The pioneering Goods and Services tax is now on its way to be implemented from 1st July. It is important to understand that GST is not a tax concession scheme where the government has reduced the tax rates and hence all the goods and services would become cheaper once GST is implemented.
The need for GST has been felt because under the current indirect tax structure 1) tax barriers have fragmented the Indian market, 2) cascading effects of taxes on cost have made indigenous manufacture less attractive, 3) complex multiple taxes have raised cost of compliance.
Government was attempting to fix a single Revenue Neutral Rate (RNR) on the goods and services so that the total tax revenue of the State and the Central Government remain same. The GST Council has finalised a four-tier GST tax structure of 5 per cent, 12 per cent, 18 per cent and 28 per cent, with lower rates for essential items and the highest for luxury and de-merits goods, including luxury cars, SUVs and tobacco products, that would also attract an additional cess. There is also a special rate for precious metals. The rate of 18% would however be applicable for most goods and services.
Most goods would become more expensive since the GST rate of 18% or 24% is much more than the present VAT rates which are around 12-15 %. Some goods would become cheaper due to lower rates levied on such items. The dealers and retailers are not likely to pass on this extra rate immediately to the consumer and they would profit from the increase Input Credit Tax (ICT). However, soon the consumer would reap the benefit and the prices would come down.
All the services would become more expensive immediately since the present Service Tax rate is only 15% which is now raised to 18% in GST.
Most analysts forecast the economy to grow close to 7.4% in 2017-18, the first year of GST rollout, which is slightly higher than 7.1% in 2016-17, but lower than 7.9% of 2015-16.
While GST is unlikely to be a “positive” for economic growth in the short term, Crisil’s Joshi said the reform will improve the ease of doing business, bolster investor sentiment and lure more foreign investment in coming years.
Some benefits of GST:
(a) Increased FDI: The flow of Foreign Direct Investments may increase once GST is implemented as the present complicated/ multiple tax laws are one of the reasons foreign Companies are wary of coming to India in addition to widespread corruption.
(b) Growth in overall revenue: It is estimated that India could get revenue of $15 billion per annum by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. Over a period, the dilution of the principles may see that only part of this is accruing.
(c) Single point taxation: Uniformity in tax laws will lead to single point taxation for supply of goods or services all over India. This increases the tax compliance and more assesses will come into tax net.
(d) Simplified tax laws: This reduces litigation and waste of time of the judiciary and the assesse due to frivolous proceedings at various levels of adjudication and appellate authorities. Present law appears to be much worse and an amalgam of the bad parts of VAT/ ST/ CE.
(e) Increase in exports and employment- GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production -land labour and capital.
IMPACT OF GST ON INDIAN ECONOMY:
- INCREASE PRODUCTION: Reduce tax burden on producers and foster growth through more production. This double taxation prevents manufacturers from producing to their optimum capacity and retards growth. GST would take care of this problem by providing tax credit to the manufacturer.
- ELIMINATES TAX BARRIERS: Various tax barriers such as check posts and toll plazas lead to a lot of wastage for perishable items being transported, a loss that translated into major costs through higher need of buffer stocks and warehousing costs as well. A single taxation system could eliminate this roadblock for them.
- REDUCE PRICES: A single taxation on producers would also translate into a lower final selling price for the consumer.
- TRANSPARENCY: Also, there will be more transparency in the system as the customers would know exactly how much taxes they are being charged and on what base.
- WIDEN TAX BASE: GST would add to government revenues by widening the tax base.
- INCREASES THE COVERAGE AREA OF TAXATION: GST provides credits for the taxes paid by producers earlier in the goods/services chain. This would encourage these producers to buy raw material from different registered dealers and would bring in more and more vendors and suppliers under the purview of taxation.
- INCREASE COMPETITIVENESS: GST also removes the custom duties applicable on exports. Our competitiveness in foreign markets would increase on account of lower cost of transaction.
The introduction of Goods and Services Tax would be a very noteworthy step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax, it would alleviate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of reduction in the overall tax burden on goods and services. Introduction of GST would also make Indian products competitive in the domestic and international markets. Last but not the least, this tax, because of its transparent character, would be easier to administer. However, once implemented, the system holds great promise in terms of sustaining growth for the Indian economy.