The GST is still several crucial steps away from reality but the Modi government is moving methodically for its rollout from April 1 next year. On September 1, 2016 Odisha became the 16th state to ratify the Constitutional Amendment Bill that will pave the way for the passage of the Goods and Service Tax (GST) Bill, thus, fulfilling the constitutional requirement of at least half of India's 29 states approving the bill. The President has, since, signed the 122nd Constitutional Amendment Bill into law soon. This has allowed the government to proceed with the formation of the GST Council, which will decide on contentious issues like the GST rates, the mechanism to settle disputes and also come up with a draft GST legislation. Thereafter, the central and state governments will have to pass the central and state GST legislations and announce the date from which it will be implemented. How GST will help India is one country but, actually, it is 29 different markets, with the Centre and each state levying a bewildering number levies. This results in cascading taxes, massive complexities, higher prices for consumers, difficulties in administering the indirect tax regime and largescale corruption. GST will replace central and state taxes such as Central Excise (Cenvat) duty, service tax, central sales tax, entertainment tax, octroi and entry tax, etc. with one tax and bring uniformity in India's taxation structure and lead to cheaper goods and services. (See: GST decoded). Easier and cheaper logistics A common complaint that most businessmen have against India is that it is easier, cheaper and it takes less time to ship goods from Europe to Mumbai than to transport the same goods from India's financial capital to Delhi. The culprit The entry taxes charged by various states as well as the plethora of state-level levies that have to be calculated before trucks can cross state borders. It is a common sight to see miles-long lines of trucks parked at state borders while petty officials go about their task of calculating taxes. GST will subsume all these state-level taxes and so considerably reduce the need for this elaborate and corrupt network of infrastructure and officials at state borders. Transport times will improve dramatically, corruption will be reduced and inventory management costs will fall once these unnecessary network of check posts is dismantled. CRISIL Research report estimates that “the rollout of GST will bring down the logistics costs of companies engaged in the production of non-bulk goods by as much as 20 per cent. Savings will accrue as a result of gradual phasing out of the central sales tax, consolidation of warehouse space, faster transit of goods since local taxes will be subsumed into the GST and as state level check posts will be dismantled.” The same report adds: “Indian corporate spend an average of 6-8 per cent of sales towards logistics. GST is expected to lead to a costs savings of 1.0-1.5 per cent of sales over a 3-4 year period. Eliminating delays at check posts will yield additional savings of 0.4-0.8 per cent of sales, which will take the overall logistics costs savings to up to 1.5-2.0 per cent of sales for companies. These cost savings are, however, more likely to be gradual and back ended as corporates will have to realign their supply chain while ensuring minimum business disruption.”
Improved ease of doing business At present, the same item often costs different amounts in different states because of local levies. Alternatively, companies that want to sell its products at a uniform price across the country - for example, a small bottle of Coca Cola at Rs 5 - have to tweak prices for each state so that the final post-tax selling price remain the same. This increases the complexities of calculating taxes and naturally increases the scope for both disputes and corruption. GST will ensure simplicity and easier administration. Then, companies with operations in multiple states will find it easier to manage their inventory more efficiently. This will reduce transaction costs and improve efficiency levels across India Inc. Fewer exemptions likely India's indirect tax regime is incredibly complex and riddled with dozens of exemptions, making calculations difficult. According to a Crisil report, about 300 items are exempted from central excise duty and a further 90 don't come under value added taxes. The Centre and the states must now agree on which items to exempt and which to bring under the GST net. This will be a tricky issue. Bringing hitherto exempted items under the tax net will increase their prices and, potentially, fuel inflation. At the same time, it is essential to keep exemptions at the minimum possible level in order to keep the overall GST rate low. Low GST rate the key The Chief Economic Advisor has proposed a low standard rate of GST (at which the majority of items will be taxed) of 16.9 per cent to17.7 per cent as the revenue neutral rate, ie, the rate at which the public exchequer is expected to be fully compensated for the changeover to the new system of tax. He has also proposed a low rate of 12 per cent for essential goods and high rate of 40 per cent for demerit goods such as luxury cars, cigarettes, alcohol, etc. This has received broad support from industry and sections of political parties. Leading chamber, the Federation of Indian Chambers of Commerce and Industry said in a statement: "As per current indications and reports, goods will be categorised as being subject to merit rates (12 per cent), standard rates (18 per cent) and de-merit rates (40 per cent)." It added that to keep inflation in check and to cap the tendency to evade taxes, “"the merit rate should be lower and the standard rate should be reasonable”. However, some state governments are batting for higher rates fearing a loss of revenues. It will take all of Finance Minister Arun Jaitley's famous persuasive skills to guide every state and political party to a broad consensus on this issue.
Inbuilt mechanism against evasion GST, which taxes only the portion of value added at each stage of the supply chain, works on a system of tax credits, ie, a downstream member of the supply chain pays tax only on that portion of the value that he adds and receives a credit for taxes paid by his upstream channel. This will necessitate a paper trail from the beginning of the supply chain to the end. As a corollary, it follows that any member of the supply chain who evades taxes will be found out by the IT backend as his downstream partners claim their credits. This will ensure that millions of untaxed and unreported transactions will now come under the tax net, leading to improved collections and higher revenues for the government. On the flip side, this will mean that many items will cost more, thus, increasing the possibility of an overall rise in inflation at least in the short to medium term. Structure of GST Under the Indian Constitution, both the Centre and the states are allowed to levy taxes on goods and services sold within its territory. The GST structure to be adopted respects this by allowing the Centre to levy the Central GST and individual states the State GST within their designated territories. This dual structure means that the central GST rate can be altered only by Parliament while states will be allowed to fix their GST rates above a floor rate but within a narrow band. According to the consensus reached between the Centre and the states, alcohol, which is a massive revenue earner for many states, will remain outside the purview of GST. The present system of imposing existing central and state taxes on petroleum and petroleum products is expected to continue. Impact of GST Prices of most goods to decline: Currently, a majority of goods are taxed at 12.5 per cent excise duty, 12.5-15 per cent VAT plus entry taxes, CST and various cesses, taking the total incidence of taxes to about 30 per cent. Following the imposition of GST, this will fall to the standard rate that is expected to be in the range of 18-21 per cent. Thus, prices of a large number of goods are expected to fall. However, many goods that are currently exempted from taxes or are taxed at concessional rates will have to pay bear the full GST rate as the list of exempted goods is expected to be small. The prices of these goods will rise. Services to become dearer: Service s are currently taxed at 14 per cent. After GST is imposed, this will rise to the standard rate of 18-21 per cent. Thus, services will become more expensive. Exports to become more competitive: GST will enable Indian exporters to live out the maxim: export goods, not taxes. GST is a consumption tax, ie, it is levied at the point of final consumption with all taxes paid at upstream points being given credits. Thus, exporters will get full credit for excise customs duties paid as well as state taxes such as octroi, sales tax, etc. At present, they get offsets for only some of the central levies.