One nation, one market, one GST
On July 1, the government of India (EPI) (INDY) (INDA) implements a significant tax reform in the country; a single indirect tax, the Goods & Services Tax (GST). Once successfully introduced, the tax reform is expected to aid overall growth in the economy. Economists expect the tax reform to add 1-2% to India’s annual growth rate. The new tax regime could also prove to be a catalyst in achieving its other economic goals for India including:
- promoting the manufacturing sector
- boosting exports by making production more competitive
- creating more jobs
- improving the investment climate
- cutting down tax evasion
- lowering the compliance cost to businesses
India’s biggest ever tax reform: what is changing?
The GST will be imposed mainly on the supply of goods and services, so the liability would now shift from the manufacturer to the consumer, marking the beginning of a tax revolution in this Asian (AAXJ) (VPL) nation. Under the new tax regime, a tax will eventually be borne at the point of consumption rather than the point of production. The tax department will be able to track value addition at each step and collect tax proportionate to the value added at each stage. One of the biggest changes brought about by the GST in the Indian tax regime is that it will help generate revenue to the states where the consumer resides, as opposed to the state from where goods are produced.
As a new form of tax, it seeks to replace all central and state taxes and levies. Accordingly, the GST would subsume numerous existing taxes:
Taxes Subsumed in GST
|Central Taxes||State Taxes|
|Excise duty – central and additional||Value added tax (VAT), Sales Tax, Entertainment Tax|
|Service tax||Entry Tax and Octroi|
|Additional customs duty or Countervailing Duty (CVD)||Luxury tax|
|Special additional customs duty||Purchase tax|
|Central surcharges and cesses||Taxes on lottery, bets, gambling etc. State surcharges and cesses|
Basic Customs Duty will continue on exports, as is, since it outside the scope and applicability of GST.
The Constitution of India provides a dual policy with a clear division of powers between the Union and the 29 States. In this two-tier system, the central government has the final say in all the matters and in this way India is federal but unitary. For the first two years, the GST would be levied by both the Centre (under the name of Central GST or CGST) and the State (State GST or SGST). An Integrated GST (IGST) would be levied on all inter-state supplies of goods and services, be it a sale or stock transfer by the Centre and then transferred to the destination state. Starting from the third year, all forms of GST will be merged into one single tax.
Currently, there are four tax rates for goods and services—5%, 12%, 18% and 28%. The list of eligible items, however, excludes crude oil, petrol, diesel, jet fuel, natural gas, as well as liquor, real estate and electricity from the purview of GST. Oil and liquor are among the biggest tax revenue sources for the central and state governments and were, therefore, part of a compromise that the Union government had to accept as the states wanted to keep these items out of the new regime. Apparently, these are items on which tax collection is the easiest. Keeping them within the GST system gives little liberty to individual states to revise rates on their own.