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GST and You PDF
GST and You PDF
TABLE OF CONTENTS
Page
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3
What is GST?
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7
How will GST work?
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10
What will be the rate of tax?
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11
Why states like the idea of GST?
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12
What are the potential areas of conflict?
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13
The fiscal deficit conundrum
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14
What are the advantages of GST?
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14
And what about the GDP?
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What the Media Did Not Tell You About the Goods and Services Tax
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- By Vivek Kaul
On August 3, 2016, the Rajya Sabha, the upper house of Indian Parliament, finally
passed the 122nd Constitutional Amendment Bill for the introduction of the Goods
and Services Tax(GST).
The passing of the Bill will be looked at as an important achievement for the Modi
government. Also, credit must be given to the Modi government for reaching out to
the opposition and getting almost everyone on board (excluding the AIADMK party)
to get the Bill passed in the Rajya Sabha.
To be honest, I didnt think this would happen and which is what I had said in my
past pieces. Nevertheless, the Bill could have been passed during the period 20092014, if the Bhartiya Janata Party, which is in power right now, hadnt opposed it as
vehemently as it did.
The television and the print media have gone totally gaga about the whole thing. If
you were watching any television channel after the GST Bill was passed on August 3,
you would think, looking at the excitement of the anchors, that the Indian per capita
income had just crossed that of the United States.
The excitement of the mainstream media notwithstanding there is a lot that remains
to be done for a Goods and Services Tax to become a reality. Here is what needs to
happen on the legislative front:
a. The Constitutional Amendment Bill will first go back to the Lok Sabha in
order to clear the amendments made to it in the Rajya Sabha. The Lok Sabha
had earlier passed the Bill in May 2015. This should be fairly straightforward
given that the Bhartiya Janata Party led National Democratic Alliance has the
required numbers in the lower house of the Indian Parliament.
b. After this is done, 15 or more states will have to ratify the Constitutional
Amendment Bill.
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What the Media Did Not Tell You About the Goods and Services Tax
c. Then 29 states and two union territories will have to pass their own GST Bills.
d. The Parliament will have to pass the actual GST Act and the interstate GST Act,
which will specific the structure of the tax and enable its collection.
As of now this seems doable given that the two Acts that need to be passed by the
Parliament need a simple majority of more than 50 per cent and not two-thirds
majority as was the case with the GST Constitutional Amendment Bill. Nevertheless,
this will take time and when things take time, it is always possible that political parties
change their mind.
Further, the GST Constitutional Amendment Bill will lead to the creation of the GST
Council comprising of the finance minister of the union government, who will be its
Chairperson, as well as the finance ministers of state governments. The GST Council
will essentially go about setting the tax rates.
Before we go any further, it is important to understand what GST exactly is, and how
will it help improve Indias taxation system.
What is GST?
India currently has many indirect taxes. Indirect tax is essentially a tax on goods
as well as services and not income or profits, for that matter. India currently has a
plethora of indirect taxes both at the state government level as well as the union
government level. The GST will subsume many of these taxes. It hopes to have one
indirect tax for the whole nation and this will convert the country into one unified
common market.
The GST or value added tax(VAT), as it is known in other parts of the world, is already
present in large parts of the world, as can be seen from the following chart.
What the Media Did Not Tell You About the Goods and Services Tax
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99
101
105
113
122
127
132
135
138
140
143
146
149
151
155
158
160
163
165
165
180
160
140
91
120
73
83
100
60
40
20
1
3
4
7
9
11
12
14
18
19
21
22
25
27
30
32
33
34
41
42
45
46
50
61
80
Source: Goods and Services Tax in IndiaTaking Stock and Setting Expectations, Deloitte-Assocham.
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What the Media Did Not Tell You About the Goods and Services Tax
This multiplicity of taxes has led to an inherently complicated indirect tax structure.
As the Select Committee Report points out: Firstly, there is no uniformity of tax rates
and structure across States. Secondly, there is cascading of taxes due to tax on tax.
No credit of excise duty and service tax paid at the stage of manufacture is available
to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no
credit of State taxes paid in one State can be availed in other States. Hence, the prices
of goods and services get artificially inflated to the extent of this tax on tax.
What the Media Did Not Tell You About the Goods and Services Tax
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What the Media Did Not Tell You About the Goods and Services Tax
the country. Crisil Research estimates that eliminating delays at check posts will yield
additional savings of 0.4-0.8% of sales [of companies].
