The indirect tax structure in India is quite cumbersome consisting of multiple taxes like sales tax, excise tax, custom duty, service tax, value added tax (VAT), entry tax etc. While the excise, customs and service taxes, etc are levied by central government, VAT falls under the ambit of state government and each state has its own rate of VAT. 

 

Thus India is yet to have a single internal market. Businesses selling across states face a border tax, local sales tax, central service tax, excise, central sales tax and other duties that often vary by state and product. An important alternative to the multiple central and state taxes is Goods and Service tax (GST). In his budget speech in July 2014, Indian Finance Minister proposed the implementation of GST.

 

GST is a comprehensive tax levied on manufacturing, sale and consumption of goods and services at a national level. It is expected to streamline the tax administration consequently delivering higher revenue for the central and state governments. 

 

Experts believe that GST would improve tax collections and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate. Also, it will help in building a transparent and corruption-free tax administration. GST will be levied only at the destination point, and not at various points (from manufacturing to retail outlets).

 

According to National Council of Applied Economic Research, once implemented, GST could boost the economy by as much as 1.7 percent by replacing more than a dozen types of tax prevailing in India that increase incentives for corruption. Huge leakages in the current system are not hidden from anyone. With a uniform system, businesses will finally be able to make decisions purely on the grounds of profit.

 

Proposal to introduce a national level Goods and Services Tax (GST) by April 1, 2010 was first mooted in February 2006. Since the proposal involved reform/ restructuring of not only indirect taxes levied by the Centre but also the States, the responsibility of preparing a Design and Road Map for the implementation of GST was assigned to the Empowered Committee of State Finance Ministers (EC). The EC proposed dual GST module for the country which has been accepted by the centre. 

 

Under this model GST will have two components viz. the Central GST to be levied and collected by the Centre and the State GST to be levied and collected by the respective States. Central Excise duty, additional excise duty, Service Tax, and additional duty of customs (equivalent to excise), State VAT, entertainment tax, taxes on lotteries, betting and gambling and entry tax (not levied by local bodies) would be subsumed within GST.

 

GST can dramatically alter tax administration where Centre and states could tax goods and services in identical rates. For instance, if 20 percent is the agreed rate on a certain good, the Centre and states will collect 10 percent each on the good. The proceeds would be shared on the basis of the devolution formula recommended by the Finance Commission.

 

However, the road of implementation is not smooth and there are many hurdles. It can be rolled out only when Parliament passes the Constitution Amendment Bill which requires votes of at least two-thirds of the members in its favour. In addition, at least half of the state Assemblies will have to pass the Bill. Apart from the passage of Bill, it is also imperative to have a robust country-wide IT network and infrastructure to make the implementation seamless. The IT network work is still in progress.

 

Different states have their share of concerns too. Southern states of Karnataka, Tamil Nadu and Kerala are hubs for manufacturing, services and technology and they stand to lose the most if government bans them from collecting local taxes without offering a substitute. Madhya Pradesh may oppose the GST if alcohol and petroleum aren’t exempted.

However, despite the concerns, everyone understands the benefits accruing once GST is fully implemented. It is for this reason that states have dropped the controversial issue of compensation to them to make up for the cut in the central sales tax (CST) which was a major roadblock for GST implementation. CST is levied by the Centre on inter-state movement of goods, but collected by states. 

 

States such as Gujarat, Madhya Pradesh and Uttar Pradesh, which were standing in the way of GST earlier, have now said they are not opposed to the new indirect tax as long as their concerns on autonomy and other issues are concerned. States are opposing inclusion of petroleum, alcohol and entry tax in GST.

 

As the central government has assured to address the concerns of state government and the latter have also toned down their opposition, GST could be a reality soon. Experts believe that if not in April 2015, it can be implemented in 2016-17 due to conducive environment.

 

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