April 26, 2024

The Goods and Services Tax Bill or GST Bill proposes a national Value Added Tax to be implemented in India. Ever since the idea was floated, it has become a ping-pong issue in national politics, with the party in government wishing to implement it and the opposition stalling it for specious reasons. PM Modi recently appealed to all parties to let the government implement the GST bill and said that it was not important who took the credit.

In 2000, the Vajpayee government set up empowered committee headed by the then finance minister of West Bengal, Asim Das Gupta, to design a GST model. During the central budget of 2006-07, P.Chidambaram, the then Union Finance Minister said that GST would be introduced from April 1, 2010 and asked empowered committee with state Finance Ministers to submit their views. However facing opposition, the UPA government was unable to pass the GST despite introducing changes in the bill. The BJP, which was in the opposition then, created many obstacles in the path. But in a reversal of roles, the GST bill has been one of the top priorities of the BJP led NDA government ever since it came to power in 2014.

Presently indirect taxes are levied by Central and State governments separately. Centre collects central excise, service tax, Customs, CVD (Countervailing Duty), SAD (Special Additional Duty), CST whereas the State collects VAT. GST will cover all these taxes since it would be a comprehensive indirect tax on manufacture, sales and consumption of goods and services (except for a few exempted goods and services) all through India levied jointly by Central and the State government. It would be levied and collected at each stage of sale. This comprehensive tax would cover all stages from manufacturing to sale and thus multiple taxes won’t exist. The tax will be levied at each step of the value added to the life cycle of a product or service. GST is a long pending indirect tax reform which is hoped to iron out the wrinkling tax system in India. Finance Minister Arun Jaitley believes that it is going to be the biggest tax reform since independence. Dr. APJ Abdul Kalam also suggested a comprehensive GST based on VAT principle. Worldwide GST has been implemented in over 150 countries.

GST is considered to be a great tax reform since it rectifies many problems of the existing tax system and also boosts the economy in many ways.

Firstly, as argued by PM Narendra Modi, GST will increase resources available for poverty alleviation and development as tax base will become more simple and buoyant and also resources of poor consumer states (like UP, MP) will increase. Paperwork will become simpler and there will be a reduction in accounting complexities by businesses.

Secondly, amalgamating several Central and State taxes in to a single national tax will mitigate double taxation facilitating a national common market. This will help “Make in India” by making a unified system. GST would be covering imports also, so negative protection covering imports and discouraging domestic manufacturing would be eliminated.

Thirdly, GST will improve tax governance due to simpler tax structure and self-policing incentive of individuals. Moreover, dual monitoring by State and Centre will make tax evasion difficult. Also it may increase government revenue.

Fourthly, it is widely believed by economists that GST implementation will boost the GDP by 1-2%. GST will eliminate all other indirect taxes, which effectively means that the final tax paid by customers will come down effectively in most cases. Also from consumer point of view, there will be a reduction in overall tax burden of goods. Today, a large number of indirect taxes results in a total indirect tax incidence of close to 30% for both Centre and State together. A simple GST of 18-20% will reduce tax levels and boost GDP.

Finally, due to full and seamless credit, manufacturers do not have to include taxes as a part of their cost of production. For this reason, there may be a reduction in prices. However this may not be the case if the government increases GST rate.

Despite having such positive effects, GST bill has repeatedly received opposition from various parties. In India, there are four types of bills- Money Bills, Financial Bills, Constitutional Amendment Bills and Ordinary Bills. GST is 122nd Constitutional Amendment Bill. Such bills may be introduced without recommendation of the President, but, the Bill must be passed by each house (Rajya Sabha and Lok Sabha) separately with a special majority( two third of the members present and voting must be more than absolute majority). In the Lok Sabha, out of 545 seats NDA have 336 seats. So, NDA has a clear majority in Lok Sabha. In Rajya Sabha NDA have 74 seats out of 245. So, NDA is minority in Rajya Sabha and would require outside support from other political parties to pass legislations which are in the form of Constitutional Bill, Financial Bills or Ordinary Bill.

The UPA Government wanted to pass the GST bill since a long time. However at that time, BJP opposed the bill just for the sake of opposition. Congress is repaying the favour by blocking the bill now. Finance Minister Arun Jaitley claimed Congress is opposing the bill just for ‘purely political reasons’. Also that precious economic growth is being sacrificed because of the delay in the implementation of GST. The truth is, neither Congress nor BJP want to let the other party pass it when in power and claim victory. Unfortunately all this is happening at the cost of the country’s welfare. The first deadline was missed in April 1, 2010. Also, the second probable time of June 2016 is also past. So, India has lost almost 7 years in this quibbling. Even if we take just 1.5% as the GDP growth after implementing GST, the loss amounts to approximately 10 lakh crore rupees.

However, the opposition has put forward a conditional agreement. Rahul Gandhi has said that the Congress will allow GST to be passed in 15 minutes if these 3 conditions are accepted.

The conditions are-
1) Constitutional Cap on the rate of GST.
It limits the scope of the government to arbitrarily increase taxes to any extent.
2) Scrap the proposed 1% additional levy (over and above the GST) for manufacturing states.
It has been widely agreed that the 1% additional levy is very against the concept of GST. After receiving a lot of flak, there has been some recent development in this matter and BJP has said that they are ready to scrap the 1%.
3) Change the composition of the GST council by reducing the centre’s share to one-fourth.
GST council is formal grouping of Centre and States that will decide on all operational aspect of GST.

Out of the three conditions, 2 and 3 are essential and highly recommended. The major reason for opposition is the first condition. The NDA government does not want to have a built-in constitutional cap of 18% as demanded by the Congress as it will restrict revenue generation capacity in future as any change would require a constitutional amendment and that is a time consuming affair.

The three main things excluded from the BJP’s version of GST are petroleum, alcoholic liquor and entry taxes. The main reason to exclude them is that states earn a lot of revenue from these things. But exclusions are self-defeating for any major tax reform like GST.

These changes were made by BJP to bring the states on board. All the states, except Tamil Nadu, have agreed to pass the GST bill. The Tamil Nadu government has opposed the GST as it is concerned about the impact of the tax on the on the autonomy of the state in fiscal matters. The state wanted petroleum and petroleum related products out of GST permanently. CM Jayalalithaa believes that a manufacturing state like Tamil Nadu will permanently lose substantial revenue if GST is implemented, due to “shift in levy from point of origin to point of destination.” The State also reiterated the need for full compensation of revenue losses for no less than 5 years.

The reasons why manufacturing states can incur loss from GST are as follows-

1) GST is a destination-based tax unlike VAT, which is an origin-based tax.
2) Loss of Central Sales Tax. CST is levied by Central Government, but collected and appropriated by State governments.
3) Tax credit on inputs purchased from other states. A manufacturer uses a large number of manufactured items from other states to produce the final product. No tax-credit is offered in such items but GST will cover this.
4) In GST regime, all goods and services credit shall be available to the manufacturers. Hence their tax liability will considerably be reduced while discharging their final GST.

These factors are likely to reduce the tax collection of manufacturing states like Tamil Nadu. However states can tax services to increase revenue which were not possible under taxation laws.

So, the NDA government should make desired changes and convince all the States to come on board and implement the GST. Postponing the bill and not taking immediate decision will cost India more years of GDP growth and welfare. Both government and opposition should come to an agreeable term and pass the bill in the monsoon session of Rajya Sabha. Hopefully, if everything goes right, the GST will be a reality in 2017.