain planning and inventory reduction.

 

1. M&M: Auto sector would benefit from reduction in duties on large SUVs and cars as GST rate is likely to be lower than the present excise plus VAT rate. Tractors may be taxed at lower rate in GST.

 

1. Plastiblends: Unorganized players, which account for a major share of the plastic industry, will come under tax net and may not be able to pay the high dealer margins they currently pay.

 

1. PVR Cinemas: The implementation of GST will lead to lower entertainment taxes. The company expects its margin to go up by about 200-300 basis points.

 

1. Transport Corporation of India: Demand for large warehouses will increase, which will benefit TCI. Truck utilization will also go up.

 
POSITIVE IMPACT ON INDIAN ECONOMY
 

1. Speeds up economic union of India.
2. Lead to better compliance and revenue buoyancy, replacing the cascading effect [tax on tax] created by existing indirect taxes, tax incidence for consumers may fall, and lower transaction cost for final consumers.
3. By merging all levies on goods and services into one, GST acquires a very simple and transparent character.
4. Uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present.
5. Increased tax collections due to wide coverage of goods and services.
6. Improvement in cost competitiveness of goods and services in the international market.

 
 
CONCLUSION
Presently, lots of speculations are going as to when the GST will actually be applicable in India. Looking into the political environment of India, it seems that a little more time will be required to ensure that everybody is satisfied. The states are confused as to whether the GST will hamper their revenues. Although the Central Government has assured the states about compensation in case the revenue falls down, still a little mistrust can be a severe drawback. It seems appropriate to conclude by briefly noting the policy implications of the results. Firstly, , the macroeconomic impact of a change to the introduction of the GST is significant in terms of growth effects, price effects, current account effects and the effect on the budget balance. Secondly, in a highly developed open economy with a high and growing service sector, a change in the tax mix from income to consumption-based taxes is likely to provide a fruitful source of revenue. Lastly, the scope to lower fiscal deficit in fiscal 2015 is limited given large roll-over of subsidies from last fiscal and little possibilities of implementation of GST within this year.  In the base case, it is believed that partial GST – one that excludes petroleum goods is most likely. Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017.