Goods and Services Tax (GST)

The 122^nd Amendment to the Constitution is about to give India the most progressive tax reforms in the form of Goods and Services Tax (GST) which should make life easier for the trade and industry and more importantly reduce the cost of goods and services for the consumer, without compromising on the revenues of either the Centre or the States.

By a single measure, India would move up the World Bank ranking of ease of doing business by several notches.

What is GST

It is a plethora indirect taxes which contribute to bulk of revenues of the states and just about half of the tax kitty of about Rs 16 lakh crore of the Central Government. While direct taxes like the personal income tax concern a small fraction of the population, the indirect taxes affect every Indian. Since the indirect taxes are on consumption, rich and poor, both have to pay the same amount.

Presently, the Constitution gives mandate to the Centre and the States to levy indirect taxes ranging from excise duty, customs, service tax. Valued Added Tax or sales tax, entertainment tax, octroi, entry tax, purchase tax, luxury tax and different surcharges. Both the Centre and the States have their own official machineries to collect these taxes. But for Central excise and VAT, most of the taxes get calculated on a base which itself has been subjected to taxation at some or the other stage of manufacturing value chain. So, it is a tax on tax making goods and services rather expensive for the ultimate consumer while making life hard for the trade and industry. The most visible example of inefficiencies of the system can be seen at inter-state borders with long queues of trucks being subjected to different kind of tax inspection and payment ofoctroi and entry tax, blocking traffic on the highways for hours together.

With the roll out of the GST, all these taxes would be subsumed into a single tax for the consumer. The Centre 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. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. Services and goods would be subjected to taxes only on value addition at each stage, thus bringing down the overall tax burden for the consumers.

GST Rate

There would be about three rates - Standard rate in the form of X which will cover bulk of the items, X-minus for the items of mass consumption and X-plus for the luxury goods or the so-called “sin goods’’. In the Constitutional Amendment, there is no mention of the GST rates, which would be decided by the GST Council comprising of Union Finance Minister as the Chairman and Finance ministers of the states. Any decision of the GST Council would require three-fourth approval of the Council.