GST – INDIA’S MOST AMBITIOUS INDIRECT TAX REFORM

The big bone of contention in implementation of GST has been – how will the state and the Centre levy one flat rate of tax? Right since the time GST was proposed, the challenges had seemed so overwhelming that many felt, GST would either remain only on paper or would see a very watered down version getting implemented.



And the proposal put out by the FM is a relief – relief because GST will indeed the light of the day but would be a watered down version. To get the states to agree to meet the 1st April 2011 deadline, the FM has diluted the biggest plus point of GST – to have one tax slab for the state as well as the Centre. What is proposed now is multiple tax slab, and it will not include actual money earners like alcohol, petroleum products, electricity and real estate.



So what we could now have is Central GST (CGST) rate pegged at standard rate of 10%, 6% concessional for goods and 8% for services. The proposed timeline is three years, starting next fiscal, 2011-12 where there will be dual GST rate – CGST at 6% for essential commodities and 10% standard rate on other goods. This means, combined GST will be between 12 to 20%. In 2012-13, only standard rate will be reduced to 9%, with CGST remaining constant at 6%. In 2013-14, all rates will be brought down to 16%, both CGST and State GST (SGST) put together (8% each on CGST and SGST). The FM expects peak rates to be 15% in first year, coming down to 12% by end of third year.



This is probably the best formula which the FM could come up with, more importantly, he stuck to the deadline of 1st April 2011 and got the states to agree. The indirect tax stands simplified - goods at 20%, services at 16% and essential items at a concessional 12%. But this has come at a cost. This dual GST is expected to increase costs. Undoubtedly, 20% is high but it could be slightly lower than the current rate, which is around 22.5-23%, excise plus VAT. Only if the manufacturers pass on their benefits to consumers, will the tax burden come down for the common man. A list of 99 essential items exempt under the value-added tax regime will not be taxed under the GST as well. But many have voiced concern that many essential items which get charged just a 4% VAT, will now come under the 12% bracket. And that could be the main cause for concern.







What is GST?

Known as Goods and Service Tax (GST), it is a reform in the entire indirect taxation process of India. This Finance Minister has set the deadline of 1st April 2010 for implementation of GST. The basic idea of GST is to simplify the indirect taxation process and earn more revenue. Its aim is to re-distribute the burden of taxation equitably between manufacturing and services.



What will GST include?

It will include central excise, service tax and state VATs. It will also include entertainment tax, luxury tax and entry tax. GST would be on all products except petroleum, electricity, real estate and liquor. It is a consumption based tax. Currently, the despatching state pays the tax but under GST, it is the receiving state which will pay the tax. There would be a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. Exports would be zero-rated but imports would attract GST, both from the state as well from the Centre. Inter-state transactions would attract an integrated GST of state and centre. Tobacco products, like cigarettes and gutka would face the double wrath and will attract both GST as well as excise duty.



What is input tax credit?

Input tax credit will allow a manufacture to deduct the tax he has already paid on an input from the tax on final product. Credit would then be available on the calculation of GST.



How to calculate GST?

Suppose a manufacturer buys his inputs for production at Rs.10 and then he makes the product with value add which costs Rs.30. The his total cost on goods would be Rs.30, so assuming GST is 10%, GST on output would be Rs.3 and input tax credit would be 10% of cost of input, which would be Re1. So net GST to be paid would be GST on output minus the input tax credit, ie; Rs.3 – Re1 = Rs.2. This is how net GST would percolate down the value chain – from the manufacturer to the wholesaler and then to the retailer and as it goes down the chain, as the purchase price goes on at each level, the net GST would come down.



Does this mean higher prices for common man?

The introduction of GST would remove all the current effects on pricing due to levy of CENVAT and service tax and its cascading effect. Currently, both the Centre as well as states, levy tax on production, manufacture and many more, which add on to the cost of the goods and is passed on to the consumer. Under GST, the central taxes – service, excise, additional excise and customs duties, countervailing duty, surcharges and cesses, all will be subsumed under GST. On the state level - VAT, entertainment tax, luxury tax, taxes on lottery, betting and gambling, state cesses and surcharges, will all come under GST. Hence the idea of GST is that the taxation burden would reduce as it goes down the value chain and by the time it gets to the consumer, rates would be lowest.