It is a reform measure that has been in the making for several years. The Goods and Services Tax — a single, unified tax across the country for all goods produced and sold, and all services rendered — will hopefully be a reality, come April 1, 2016. That is, of course, assuming that our honourable representatives in the Rajya Sabha (the Lok Sabha has passed the Bill already) deign to pass the Bill at least in the monsoon session beginning July. On Tuesday, the Bill was referred to a select committee for its appraisal after the Government gave in to the demands of the Opposition, specifically the Congress.
What exactly is the GST Bill all about? India, as you all know only too well, has a plethora of taxes. Whether it is the petrol in your car or the beer at your friendly pub… what the heck, even if it’s that silly little match box you use to light up your cigarette, not to talk of the cigarette itself…. every product you buy or every service you consume is subject to multiple taxes. Sales tax, octroi, value added tax, luxury tax…. the list is really long. The GST will subsume all these taxes. Yes, really. No longer will there be the anomaly of a tax on tax, as is the case now.
Don't celebrate yet
But wait don’t start the celebrations yet for it’s not as if your taxes will go down. If the powers-that-be have their way, the GST rate will be fixed at 27 per cent which is the revenue-neutral rate (RNR) according to a committee of state finance ministers that went into the subject in depth. Remember, the GST has implications for the federal polity because it will take away the right granted in the Constitution to States to have their own sales tax. This is why a Constitutional amendment is required before the GST can be introduced.
A Constitutional Amendment Bill requires two-thirds majority in Parliament of members present and voting and the Bill also has to be ratified by State legislatures before it becomes law. That is why the GST Bill has to be passed in Parliament by at least this monsoon session; the remaining months of this fiscal year will be spent in getting the Bill through State legislatures and finalising the GST Council. The latter body will fine tune the specifics of the tax.
Compensation
Returning to the GST rate now, the Finance Minister Arun Jaitley has agreed, and may God bless him, that the 27 per cent RNR is very high. Imagine paying more than a quarter of the product’s price as tax to the government, which is what we are now doing apparently! The final rate will be set by the GST council which will be formed after the Bill is passed. The Council will have two-thirds representation from the States in order to ensure that their interests are protected. It is likely that the rate will be lower than the 27 per cent recommended by the state finance ministers committee.
Alcohol and petroleum products will continue to be taxed by the States. The latter will be subject to GST from a future date to be decided by the GST Council. These concessions have been granted following demands from the States as these products are the largest revenue generators for the States. The Centre will compensate the States for revenue losses that they may suffer consequent to the introduction of GST.
Apart from this, States can also levy a 1 per cent origin-based optional tax for a period of 2 years to compensate for possible loss of revenue. The biggest difference between the GST and the present regime is that the former is a destination-based tax. In other words, the GST tax will be levied and enjoyed by the State where the product or service is consumed. The present system is origin-based, which means that the tax — mainly sales tax — will accrue to the State where the goods are produced and sold.
Losing out
The large manufacturing States, also called ‘producing States’, such as Tamil Nadu, Maharashtra and Gujarat, stand to lose in the GST regime as the tax for products manufactured in their States will accrue wherever they are consumed from Kashmir to Kanyakumari. This is why Tamil Nadu has been vociferously opposing the GST Bill in Parliament.
However, a part of that loss will be offset by the share of service tax that will now accrue to States as part of the GST. Presently, service tax is a central tax and the proceeds go straight into the central government’s coffers.
Given the simplicity of GST and the fact that it does away with the anomalous situation of “tax-on-tax”, its introduction is estimated to add as much as 2 per cent to the GDP. It will also be a very significant reform that has been hanging fire for years and will bring the country’s taxation system on par with the developed world. All this is, of course, assuming that our dear MPs pass the Bill quickly.