GST basics have been covered in RSTV debates and PIB.
GST rate will be harmoniser and standardiser
For several manufacturing products, the current prices are higher than whatever the GST rate is going to be. So the prices of manufacturing products will come down. But the prices of services are lower than whatever the rate is going to be, so the services rates will go up. Standardisation is all about paying more for one product and less for another and create a harmonising base.
Considering a GST rate of 18%, there will be uniform taxation on goods and services. The exempted products are petroleum products, tobacco and alcohol. But there will be products that will be exempted from 18% and taxed at a lower rate. It has to be realised that if too many products are exempted, it nullifies the intention behind GST, which is standardisation. Many states have argued and will argue that food products should be taxed at a lower rate because they are items of essential consumption. It is not yet known though what consists the list of exempted items. It is possible that food product GST rate might be as low as 4%. If too many exemptions
Impact of GST will be nullified
The Revenue Neutral Rate (RNR) goes up. If something is less than 18%, there will be other things which will have a higher rate.
If the tax system is streamlined, it enhances the resources to be spent on everyone.
Most countries that have equivalent system as GST, don’t have a federal structure. India having a federal structure is expected to have three different GST rates.
The country that comes closest to having same GST structure as India is Canada. It took more than ten years to bring about the reforms in its existing GST structure.
GST in India
The GST road map is of 10 years. By the next year’s budget, there should be a GST bill. It will give some kind of a band. The cap on GST is not possible to be included as the revenue neutral rate is not known. The band can be anything between 16-22% depending on what exemptions are put in place.
There will be an indication as to what items are part of GST and what are not. Informally it is known that taxes like entry tax will be subsumed, but it is not known formally unless the GST council does the work.
If alcohol, petroleum products, tobacco are part of GST, the RNR will be less, if not, the RNR will be more.
GST and states
The GST will be at the point of consumption, much of the manufacturing tax has been at the point of production. So if there is GST, manufacturing state tends to lose and consuming state tends to gain. So, WB gains and TN loses.
Similarly, there are other manufacturing states like Maharashtra, Gujarat who also had similar apprehensions about revenue losses.
If one big state does not support GST, it is not a major problem. It is similar to what had happened under VTA also. Eventually, when the states are reassured that there won’t be any revenue loss and the centre has already reassured them, they will support the GST to garner benefits.
It is expected that there will be inclusion of previously non-included traders. Hence, many apprehensions about the revenue loss will disappear. Other issues that states had like revenue compensation, inter-state GST have been already taken care of.
Thus, not much obstructions on part of states is expected.
GST main benefits
GST replaces complex and multiple central and state taxes with one GST. So, instead of multitude of taxes like sales tax, state VAT, entertainment tax, all are supposed to get subsumed into GST. Thus, the tax structure becomes easy.
Even after 70 years, there isn’t any single national market. The states would try to maximise its own revenues and try to protect their revenues in inter-state movement of goods by levying octroy, central taxes on inter-state movement of goods etc. Thus, the small markets add in cost of doing business, time delay, and corruption. A single market makes the business functions efficient.
The tax administration will be easier. It will be difficult to evade taxes and will increase the tax revenue.
The need of constitutional amendment for GST
Under constitution, the centre has the right to levy taxes at the point of production and the states had the right to tax at the time of sales.
There is no mention of service tax in constitution, thus the centre has been implementing the service tax as it has all the residual power. Soon, service tax became a huge part of GDP. The states realised that they did not have access to huge source of funds.
So, partly to simplify tax structure and have more equitable distribution of taxing powers at the centre and the states, there was a need of constitutional amendment which will give both centre and state the right to tax goods as well as services.
This is a necessary condition and not sufficient as after the CAA bill, there will be three other legislations- the central GST, state GST and interstate GST
GST and consumer
For first few years, taxes will be slightly higher and it may be expensive, some services especially. Certain prosperous manufacturing states are likely to lose in the short term as GST is the destination based tax.
The inflation may go up mainly because under the present system, the taxes are at lower rate. The taxes on goods are about 27% and services is 15%. So, in uniform GST, the tax on services will go up. Hence, services will become expensive.
But, by looking at the consumption basket of India, typically the rural consumption basket as India is a rural economy, services don’t count for much. Thus, increase in service taxes will not matter much.
GST and private companies
There are reports that 6 million establishments will be covered in GST. The corporates will gain hugely. They will get a single common market and because of huge economies of scale, there will cost saving for them. Right now, the companies have to maintain warehouses in different states when the goods move inter-state. Post GST, there tend to be no such additional expenditures.
Thus, in medium to long term, all will benefit from GST.