All you need to know about GST

By Registrationwala

4th April 2017

 

Having been stalled for what seemed like ages, the GST was finally passed by both the houses of the parliament last year. The Goods and Services tax is an indirect tax and will be levied on goods and services. The bill seeks to replace all the indirect taxes that an individual has to pay these days.

The government missed many deadlines and after it was passed last year, April 2017 was set as the deadline for rolling out the GST and to bring trade under a common national market. As I write this, the newspaper headlines are flooded that despite missing the April, 1 deadline for rolling out the GS, the government seemed to have solved the stalemate and by July, it is expected to be adopted. The following write-up seeks to enlighten you about everything that has happened in the course of GST being passed by the parliament. From its days of origin to who were the people behind it being rolled out for the country.

India has come a long way as far reforming its tax structure is concerned. Introduction of the GST is one such move by the government. Though the GST is not something that has happened overnight. Ever since the financial reforms were introduced by the Congress government in 1991, there has been substantial progress made in the field of taxation. But for long, there have been a demand for a better and more uniformed tax structure in the country. One of the first signs of GST were kicked off by the UPA regime way back in 2006 and since then almost all the political parties have toed for reforms. It is evidenced by the fact that the custom duties that were once soaring around 150% during the beginning of the 90s have mellowed down to around 10%. Even the excise duties are around a median rate that once used to be in abundance. Several years ago the country adopted tax credits and the GST is expected to further smoothen and fuel the process. Given the great potential of the service sector, service tax was introduced in 1993 and today it has reached a stage where it accounts for more than 14 percent of the total tax collection in India. And it was in the financial year 2008 when direct tax collection, often deemed socially progressive, overtook indirect tax collection in the country.

And since we are here to tell you all about GST, as mentioned above, let’s also credit and know those who were behind it. It all started with former Prime Minister Manmhohan Singh, who was then finance minister in 1991. The reforms started on advice of Raja Chelliah, whose vision was to see the tax system evolve by spreading the base and levying lower and less differentiated states. All this came after the report submitted by M Govinda Rao. Chelliah’s recommendation included the introduction of service taxation. He also advised to replace the state sales taxes with VAT.

Years later under the NDA I rule, former finance minister Yashwant Sinha initiated a gigantic leap by simplifying excise duty rates and settling down to a moderate central rate. And when the UPA I came into power, two years later in 2006, P Chidambaram pitched the idea of GST. The law was to be adopted by 2010. Also the political scenario at that time did not allow it to be cleared by a mandate and hence the procedure had to be stalled. Heads of the empowered committee of state finance ministers like Asim Dasgupta, Sushil Modi and Amit Mitra ensured that most states came on board. The committee created an environment convincing the state machinery that not implementing the GST would directly hurt bigger goals like Make In India.

What makes GST paramount in given circumstances is thatvarious schemes over the past decades haven't helped much. Also to the dismay of the common citizenry was that the current tax system has not led to awareness. When the GST is implemented, it will be a fully computerized system that makes things easier from top to bottom.

Once the GST Network is implemented, it will lead to a scenario where it will ensure a better tax compliance since most of the transactions will get captured at some point or the other. There is a little howler in the system as the real estate business has been kept out of the GST and that might lead to large sums of un-rebated tax credits.

One of the basic points to notice is that the GST aims to eliminate the origin-based tax collection and replace it with destination-based tax collection. It will also seek to eliminate the border check posts at every state boundary, thus saving a lot of time and unnecessary tax-fraud. These check posts

Apart from the fact that GST makes a fundamental shift from an origin-based tax to a destination-based one, its biggest contribution will lie in eliminating the border check-posts at every state boundary. It is due to these border posts, trucks wait at highways while their cargos are subject to frisking.It is expected that GST will lead to an increased GDP growth as a lot of time will be saved at these places. Also how it will ensure a centralized system is by empowering companies to open warehouses in various states, without having to care for the tax collected at the origin. Because as written above, the tax will be collected at the destination and not at the source.There are still doubts over the fact that the State governments will agree to remove these border posts but once all the information are uploaded to the GSTN and the states realize that the tax collection is witnessing a steep rise, they will do away with the border posts.

Tracing its history:

Fiscal Responsibility and Budget Management Act was notified in 2003. And after that then Finance Minister Jaswant Singh summoned the senior officials to know what was the plan to implement the new law that bound governments to reduce the fiscal deficit and revenue deficit annually to meet fixed targets. In fact, Singh appointed Vijay Kelkar as his adviser. Kelkar, former finance secretary, had returned from his stint at the IMF board as the Indian representative. The conclusion that came out of it was that the key to meeting the targets set was to plot a strategy that would increase the revenue and not cut the expenditure. Thus in 2003, the finance minister approved a proposal to form a Task Force for Implementation of the FRBM Act, 2003. The task force was headed by Kelkar and with all Secretaries of his Ministry — Revenue, Expenditure and Finance — and the Chief Economic Adviser.

