The
GST framework could easily be one of the most important tax reforms to be
tabled for discussion in the parliament. It does bring with it some
problems, like division of taxation powers between the central government and
states. Not surprisingly, the Finance ministry has already missed three of its
deadlines to come out with an acceptable framework. In fact, most of the
proposals aren't even in the beta stage yet. But, most administrators and more
importantly, producers believe it would make the tax procedures more fair,
transparent and efficient.
An ideal tax system collects taxes at various stages of production, supply and retail. It is based on the value that the producers, suppliers and retailers individually add to the product. However, the current tax regime is unfairly skewed against most producers. Let's outline and simplify the current system of taxes to see how it operates:
Assume there is a soap manufacturer that procures raw materials at 500 lakhs per batch. The manufacturer keeps his operating profits at 100 lakhs and encumbers a processing cost of 50 lakhs. The flow would look something like this:
An ideal tax system collects taxes at various stages of production, supply and retail. It is based on the value that the producers, suppliers and retailers individually add to the product. However, the current tax regime is unfairly skewed against most producers. Let's outline and simplify the current system of taxes to see how it operates:
Assume there is a soap manufacturer that procures raw materials at 500 lakhs per batch. The manufacturer keeps his operating profits at 100 lakhs and encumbers a processing cost of 50 lakhs. The flow would look something like this:
If we calculate the total tax that the producer has to pay in this case, it
would be 120 lakhs(50 lakhs on procurement and 70 lakhs on sales).
Now if you have a GST framework in place, the total tax that the producer pays
is 70 lakhs. How?
The producer had initially paid an input tax of 50 lakhs. Now when he goes on to sell his batch for 700 lakhs, he gets a tax credit of 50 lakhs. Thus, he pays 20 lakhs in the form of taxes for the final transaction. This adds up to just 70 lakhs for the producer. The GST hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants in the supply chain. Reducing such taxes would lower the overall production cost and increase the output of the economy in the long run.
That
sounds great, but, why GST when we already have VAT? Isn't the VAT framework
similar to that of GST? VAT regulations and rates generally
vary across states. There is a tendency, as has been observed, that states may
resort to undercutting of rates to attract more investors. This generally leads
to a loss of revenue to both the state and centre. GST would introduce uniform
taxation laws across states and different sectors. The taxes would be divided
between the state and centre, based on a formula that would be acceptable to
both. Also, it would be easier to supply goods and services uniformly across
the country, as no additional taxes would have to be paid across different
states. Currently, no tax credits are provided for interstate
transactions.
So do we as consumers get goods at a cheaper price? Probably not, and it is here that the GST has been attacked by the opposition. Since taxes are distributed across the chain, the consumer prices are likely to rise to maintain the current tax revenue levels. The government has justified this by saying it would provide tax cuts across various brackets. This isn't entirely satisfactory. First, the tax paying population isn't too significant a number to begin with and second, the tax payer is likely to get a meager tax cut for the GST he would pay for all the goods or services he purchases.
GST is clearly a long term strategy, it would lead to a higher output, more employment opportunities, and economic inclusion. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy.
The
following are the salient features of the proposed pan-India Goods and Services
Tax regime that was approved by the Lok Sabha by way of an amendment to the
Constitution:
1. GST, or
Goods and Services Tax, will subsume central indirect taxes like excise duty,
countervailing duty and service tax, as also state levies like value added tax,
octroi and entry tax, luxury tax.
2. The
final consumer will bear only the GST charged by the last dealer in the supply
chain, with set-off benefits at all the previous stages.
3. As a measure of
support for the states, petroleum products, alcohol for human consumption and
tobacco have been kept out of the purview of the GST.
4. It will have
two components - Central GST levied by the Centre and State GST levied by the
states.
5. However,
only the Centre may levy and collect GST on supplies in the course of
inter-state trade or commerce. The tax collected would be divided between the
Centre and the states in a manner to be provided by parliament, on the
recommendations of the GST Council.
7. The GST
Council is to consist of the union finance minister as chairman, the union
minister of state of finance and the finance minister of each state.
8. The bill
proposes an additional tax not exceeding 1% on inter-state trade in goods, to
be levied and collected by the Centre to compensate the states for two years,
or as recommended by the GST Council, for losses resulting from implementing
the GST.
-Article published in Business Standard
2 comments:
sir,
it is but natural that there will be criticism by owr beloved opposition but the criticism should not be unfair ,it should be noted that the GST prevalent in almost all the countries including European union and Canada are flawed and not perfect more over the bulk products such as alcohol petroleum and tobacco which amount to the 40% of the revenue is kept out of the ambit of the GST due to he proposition that states will incur losses after the implication of GST but we should not miss the big picture here thet is the inclusion and the creation of a common market for the general merchandise, like raw materials and machines also the standardization of services bringing them under a common tax roof according to me no great harm will be done if parallel VAT runs with GST as far as petroleum is concerned, it is prevalent in many other countries therefore Saying that GST without petroleum is not GST at all, is just over reaction being prorated by people who are undermining the effect GST will have other products.
lets look at the implications this 101st (proposed constitutional amendment) will have on our lives
no more of that fat book called excise tariff no distinction in goods and services no layering and compound taxation it would to wonders for business community it will be like giving the mobile operators mobile number portability (MNP) through which mobile users can retain their numbers despite changing states/circles across the country, without incurring any roaming charges. with the launch of GST the business houses can undertake their business activities on a pan India scale without thinking about the different tax regimes of different states
GST seems structured to simplify and to replace multiple central and state taxes on goods with a single tax that will create a unified national market and eliminate the multiple sources of evasion and pilferage.The larger picture of this looks something like cooperative federalism. In the long term this strategy will lead to a higher output, more employment opportunities, which will lead to economic boom, beneficial for both economy and corporations.The reduced tax burden on producers will reduce production cost making exporters more competitive,leading to a feather in the foreign investment policy and also will supplement other policies which work directly on increasing the reserves.this will enable value creation and the unorganised sectors will come in the main stream economics as i can say.
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