India’s tax overhaul: the introduction of GST
A significant step being taken by the government of India (EPI) (INDY) (INDA) towards making the country a unified common market is the introduction of an indirect tax, GST. “The rollout of the goods and services tax (GST) on 1 July will, in a single stroke, convert India into a unified, continent-sized market of 1.3 billion people,” Prime Minister Narendra Modi wrote in an open editorial for the Wall Street Journal while visiting the US during the last week of June.
Difference between the Current Tax Structure and GST Tax
| Current Tax Structure | GST Tax | |
| Number of Laws | There are separate laws for separate taxes and respective VAT on states | There is only ONE law |
| Tax Rate | Existence of separate tax rates | There will be one CGST rate and uniform SGST rate across all the states |
| Cascading effect (Taxes on Tax) | Presence of cascading effect of taxes due to multiplicity in taxes | Cascading effect is reduced which makes it very simple |
| Tax Burden | High tax burden on taxpayers | Tax burden is much reduced |
| Tax Structure | Presence of multiple taxes makes compliance difficult | Subsuming or absorbing the taxes into one makes compliance simple and easy |
| Prices for Consumers | Usually very high due to cascading effect of taxes | Prices are expected to be reduced |
Slated to be introduced from July 1 this year, the Goods and Services Tax (GST) seeks to address the following shortcomings of the current indirect tax structure in this Asian (AAXJ) (VPL) economy:
- The Indian market is currently very fragmented due to several tax barriers. The GST would help unify the Indian goods and services market. With the introduction of the GST, the Indian economy would be collapsing 17 central, state and local body taxes into a single tax, thereby reducing the multiplicity of internal taxes.
- The cascading effects of taxes on costs have made indigenous production less attractive. A single tax applicable on sale (rather than production) should lend a new life to such production, in effect helping the economy attain more self-reliance.
- Compliance costs should reduce. These have been inflated until now by the complex multiple taxes imposed at various levels of the production and sales cycle. Simpler tax compliance procedures would also encourage more and more businesses to come into the formal tax net. As more and more of the informal economy becomes a part of the formal economy, the spending capacity of both the central and state governments would improve, thereby contributing to the nation’s GDP.
