The Gist of the GST
- In Economics
- 09:20 PM, Nov 27, 2015
- Pramod Kumar Buravalli
The Status on May 8th 2015: The Constitutional (122nd Amendment) Bill, 2014 on Goods and Services Tax (GST) was passed in the Lok Sabha with 2/3rd majority on Wednesday May 6th 2015 even as the Indian National Congress (INC) party staged an inexplicable walk out even after the Finance Minister Shri Arun Jaitley explained and rebutted all concerns raised by the aggrieved party. The INC’s major concerns seem to stem out of the exclusions- petroleum, alcohol, real estate whereas their concerns (if any) should have been around the inclusions.
Now, the GST Bill requires to be passed with 2/3rd majority (162 seats) in the Rajya Sabha followed by its ratification by atleast 50% of the States before it becomes law. The magic number to pass the GST in the Rajya Sabha is reduced to 123 if the congress party with 68 seats abstains but the bill still needs other regional parties to vote in favor or abstain from the vote.
The AIADMK with 11 seats is so far against the GST bill in its current form. The Trinamool Congress (TMC) with 12 seats and the Biju Janata Dal (BJD) with 7 seats respectively are on the fence but they might be cajoled to either abstain or vote in favor when the bill is brought up again next week. The votes from NCP, JDU, SP, and BSP are crucial yet undecided. And if all fails, the NDA Government might decide to send the bill to a joint committee of both of the houses for further review and recommendations.
What’s in and what’s out?
The current compromise and salient features of the GST in its current form are:
1. Compensation will be provided by the Center to certain states for loss of revenues for 5 years. Especially states that are manufacturing hubs such as Maharashtra, Tamil Nadu. The compensation will tapered- 100% for first three years, 75% in the fourth year and 50% in the fifth year.
2. Article 246A confers simultaneous power to the Union and the State legislatures to legislate on GST.
3. Article 279A paves way for the creation of a Goods & Services Tax Council (GSTC), which will be a joint forum of the Center and the States. The GSCT will function under the Chairmanship of the Union Finance Minister with the Deputy Chair being State Finance Ministers on rotation.
4. Both Center and States will simultaneously levy GST across the value chain. The Center would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
5. The Center would levy and collect the Integrated Goods and Services Tax (IGST) on all interstate supply of Goods and Services. There will be seamless flow of input tax credit from one State to another. Proceeds of IGST will be apportioned among the States.
6. GST is a destination-based tax. All SGST on the final product will ordinarily accrue to the consuming State.
7. GST rates will be uniform across the Country. However, to provide some fiscal autonomy to the Center and States, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.
8. It is proposed to levy a non-vatable Additional Tax of not more than 1% on supply of goods in the course of inter-State trade or commerce for a period not exceeding 2 years, or further such period as recommended by the GST Council. This Additional Tax on supply of goods shall be assigned to the States from where such supplies originate. (This is another bone of contention for some opposition parties and trade bodies).
9. GST will do away with the concept of ‘declared goods of special importance’ and the term “Services” is proposed to be exhaustively defined as “anything other than goods”.
10. Central Taxes such as Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD) will be subsumed in GST.
11. At the State level, taxes such as VAT/ Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax would be subsumed in GST.
12. All Goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Center on petroleum and petroleum products, i.e., Sales Tax/VAT, CST and Excise duty only, will continue to be levied in the interim period.
Apprehensions, Caveats and Answers
A day after the Lok Sabha cleared the Goods and Services Tax bill, a two-day meeting of the Empowered Committee on GST began in Trivandrum on Thursday May 7th 2015 to arrive at a consensus among states on many contentious issues that are still pending before it.
Some state level issues that still need consensus are tax structure on inter-state services, including transportation and communication, rate of tax on essential commodities, including food products and system of mechanism to collect tax.
Some of the Federal level Apprehensions are illustrated below:
Ø Opposition Apprehension 1: That there is a vast difference between the 2011 and 2015 bill. Therefore it needs to go back to the standing committee of the Rajya Sabha.
o Caveat 1: The 2011 was a bill of the UPA-2 (shepherded by INC). The 2011 GST bill initially sought the appointment of an independent judge to adjudicate disputes between states and the center. The 2011 parliamentary standing committee’s recommendation was to further establish a GSTC to establish a mechanism for dispute resolutions on an ongoing basis.
v NDA Answer 1: 2015 bill by the NDA does exactly what the UPA-2’s parliamentary standing committee recommended which was to establish a GSTC for dispute resolution.
Ø Opposition Apprehension 2: 1 % additional tax on IGST and that there would a cascading effect including increase in prices due to this additional tax.
o Caveat 2: Manufacturing states feel what they manufacture, the taxation advantage in terms of CGST will go to the consuming state.
v NDA Answer 2: In order to compensate the manufacturing state, there are certain protections that are guaranteed by the center to the state including compensation due to the loss. As far as the 1% additional tax, the manufacturing states will set off any likely loss by charging this additional tax.
The GIST of the GST
GST has been in news ever since the NDA -1 government under Prime Minister Atal Bihari Vajpayee decided to replace the existing multiplicity system of taxation in India. Many have tipped the GST to be the single largest tax overhaul system, in the history of independent India. While there is drift between the opposition and government regarding GST, it is expected that GST might see the light of day during the term of NDA-2 under Prime Minister Narendra Modi. There are many theories which suggest that the introduction of GST would actually enhance the economic growth (GDP numbers up by 2 %), bring in FDI and FIIs and clear the negative environment surrounding taxation. The effective taxation rate is expected to hover around 21-22% (down from the present 27%) over a period of time and it is expected that prices on most goods and services will go down due to the expanding ambit of taxation for several sectors.
While many countries have a centrally unified GST, some countries such as Brazil have a dual GST system where GST is levied by both central as well as provincial and state governments. In India, the proposed GST will follow a similar dual system, through which CGST or Central Goods and Service Tax and SGST or State Goods and Service Tax will be levied.
A 13 digit PAN linked number for identification would be provided for taxpayers, with periodical returns submitted to both state and central government. Under the dual taxation system, transactions would have components of CGST and SGST. SGST would be levied only if both parties are located within the state. With Implementation of GST, a uniformity of tax rates and increased competitiveness among Indian business across states can be achieved. Also, due to different tax regulations across different states, it becomes difficult for FDIs and FIIs to evaluate returns on Indian market. A uniform GST system would make India a single market instead of a group of different states with different local and state level taxes.
The question now remains is when will the system be implemented? With the opposition being skeptic of tax revenues for certain states and the exclusions, the compromise expected to be arrived at is expected to be a novel formula for future taxation.
Hope and pray better sense prevails and the broader framework for GST is achieved very soon. India needs it and very quick!
By Pramod Kumar Buravalli
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