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One of the biggest taxation reforms in India
-- the Goods and Service Tax (GST) -- is all set to integrate State economies
and boost overall growth.
GST will create a single, unified Indian
market to make the economy stronger.
Finance Minister Pranab Mukherjee while
presenting the Budget on July 6, 2009, said that GST would come into effect
from April 2010.
(The
date of implementation of GSTN is set on August 2012. GST might not be
implemented before 1 April 2013.)
The implementation of GST will lead to the
abolition of other taxes such as octroi, Central Sales Tax, State-level sales
tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on
consumption or sale of electricity, taxes on transportation of goods and
services, et cetera, thus avoiding multiple layers of taxation that currently
exist in India.
But just what is GST all about and how will
it impact you?
What is GST?
Goods and Services Tax -- GST -- is a
comprehensive tax levy on manufacture, sale and consumption of goods and
services at a national level.
Through a tax credit mechanism, this tax is
collected on value-added goods and services at each stage of sale or purchase
in the supply chain.
The system allows the set-off of GST paid on
the procurement of goods and services against the GST which is payable on the supply
of goods or services. However, the end consumer bears this tax as he is the
last person in the supply chain.
Experts say that GST is likely to improve tax
collections and boost India's economic development by breaking tax barriers
between States and integrating India through a uniform tax rate.
What are the benefits of
GST?
Under GST, the taxation burden will be
divided equitably between manufacturing and services, through a lower tax rate
by increasing the tax base and minimizing exemptions.
It is expected to help build a transparent
and corruption-free tax administration. GST will be is levied only at the
destination point, and not at various points (from manufacturing to retail
outlets).
Currently, a manufacturer needs to pay tax
when a finished product moves out from a factory, and it is again taxed at the
retail outlet when sold.
How will it benefit the
Centre and the States?
It is estimated that India will gain $15
billion a year by implementing the Goods and Services Tax as it would promote
exports, raise employment and boost growth. It will divide the tax burden
equitably between manufacturing and services.
What are the benefits of
GST for individuals and companies?
In the GST system, both Central and State
taxes will be collected at the point of sale. Both components (the Central and
State GST) will be charged on the manufacturing cost. This will benefit
individuals as prices are likely to come down. Lower prices will lead to more
consumption, thereby helping companies.
What type of GST is
proposed for India?
India is planning to implement a dual GST
system. Under dual GST, a Central Goods and Services Tax (CGST) and a State
Goods and Services Tax (SGST) will be levied on the taxable value of a
transaction.
All goods and services, barring a few exceptions,
will be brought into the GST base. There will be no distinction between goods
and services.
Which other nations have
a similar tax structure?
Almost 140 countries have already implemented
the GST. Most of the countries have a unified GST system. Brazil and Canada
follow a dual system where GST is levied by both the Union and the State
governments.
France was the first country to introduce GST
system in 1954.
Will this be an extra
tax?
It will not be an additional tax. CGST will
include central excise duty (Cenvat), service tax, and additional duties of
customs at the central level; and value-added tax, central sales tax,
entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state
surcharges related to supply of goods and services and purchase tax at the
State level.
What will be the rate of
GST?
The combined GST rate is being discussed by
government. The rate is expected around 14-16 per cent. After the total GST
rate is arrived at, the States and the Centre will decide on the CGST and SGST
rates.
Currently, services are taxed at 10 per cent
and the combined charge indirect taxes on most goods is around 20 per cent.
Will goods and services
cost more after this tax comes into force?
The prices are expected to fall in the long
term as dealers might pass on the benefits of the reduced tax to consumers.
Why are some States
against GST; will they lose money?
The governments of Madhya Pradesh,
Chhattisgarh and Tamil Nadu say that the information technology systems and the
administrative infrastructure will not be ready by April 2010 to implement GST.
States have sought assurances that their existing revenues will be protected.
The central government has offered to
compensate States in case of a loss in revenues.
Some States fear that if the uniform tax rate
is lower than their existing rates, it will hit their tax kitty. The government
believes that dual GST will lead to better revenue collection for States.
However, backward and less-developed States
could see a fall in tax collections. GST could see better revenue collection
for some States as the consumption of goods and services will rise.
How will GST be
implemented?
The empowered committee is likely to finalize
the details of GST by August. But States have to sort out several issues like
agreement on GST rates, constitutional amendments and holding talks with
industry associations. Experts feel the drafting of legislation and the
implementation of law will take time.
What are the items on
which GST may not be applied?
Alcohol,
tobacco, petroleum products are likely to be out of the GST regime.
