GST Decoded: What it means for India and the common man

August 2016 will be remembered as an important month in the history of reforms in India. It's the month when the Constitution Amendment Bill for Goods and Services tax or GST was passed by the Parliament. The government has set itself a target of implementing the tax latest by April 2017. The plain and simple objective is to end the regime of multiple taxes on goods and services and bring them under one rate.

Once introduced, the GST will replace the raft of indirect taxes levied by the Centre and the states with a single unified value added tax system that will not only make the tax system much simpler, but also bring in more compliance in the system, cut down tax outflow in the hands of the consumers, boost revenue from taxation, and give a leg up to exports. It will also allow India to emerge as a common single market. Significantly, the new tax system will change from the current production-based taxation to being consumption-based.

Though the GST Council led by the Finance Minister is yet to decide on the tax features, final rate structure, threshold limits, exemptions etc, the passage of the GST is being hailed as the single largest tax reform since the economy opened up 25 years ago.

But first let's try and understand what GST is and how it is going to impact the common man and benefit the nation's economy.

What is GST?

The GST is a comprehensive indirect tax that would be levied on the sale, manufacture and consumption of goods and services on the national level. When implemented, the GST would replace all other indirect taxes such as the VAT, Service Tax, etc. on goods and services.

Once this tax is rolled out, the different taxes and levies imposed on all goods and services at the Centre and state level will be subsumed within a single tax. This single tax will have only two components - a central GST and a state GST. Under this system, the tax will be levied only on the value addition that happens at every stage, while the manufacturer or seller of the goods will be able to offset the taxes he incurs at every stage against the central or state GST which he has already paid to procure his material.

This effectively means that the final consumer will bear only the GST that was charged by the last dealer in the supply chain.

What Gets More Expensive & What Gets Inexpensive

The GST bill is obviously intended for the long run. However it would definitely be changing what the common man pays for almost everything. The only categories exempted from the GST for now are alcohol and petroleum.

Goods like FMCG items, SUVs, luxury cars, consumer durables, electronic items, and readymade garments will get cheaper. For those of you planning to buy a car for yourself or a two-wheeler, this might be the right time. With the implementation of the GST, prices of automobiles are set to become affordable. A Crisil Research predicts a spike in demand for two-wheelers, especially those in the 100 to 125cc category.

On the other hand, mobile phones, banking services, insurance services, telecom bills, air travel, travelling expenses, hiring of cabs, eating out, broadband services, movies, branded jewelry and all other services are set to get costlier.

However, raw food, ambulance service, cultural activities, pilgrimages and sports activities are all exempted from GST.

Why is GST a good idea?

Interestingly, this concept of co-operative financial federalism was first discussed by the Kelkar Committee 13 years back. Also, the GST has already been implemented by over 160 countries all over the world in one form or another and has proved to be a success. So let's see why this tax, if implemented correctly, can be a good idea.

  • The GST is aimed at bringing relief to consumers as it will avoid the overall double tax burden, and eventually reduce the prices for most commodities. This will automatically boost competition amongst manufacturers and also attract foreign investors, easing out the tedious, multi-layered and complex tax structure in the country.
  • The GST is a unanimous tax and one which is robust enough to compete with the tax systems of other countries in the world. It is expected to propel manufacturing entities and startups towards greater growth and give way to a comparatively simpler tax structure.
  • The basic framework of GST is framed by the merging of large number of central and state taxes into a single tax. In the present scenario, the current tax burden on goods is estimated to be 25%-30% for an individual. After the introduction of GST, this will reduce the overall tax burden on goods, and will make Indian products more competitive in the domestic and international markets.
  • GST is defined as a single indirect tax for the entire country, which will help India to emerge as a unified common market.
  • Earlier, taxes were levied on the manufacturing of goods or on provision of services. But once GST comes into force, this would be applicable purely on the supply of goods and services, which will keep a check on the unnecessary VAT.
  • A revolutionary change like GST will naturally imply drastic overhauling of the federal political-economic structure of the country too. After all, other countries that have already adopted GST have also undergone a similar experience.
  • With the state-level taxes subsumed, there would be better operational efficiency since state border checkposts will expectedly be gone. This would increase the speed at which goods move through our states, thereby reducing logistics and inventory management costs. For example, trucks in India average just 270 km a day against 800 km in the US because of check-post delays at state borders, and GST could slash the inefficiencies in logistics and transportation.