While, the state governments are yet to agree to removal of border check posts, as
and when this happens, it will be one of the bigger benefits of the GST. If it doesnt, it
will make GST a little less useful.
While GST plans to subsume many indirect taxes it does leave out several taxes as
well. Hence, in that sense GST is not a one nation one tax that it is being made out to
be.
What the Media Did Not Tell You About the Goods and Services Tax
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Manufacturer
Wholesaler
Retailer
Total
600
800
1200
2600
600
800
1400
600
200
400
1200
60
80
120
260
60
80
140
60
20
40
120
120
120
C. RST
7. Tax on retail sales (10% of A1/R)
Source: Professor Mukul Asher of the Lew Kuan Yew School of Public Policy, National University of Singapore
There are three levels in the above table the manufacturer, the wholesaler and
the retailer. Lets start with the manufacturer who sells a product for Rs 600 to a
wholesaler. He does not purchase any inputs and makes everything in house (I know
this is an unrealistic assumption, but it just keeps the Maths a little simple).
On this, the manufacturer pays a tax at the rate of 10% which amounts to Rs 60. The
wholesaler sells the product for Rs 800. On this he has to pay a tax at the rate of 10 per
cent. This amounts to Rs 80, but he also gets credit for Rs 60 indirect tax which the
manufacturer has already paid. Hence, his tax outflow amounts to Rs 20.
The retailer finally sells the product for Rs 1,200. On this he pays tax at the rate of 10%.
This amounts to Rs 120. But he gets credit for Rs 80 (Rs 60 paid by the manufacturer
and Rs 20 paid by the wholesaler). Hence, he actually pays a tax of Rs 40. In this way,
there is no cascading effect and all the tax that has already been paid is taken into
account.
What this also tells us is that GST is a destination based tax and will finally accrue
to the government once the final customer has bought the good or the service. This
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What the Media Did Not Tell You About the Goods and Services Tax
explains why parties that rule states like Bihar and Uttar Pradesh have come out in
its support. While these states may not have a large industrial base, they do have
consumers.
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But there might be some starting troubles on this front. The onus is on the customer
to prove that all the suppliers in the value chain have paid their share of taxes, if he
wants to take the input tax credit. This is as per Section 16(11)(c) of the Act. Basically
what the section says is that if a supplier has not furnished proper returns or made
the correct payment, then the customers of the supplier cannot avail of the input tax
credit. And if it has been given, it will be reversed.
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What the Media Did Not Tell You About the Goods and Services Tax
What the Media Did Not Tell You About the Goods and Services Tax
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What the Media Did Not Tell You About the Goods and Services Tax
the order of the day, the octroi will be subsumed into it.
As R Jagannathan writes in a column on Huffington Post India: The Mumbai
Municipal Corporation's Octroi collections annually are in the range of Rs7,000-8,000
crore. Will GST collections in Maharashtra be enough to finance this revenue loss?
This is a question worth asking.
Further, the GST system as it has been envisaged will need a solid information
technology backbone. This information technology system will essentially lead to a lot
of lower level bureaucracy, which runs Indias indirect tax system, becoming useless.
(Think of all those employees manning check posts on state borders for one).
While, the government does not fire employees, a move to GST will lead to the
income from corruption for the lower level bureaucracy coming down. And this is
unlikely to go down well with them. They, as always, remain in a position to create
problems.
Also, in a recent interaction with a few economists, I was told that the state level
bureaucracy remains unprepared for implementing the GST. The fact that GST is a
destination based tax and not an origin based one, which is one of its core points,
remains unclear to many of them.
What the Media Did Not Tell You About the Goods and Services Tax
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What the Media Did Not Tell You About the Goods and Services Tax
As the Ambit Capital analysts point out: Whilst it is difficult to assess the impact of
GST on economic growth (as GDP growth is affected by a range of variables), crosscountry evidence suggests that there is no clear evidence that the introduction of GST
necessarily leads to higher GDP growth. Although the introduction of a single GST
limits inefficiencies created by a heterogeneous taxation system, there is little evidence
that it helps boost GDP growth rates.
To conclude, there are many good things about the GST. Nevertheless, it is not a
done deal yet and a few major issues remain, which will continue to test the Modi
government in the days to come. Also, it is not the be all and end all, that the media is
making it out to be. It is just one of the factors that will set India right in the years to
come.
What the Media Did Not Tell You About the Goods and Services Tax
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What the Media Did Not Tell You About the Goods and Services Tax