GST, benefits and challenges ahead

Through taxes, government in reality decides how to draw the

required resources from the nations households and
businesses for public purpose- the money raised so is the
vehicle by which real resources are transferred from private
goods to public goods. Some say tax is a mode of income
distribution. But all in all tax is imposed by the respective
governments to fulfil their obligations on the expenditure front.
Taxation system in India is on three levels: centre, states and
combination of the two. And if we consider constitution, it is
mentioned in the Article 246(schedule vii), about the
distribution of power between Parliament and State legislature
about taxation. There are three methods of taxation prevalent
in economies with their individual merits and demerits. These
are Progressive Taxation, Regressive Taxation and Proportional
Taxation. Major economies in the world follow the route of
Progressive Taxation and India is no exception to this rule. The
idea here is less tax on the people who earn less and higher tax
on people who earn more.
Broadly speaking, in India, there are two types of tax which are
levied. They are Direct Tax and Indirect Tax. Direct tax is levied
directly on the tax payers and is paid to the government
directly. It includes Income Tax, Corporation Tax, Property Tax,
Estate Tax, and Gift Tax. Whereas, an Indirect Tax is a tax
collected by an intermediary from the customer such as Sales
Tax, Excise Duty, VAT and Service Tax.
Indian tax system has its own problems. Taxes like Sales tax
and VAT leads to cascading effect, that is you pay more tax on
tax. And this leads to people avoiding tax, selling without bill,
increase in Black Money, inflation, Fiscal deficit increase and
reduction of credit rating of our country. It is not that our
governments in the past have not done anything to cover these
loop holes. In 1970, L K Jha committee recommended ModVAT
system in place of VAT. Which later govt. Analysed and changed
to CENVAT. It had input credit system and self assessment,

random checks by state commercial departments. But every

state has different rates, they demanded cess and surcharges
according to their need and all this differences lead to false
invoicing and the problem continued. Government came up
with TIN (Tax Identification Number) in 2005, in its bid to
address the issue on Cascading effect. Central Sales Tax was
introduced to address issue of inter-state trade and commerce
but was unable to rectify all problems.
In order to overcome all these challenges, government in India
has decided to implement Goods and services tax (GST) in India
from April, 2016. The fiscal consolidation task force under Vijay
Kelkar which was formed in 2004 recommended that India
should implement GST. It is not that GST route is followed for
the first time, Countries like Canada, Newzealand, Malaysia,
Singapore and Austrailia all have implemented GST and they
have seen positive result of it in their growth.
It was
announced in the budget of 2008 that the GST will be
implemented from 2010 but the constitution amendment bill
115 lapsed in Loksabha in 2011. Present government
announced in the budget that the GST will be implemented
from next year and have already tabled the constitution
amendment bill, 122 in the lower house.
GST is a combination of Indirect Taxes with few exceptions. It
has three components, Central GST (CGST), State GST (SGST)
and Integrated GST i.e. combination of both centre and state. It
will implement a uniform tax rate all across country. To decide
on the tax rates and to make further decisions to implement it,
a GST council, a constitutional body under article 279-A, has
been constituted with Finance Minister as Chairman; MOS for
Finance with representatives of all States are part of this
council. It will decide on which union and state taxes to be
subsumed, which goods and services to be exempted, what
should be the registration threshold, principles of inter-state
commerce, special rates during calamities, what should be the
rate of special category states and issue of dispute settlement.

So GST includes, Central excise, Sales Tax, Service Tax, CVD,

Cess, Surcharges, Special duty of customs, excise on Medicines.
Petroleum Products, Stamp duty, Electricity duty and cess and
tax on Alcohol have been given exemption for the time being. A
decision on this will be taken by the Council in the time to
come.
As GST covers both goods and services and intends to
implements standard rates across country with minimum
exemptions it will increase Tax base and Tax collection in the
country. This in turn will lead to business expansion, GDP
increase, more job opportunities for the young demographic of
our country. IGST will help in efficient logistics and will
discourage corporate avoiding inter-state commerce in place of
inter-state transport. Corporate will invest less in opening ware
houses and outsourcing will be encouraged, means more
opportunities for MSMEs, creation of job and increase in tax
base. CGST and SGST will be computed on same base, so it will
not have cascading effect and prices of goods will come down,
increasing buying power of consumers and helping in growth.
There will be no GST on finished products, which will make
export zero rated and people will sell with proper papers
leading to less tax invasion and increase in govts income.
IMF in its latest report on Indian GST system criticised our dual
rate structure, lack of IT infra-structure for data base
management, inept and untrained state officials, complex
credit and compensation system, but govt has tried to address
all these issues and challenges ahead of us. First one is High
RNR (revenue neutral rate) i.e. combination of both centre and
state tax. State empowered committee has decided that rates
of CGST and SGST should be 12.77% and 13.91% i.e. total tax
of 26.68 % should be levied so that states do not suffer
revenue losses. High GST will mean a low competitive edge, a
regressive tax structure, inflation for poor and low ranking on
HID so Vijay Kelkar committee has recommended total tax of
12%, with some exemptions for hill states and special category
states and suggested that petroleum products ,Liquor products,

Electricity should be included with in GST ambit. States are

worried about compensation as IGST will only benefit
destination state where product is sold and not the exporter
state. Highly industrialised states like, Gujarat, Haryana, Tamil
Nadu fear that they will miss out on the revenue of products
produced in their state. In the 14th Finance Commission report
headed by former governor of RBI, V Y Reddy has suggested
that a GST compensation fund should be constituted and states
should be funded for losses through tapering effect for the next
5 years. Another challenge is to decide what should be limit of
registration for GST Registration threshold for VAT is 5 lakhs, for
service tax it is 10 lakhs and for Excise it is 1.5 crores. Since
GST is combination of all these taxes, what should be the
threshold? So central govt has decided that it should be 25
lakhs and for states in special category should be 5 lakhs.
Other challenge is to maintaining huge data base for GST
registration so government has formed Goods and serviced tax
network (GSTN) ltd to give IT services.
IMF in its report also estimated that if a well designed GST
regime is followed it can boost Indias growth by up to 1.5-2 %.
One would hope that mistakes of past will not be repeated and
this uniform tax structure will be implemented with full
commitment. India has already lost 5 years on this issue and
we cannot afford to lose any more time on our path to double
digit growth