The GST Structure

The Centre and states will levy the Double GST on a parallel basis. Majorly, it will be divided into CGST (Centre levied), SGST (state levied), and IGST (Integrated GST). IGST is an Interstate tax that will be levied to fuel the supply chain mechanism. This will cut down the compliance scrutiny and will facilitate the seamless movement of goods between states by eliminating unnecessary elements. According to the proposal, the tax percentage will vary form 18-20%, but this has to be discussed and decided mutually. Subsequently, the CGST, SGST and IGST will follow suit.

Once rolled out next year, even if it is in a watered down avatar, the GST is set to merge all sorts of taxes levied. These are the list of taxes which are collected by the Centre currently and are soon to be replaced by the GST.

  • Central Excise duty
  • Duties of Excise (Medicinal and Toilet Preparations)
  • Additional Duties of Excise (Goods of Special Importance)
  • Additional Duties of Excise (Textiles and Textile Products)
  • Additional Duties of Customs (commonly known as CVD)
  • Special Additional Duty of Customs
  • Service Tax
  • Cesses and surcharges as far as they relate to supply of goods or services

State taxes which are to be covered by the GST are:

  • State VAT
  • Central Sales Tax
  • Purchase Tax
  • Luxury Tax
  • Entry Tax (All forms)
  • Entertainment Tax (not levied by the local bodies)
  • Taxes on advertisements
  • Taxes on lotteries, betting and gambling
  • State cesses and surcharges as far as they relate to supply of goods or services.

Alcohol for human consumption, Electricity and Real Estate are exempted from GST.

The concept of this tax offers quite a relief from all sorts of hassles, and will give way to an easy compliance of online registration, returns and payments, thereby avoiding the clerical and bureaucratic delays for businessmen and industrialists. This will, in turn, accelerate the "Make in India" dream too. Further, the paper-less system is supposed to achieve transparency, as it will be a fully electronic process. It is expected that the single point interface for all sorts of challan generation will surely pump up overall efficiency and output.

What about effective implementation?

GST is indeed a great idea, but implementation is definitely not going to be a cakewalk from what has been seen till now. With several state governments opposing the move, fearing a drop in tax revenue, proper implementation of the GST could turn out to be long drawn process. Policymakers and stakeholders will have to pass the service quality test by all the states to ensure a win and wow situation. The wide lacunae in the implementation have to be decoded and all the states must join in hands for the seamless implementation of the GST.

For starters, the Constitution Amendment Bill has to be approved by more than half of the state legislatures, which is expected to be achieved in a month's time.

Effect on inflation and GDP

Inflation is expected to spike in the short run, right after the implementation of GST, as has been observed globally. However, in the long run, with the absence of double taxation, zero cascading effect of taxes, and lesser logistic costs, inflation is expected to drop. On the other hand, with the enhanced ease of conducting business in the country, reduced production costs, and increased profit margins for companies, experts say that the GDP is likely to rise by at least 1 to 2%. The resultant reduction in the size of the unorganized sector in India is also expected to augment GDP growth too.

Conclusion

The GST is expected to have a wide impact on the Indian economy. The hopes and aspirations from this powerful tax reform are expectedly high since there is enough proof of its potential to change the economic conditions of a country globally. Over all, the GST holds the promise of an era of transparency, a corruption-free tax system, and a single common market. This is a critical requirement for the Indian economy as it takes the next growth leap.