By the end of that year, while the committee was still at work, the government managed to get the constitution amendment bill pass through parliament. It was a big boost to the plans as it enabled the central government to impose taxes on services. While the background work continued, the authorities had done much work on Value Added Tax (VAT) that was implemented years earlier.

Then moving further, the government also had a project called TIN, that stood for tax information network. The sole purpose of this was to fuel India’s low tax base and improve its ratio of tax to GDP.

The committee went through the models adopted at countries like Canada, Australia and Brazil and took in consideration some of the stakeholders.By 2004, when it advised the government to integrate the taxation of goods and services, UPA I, under Manmohan Singh, was in power. It suggested that the way forward was a new taxation system that has to be simple, low-rate and hence it would encourage compliance and boost output. The National Council for Applied Economic Research was called for and commissioned so that it could work on a model that could projections for various scenarios. 

The Kelkar committee recommended that single a tax rate of 7 percent for states and 5 percent for centre, effectively making it 12 percent was how taxation on committees should be approached.  Among its various recommendations was the fact that the ‘Indian Goods and Services Act’ could be effective from April 1, 2005. The suggestion was to clip the tax rates to 3 and ensure that the threshold for registration was 40 Lakh. Citing China’s experience, the committee said that the country had experienced an economic boom having hauled its taxation laws in 90s. But the committee did not forget to warn that a big bargain was needed with the states to bring them on the board – by telling the states that it was a win-win situation for both the state and the centre and states’ tax base was not getting eroded by following the model.

When former finance minister P Chidambaram presented his 2005 Budget, he suggested that the entire production-distribution chain be covered by a national VAT, or National Goods and Services that would include both the states and the Centre. In the very next budget in 2006, the finance minister made it clear that the deadline for launching the GST in the country was April 2010.Three years later in 2009, the first discussion paper on the GST was launched by finance ministry.

Considering states’ concern over the revenue losses, the 9th finance commission that was chaired by Kelkar recommended that a grant of 5000 crore be made to the states. There was another empowered committee of finance ministers, headed by Asim Dasgupta, trying to forge a consensus on it. Years later after P Chidambaram’s move to home ministry, Pranab Mukherjee introduced a bill to provide the framework for GST. There was enough resistance from opposition and the bill was sent to Parliament’s Standing Committee on Finance headed by Yashwant Sinha, which suggested several changes.

Upon Chidambaram’s return to the Finance Ministry, he announced Rs 9,000 crore as compensation to states. Though the BJP-led states were not willing to give in and by the time the general elections approached in 2014, the bill had lapsed.Which is why Arun Jaitley, the Finance Minister in the new NDA government, had to introduce it again. The Y V Reddy-headed Finance Commission in the same year, filed a report and suggested the states be compensated with 50,000 crore for revenue losses.In May 2015, the government, on the basis of strength that it enjoyed in the Lok Sabah, managed to get it pass from the lower house. However, it never had the numbers in Rajya Sabha to get it through. What followed was some serious exchanges between the government and the opposition. Much later, centre approached the principal opposition party, Congress, to work on the loopholes and was able to get it through both the houses.

If the GST Bill becomes law, all the above taxes would now be subsumed under a single GST tax rate. While the final rate is yet to be decided, it is expected to be in the range of 15-18 per cent. In order to bring in GST, a constitutional amendment is needed — with approvals from both the houses of Parliament. The GST Constitutional Amendment Bill, which incorporates the provisions of the GST, was passed in the Lok Sabha last May and is pending approval from the Rajya Sabha. After many a push and pull from the Opposition, the elder’s approval might finally be at hand. It is likely the deadline for the roll out of GST would be April 1, 2017.

Importance of GST

GST will certainly help in making India a single market as it will ensure a seamless flow of goods and services and thus doing business will become far easier than what it is right now. It will also simplify the taxation structure and keep it free from state’s whims and fancies. Some of the economists have predicted that GST will help India’s GDP growth rate bolster by 1-2 percent.

Impact on common life

Most of the household items are going to get cheaper. Let’s assume you are a customer living in Mumbai buying a product originally from some state up north. Now by the time the final product reaches you, various state taxes are levied on it, making it expensive. But with GST in place, the only tax levied on it will be at the time of purchase making it far cheaper than what it would have been. Also it is expected that once doing business is eased, a lot of private firms will go local in far flung markets of the country, ushering in a new era of economic growth, creating more jobs and opportunities.

Conclusion

Most developed countries have followed this unified tax structure. While it is expected that the states might have to suffer a bit but a proper compensation will help them get on the track.Before we wind up, here is the final piece of cake. 140 countries in the world have adopted GST and most of them follow a unified tax system. India, however, will follow the dual system of taxation as the state and the centre both will impose taxes. Thus after Brazil and Canada, India will be become the third country to adopt the dual model.

 

All you need to know about GST

2017-04-04