GST – The Road Ahead

Except for an increase in tax rate for a few services, which may create inflationary pressure, the GST has a number of benefits which will far outweigh the temporary inflationary impact that can result from it

This has been a season of reforms on the taxation and regulatory fronts in India. The biggest reform, however, has been the expected passage of the 122nd Constitutional Amendment Bill for ushering in the Goods and Services Tax (GST) Bill. The progress of the Bill through the Lok Sabha and Rajya Sabha has probably been the most closely followed legislative function in the history of independent India.

A shift from a production-based indirect taxation to a system of taxation which happens at the point of consumption has been the central concept of GST which has been in the making for more than a decade and a half.

It was first discussed during the Vajpayee Government in 2000, but the Government’s intent to implement it was announced by former Finance Minister P Chidambaram during his Budget speech in 2006. Thus, it definitely took us a while to reach that stage where the GST is more or less ready now to be rolled out, but the effort put in and the time taken are definitely well worth.

This is perhaps the single largest tax reform in India ever since the economic reforms of 1991 and we need to compliment ourselves for having succeeded in building a consensus on this topic of national importance. However, implementation of GST can be challenging in a federal system. What makes our achievement even more special is the fact that a country like the US, despite trying for decades, has not been able to put in place a GST.

Amidst a prolonged global slowdown, India is currently a shining beacon of hope in world economy and is expected to emerge as an engine for global growth. In this backdrop, implementing the right reforms is imperative. This is an opportunity we cannot afford to let go.

Global investors are on the lookout for opportunities. India, with the right reforms, can attract substantial foreign investments. But GST should not be viewed only from a foreign investment perspective. It is even more important for our domestic economy. Our domestic market should be our insurance against any global downturn.

India has been connected by road and rail network, it is being digitally connected, and now it is time to connect the country with a uniform tax system. Replacing the regime of multiple indirect taxes by GST will bring in considerable clarity in terms of incidence of indirect taxation, thereby eliminating the multiplicity of taxes on same transactions, which in simpler language is termed as cascading effect of tax, or a tax-on-tax, effect.

This will also substantially improve ‘ease of doing business’ for entrepreneurs, thereby facilitating job and value creation. The ambitious ‘Make in India’ programme too will receive a major shot in the arm.

A game-changer in itself, GST will significantly restructure the power to tax between Union and State Governments and also substantially expand tax-base and revenue. Earlier, in the case of inter-State sale of good and services, all the tax paid went to the manufacturing State. States with an early head-start in industrialisation emerged as the major producer States and thus enjoyed an undue advantage. This led to uneven development amongst States. GST will lead to more even distribution of tax revenue making growth more equitable.

Our nation is almost like a continent and the States are almost like countries, when evaluated in terms of population and culture. With multiple taxation structures in different States and so many entry-exit barriers, doing business across States has been a challenge. In fact, doing export-import seemed easier than moving assets and merchandise across States.

In the process, those who suffered the most are small-time traders and entrepreneurs who need to transport their goods in search of new markets in other States and the contractors who need to move their equipment and assets to various site locations in different States to undertake project work.

By unifying all Indian States and Union Territories under one regime, GST will actually create a pan-India market for producer of every good and service. This can unleash India’s huge domestic business potential.

However, what has to be borne in mind is that the tax rates should be reasonable, not excessive and the processes must be easy. The GST Council has now decided upon a four-slab tax structure of five per cent, 12 per cent, 18 per cent and 28 per cent with total exemption for foodgrains and lower rates for essential goods. The highest rate is for luxury and de-merit goods, and some of those would also attract an additional cess.

There is one concern from the trade industry, especially the small and medium sized enterprises, that the process would be cumbersome. This concern needs to be addressed. Also, a consensus between the Centre and States is yet to be reached on the dual administrative control issue.

To sum up, except for the increase in tax rate for services in certain cases which may create some inflationary pressure, although temporarily, I feel that the GST is a huge positive for the betterment of out nation. I am certain that the resultant benefits of GST will far outweigh the temporary inflationary impact that can result from it.

India is at a unique advantageous position now due to a confluence of a number of global factors. This is a rare opportunity that has come our way, let us not squander it. There is a strong feeling that the much-needed clarity on the indirect taxation front that GST will usher in will help India attract huge investments.

Who knows — perhaps GST was the long-elusive brahmastra that India had been looking for in order to make it to the big league. The present Government has aimed to roll out the GST by April 1, 2017. For the GST to be rolled out on time, it is essential that the Centre and the States are on the same page on issue of national importance.

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