GST & Implications

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  Published : Monday, 22 December, 2014 12:15 PM
  
MBA aspirants must be updated with General Awareness on current topics. General awareness topics with analytically drawn conclusions will benefit you in XAT, IIFT, CMAT,  MAT,  Essay writing, General Awareness sections besides in GD & PI.  
 
Today, you will read Current Affair Topic:
 
GST & Implications
 
After several rounds and days of intense negotiations between the centre and the states, the 122nd Constitutional Amendment Bill seeking to introduce the Goods and Services Tax in India has been tabled in Parliament. Once the Bill is passed by a two-thirds majority in Parliament and ratified by at least half the state assemblies, the GST will replace several taxes in the transit of goods within India from April 1, 2016.
 
It is going to be the largest indirect tax reform since the introduction of the value-added tax in 2005. In fact, Finance Minister ArunJaitley has called it ‘biggest tax reform since 1947’ while tabling it in the LokSabha. The previous UPA government had planned to roll out GST — which will replace the plethora of indirect taxes levied by states, Centre and local bodies — on April 1, 2010. The NDA government hopes to get the Bill passed in the Budget session and does not see it being referred to the standing committee on finance.
 
The GST, as the name clearly suggests, will be levied both on goods (manufacturing) and services. The tax regime aims to convert the country into unified market, replacing most indirect taxes with one tax. It would have a dual structure – a Central component levied and collected as the Central Goods and Services Tax on inter-state movement, and the other will be by States called the State Goods and Services Tax (SGST) on transactions within a State. At the Central level, it will subsume Central excise duty, service tax and additional customs duties while at the state level it will include value-added tax, entertainment tax, luxury tax, lottery taxes and electricity duty. 
 
Central sales tax (CST) will be completely phased out. Entry tax or octroi would be subsumed from the start. But state taxes on petroleum products will continue for a few years after GST is introduced, as per the bargain struck between the Centre and states. State taxes on alcohol and tobacco, too, would remain. This is because the taxes on alcohol constitute a big chunk of state revenues. In Kerala, it constitutes 22% of revenue, while in Tamil Nadu it yields around Rs 21,000 crore a year. Ditto with tobacco for many states. 
 
As with VAT, the tax will be charged on each stage of value addition. At each stage, a supplier can offset the levy through a tax credit mechanism. This means, the consumer pays GST added on by only the last dealer in the supply chain. The rate for GST is as yet undecided, but different estimates suggest during the initial phase it could be anywhere in a range between 15-25%. 
 
The Bill also proposes to set up a GST council comprising the Union and state finance ministers, assigns one-third weight to the central votes within the council. Any decision needs to be passed by three-fourth of the weighted vote, with at least half of all members (quorum) in attendance. In addition, there are provisions to ensure that states are compensated for their revenue losses as they shift towards the full GST regime. Full compensation for loss of revenue is provided for during the first three years after shifting to GST. After that, compensation will be scaled down gradually. 
 
The reason why GST took so long to materialize is that states were fearful of losing their fiscal autonomy in levying local taxes that are constitutionally in their purview. The new system likely will lower the suspicion that states have historically erected against an overbearing centre.
 
The successful implementation of the GST will not only streamline and modernise a thoroughly fragmented indirect tax system riddled with multiplicity of rates levied by states, it could politically signal a new era of cooperation between the centre and states. GST’s rollout is also likely to boost the GDP growth.
 
According to a study by the National Council of Applied Economic Research it would boost the GDP growth by anywhere between 0.9-1.7%. A Crisil report had also said GST was the best way to mobilize revenue and reduce the fiscal deficit. Removal of cascading taxes makes the manufacturing sector more competitive and cut down on the tax compliance burden. As for consumers, with cascading taxes gone, over a period of time the lower tax burden would translate into lower prices for goods.
 
A single unified tax regime will also provide impetus for infrastructure growth and faster freight movement across states. A 2005 World Bank study had estimated that Indian truck drivers lose a substantial number of operating hours at entry/exit points at state borders trying to negotiate with multiple and corrupt bureaucratic structures. GST likely will improve that situation.
 
However, the story may not be as rosy in the initial phases as it may sound. The unorganized sector may face heavy burden of taxes until they learn to become more competitive compared to big multinational companies. A GST rate of 15-25% will bite the smaller companies while large companies will benefit from the VAT as they will get deductions on the taxes paid by their small suppliers. 
 
The unorganized sector creates a substantial number of jobs and reduction in profit may drive many out of their jobs thereby enhancing unemployment problem. Higher GST initially could push prices up and add to general inflation thereby affecting the purchasing power of consumers.
 
 
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