One nation, one tax now a reality

One nation, one tax now a reality
One nation, one tax now a reality

The introduction of GST has passed of smoothly and the economy looks set to enter a higher growth trajectory once the initial teething troubles are sorted out. At the stroke of the midnight hour on the intervening night of June 30 and July 1, while the world slept, much of India was wide awake, watching President Pranab Mukherjee and Prime Minister Narendra Modi formally launch the much awaited Goods and Services Tax (GST). At the stroke of the midnight hour, India was transformed - from 29 discrete markets each with its own labyrinthine tax laws to one common market. A long held dream - of one nation, one tax - shared by every political party and many experts, had become a reality Doomsday predictions of financial chaos have not yet come to pass. Dark forecasts of runaway rise in prices, desperate shortages of essential goods and hapless consumers wringing their hands in despair have also not been borne out by events on the ground. Yes, some traders' bodies are unhappy, some consumers are trying to figure out the impact on their household budgets and many businesses are still working out the impact the new tax will have on their fortunes. But that was to be expected. As everyone from the Prime Minister to Finance Minister Arun Jaitley to the mandarins in this ministry have said, there will be teething troubles. No initiative this big can get off the ground without some initial niggles. How long this phase will last is the question, but the government and several large industry bodies and ratings agencies are confident that GST will set India back on the path of high growth. Ratings positive A day after the Modi government introduced GST, the move received a massive vote of confidence from US ratings agency Moody's Investors Service, which said the new tax regime will be positive for the country's credit profile as it will increase the government's revenues through improved tax compliance. “It will support higher government revenue generation through improved tax compliance and administration. Both will be positive for India's credit profile, which is constrained by a relatively low revenue base,” a statement released by Moody's said. “We expect improved tax compliance to be driven by: (1) Incentivisation of tax credits in a GST system; (2) greater ease of compliance through usage of a common, shared IT infrastructure between the central government and the states; and (3) a reduction in the overall cost of compliance from simplified tax rates, uniform across the country... We expect the net impact of GST on government revenues to be positive,” the statement added.

Higher GDP growth Moody's expects GST to contribute to productivity gains and lead to higher GDP growth over the medium term by improving the ease of doing business, unifying the national market and boosting India's attractiveness as a foreign investment destination. This is largely in line with the expectations of experts and analysts who have forecast a 1.5-2.0 percentage point rise in GDP growth rates over the next two-three years as a result of GST. Billionaire investor Rakesh Jhunjhunwala has predicted, in a recent interview to a leading financial daily, India's GDP growth to touch double digits by 2019-20.
How GST will help
GST is a destination-based tax that will replace 17 taxes and 23 central and state cesses into a single national levy. It has four tax slabs of 5 per cent, 12 per cent, 18 per cent and 28 per cent. Prior to July 1, India was one country but, in terms of taxation, it was actually 29 different jurisdictions, with the Centre and each state levying a bewildering number levies. This resulted in cascading taxes, massive complexities, higher prices for consumers, difficulties in administering the indirect tax regime and largescale corruption.
Smooth drive across state borders
A common complaint that most businessmen have about doing business in 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 was a common sight to see miles-long lines of trucks parked at state borders while petty officials go about their task of calculating taxes. Already, states such as Tamil Nadu, Andhra Pradesh and Karnataka have dismantled border checkposts that had hitherto slowed down the transportation of goods into their states as officials checked documents and bills and sometimes carried out physical inspection of the goods being transported. Other states like Assam, Madhya Pradesh and Bihar have said they will remove their border checkposts within a few days. And states like Gujarat, West Bengal, Haryana, Maharashtra, Rajasthan, Chhattisgarh and Odisha had already dismantled their checkposts earlier in anticipation of GST. A 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 corporates spend an average of 6-8 per cent of sales towards logistics. GST is expected to lead to a cost 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
Prior to the introduction of GST, the same item would often be priced differently in different states because of local levies. Alternatively, companies that wanted to sell its products at a uniform price across the country - for example, a small bottle of Coca Cola at Rs 5 - would have to tweak prices for each state so that the final post-tax selling price remained the same. This increased the complexities of calculating taxes and also increased 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 inventories more efficiently. This will reduce transaction costs and improve efficiency levels across India Inc.
Prices unlikely to rise
Allaying the apprehensions of the ordinary consumer as well as some experts, former Revenue Secretary Shaktikanta Das has said the apprehensions about an all-round price rise and a resulting spike in inflation are misplaced. “The input tax credit will have a moderating impact on the so-called increase in (some) tax rates.... You need to see the whole basket. You cannot pick up five items and say prices have gone up,” he said, adding that the initial hiccups in implementing the new tax regime will be sorted out in two to three months.
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, i.e. 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 partners. This will necessitate a digital 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.
Myths busted
A day after the introduction of GST, Revenue Secretary Hasmukh Adhia took to social media to clear up some apprehensions expressed by experts and the ordinary Indian. We reproduce the seven myths he busted below:
Myth 1:
Businesses need to generate all invoices on computer/ internet only
Reality:
Invoices can be generated manually also
Myth 2:
Businesses need internet all the time to do business under GST
Reality:
Internet will be needed only while filing monthly returns under GST
Myth 3:
Businesses have provisional ID but waiting for final ID to do business
Reality:
Provisional ID will be your final GSTIN number. Carry on with your business
Myth 4:
My item of trade was earlier exempt so I will immediately need new registration before starting business now
Reality:
You can continue doing business and get registered within 30 days
Myth 5:
Businesses have to file three r eturns per month
Reality:
Businesses have to file only one return with three parts. The first part has to be filed by the business while the two other parts are auto-populated by the computer
Myth 6:
Even small dealers will have to file invoice wise details in the return
Reality:
Those in the retail business (B2C) need to only file the summary of total sales
Myth 7:
New GST rates are higher compared to earlier VAT
Reality:
It appears higher because excise duty and other taxes which were invisible earlier are now subsumed in GST and so, are visible now
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 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. However, the dual jurisdiction of both the Centre and the states could pose hurdles to its smooth administration. 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 will also continue.
Impact of GST
Prices of most goods to decline:
Prior to July 1, a majority of goods were 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 of 12-18 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 small. The prices of these goods will rise.
Services to become dearer:
Service s were taxed at 14 per cent. After GST, this has risen to the standard rate of 18 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, i.e. 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 taxes paid. At present, they get offsets for only some of the central levies.
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