“Bagchi Report”, which recommended the blueprint of State Value Added Tax design, recognized that VAT may not be the first best solution, but it is only feasible solution within the existing framework. VAT offered improvements over the relatively inefficient Sales Tax regime associated with narrow base, problem of cascading, multiple rates, exemptions and tax holidays. Despite tremendous benefits VAT offered, it could not be able to completely eliminate the problem of multiple taxes and cascading not because there was inherent defect in its design, but because it could hardly challenge the constitutional constraints of India.
However the enactment of Constitutional Amendment Act, 2016 and introduction of GST invited an end to the regime of numerous Central and State Acts by virtue of which GST Acts, 2017 (CGST, IGCT, SGST, UTGST & GST Compensation) came into force by the Centre , States/UTs. The constitutional amendment and the resultant GST Acts empowered the Centre to levy tax on goods beyond the factory gate and the states to levy tax on services. The GST Act intends to cure the remaining inefficiencies related to VAT and to provide a uniform market and seamless trade in the economy.
GST is a comprehensive levy on the supply of both goods and services which subsumes multiple indirect taxes like Central Excise Duty, Value Added Tax, Luxury Tax, Purchase Tax, Entry Tax, Service tax, Central Sales tax, Countervailing duty etc. imposed by Central & State Tax Authorities on manufacture, sale and supply of goods and services.
The numerous central and state taxes are now replaced by dual GST (i.e. CGST and SGCT) concurrently levied by the centre and states on a uniform base and Integrated GST (i.e CGST+SGST) for taxing interstate transactions. Now the threshold limit is enhanced uniformly to Rs 20 lakh excepting the north eastern States, tax rates are made uniform, automation is invited in tax administration.
Hence GST has offered advantages like relief to small traders below threshold, end of tax war and unhealthy competition among States, accountability and transparency in tax administration with little scope for discretion, elimination of multiple Central and State Acts and related compliance requirement. The benefits flowing from the implementation of GST are expected to play pivotal role in enhancing market competitiveness, seamless trade & ease of doing business, bringing in cost effectiveness & export competitiveness and promoting economic growth as a whole.
Soon after the implementation of this new tax regime, much has been discussed and preparedness for its successful implementation has been apprehended. The important issue here is, GST is not at all a new tax. It is an improvement over the present regime of VAT with inclusion of services and subsumption of numerous Central and State indirect taxes within its ambit. Around 160 countries throughout the globe have already accepted destination based taxation in form of VAT or GST by adopting models depending on their peculiarities.
Being a federal country, Indian GST design has been influenced by the Canadian structure of dual GST. In Canada, GST replaced the federal manufacturer sales tax at the rate of 13% which had similarities with CENVAT in the context of India. In Canada, the introduction of GST resulted to an estimated increase in potential GDP by about 1.4% due to higher factor productivity and elimination of cascading. The success of Canada from implementation of GST is an inspiration for India about the potential benefits, GST is expected to offer.
The hidden cost of CST, CENVAT, Entry Tax, and Service Tax etc. that was previously embedded with final price of goods and services is now expected to be eliminated as there is provision of set off against the entire input cost. The fear and apprehension about inflationary impact of GST is explicitly guided by the final GST rates which seem to higher than the prevailing VAT rate in certain cases. But there is no justification to be apprehensive by comparing only one part a story with the whole of another one.
The invisible cost and cascading of many taxes with no provision of set off under the VAT Act should be taken into consideration for a balanced comparison. Again, consumer goods especially food grains and commonly consumed articles are either exempted or kept in the lower tax rate slab under GST which itself is an indicator of a non inflationary scenario. Added to the set off benefits, the GST Act has provisions for anti-profiteering measure to ensure that the lower tax resulting from set off is passed on to the consumers in terms of reduction in prices.
GST seems to be a matured child, if the days of its germination and time taken for its preparation are considered, but it is only a baby in realty. If the features of a tax system is the sole consideration to rate its efficiency, GST is not less than an ideal tax system.
It has replaced business compliances required under as many as 17 tax acts, reduced the hassles to start business by inviting automation in registration process for granting it within 3 common working days with provision of deemed registration after the said time limit in the absence query, eliminated the time and cost previously required for movement of goods by abolishing boarder check posts and has laid down provisions to curb tax evasion with compulsory requirement of invoice matching for availing input tax set off.
GST is the biggest tax reform India has ever experienced since independence. Question arises, whether GST is capable enough to bring in optimal solutions to the problems of market and economy. It cannot be answered by binary response of “yes” or “no”. The most important fact is, indirect tax in any form is regressive and unlike direct tax, it has the peculiarity of inviting distortions into the consumption pattern. However in a country like India, dependence on indirect taxes as a major source of revenue cannot be ruled out.
The option left to us is to invite efficiency in indirect tax structure, design and administration so as to eliminate hindrance for resource mobilization and to boost factor productivity and economic growth. GST has taken every possible effort to reduce leakages from the tax system. For any economy, leakages are undesirable as they have tremendous capacity to stealthily take away the fruits of development nullifying every effort in this direction.
The impact of GST on prices, production, resource allocation, growth, equity, employment, revenue collection is expected to be positive by virtue of numerous efficiencies it invites into the tax scenario. At the same time, there will be challenges on the path of its effective implementation in a federal set up like India. For the time being, the stakeholders should not be over apprehensive and should give some time to the game changer to change result of the actual game.
(The views of the writer are her personal)