Yesterday marks a historic day in the history of Indian economy (post-independence) & also the history of taxation in India. Yesterday the upper house of the parliament i.e. the Rajya Sabha passed the constitutional amendment granting power to the parliament to pass a legislation empowering the government to levy a single indirect tax. This means, going ahead there will be a uniform tax regime called the “Goods and Services Tax” (hereinafter referred to as GST) apart from the Income Tax. Mind you, the GST or the Goods & Services Tax Bill as such is not passed as of now. Yesterday the parliament only the passed the constitutional amendment enabling them to pass a GST. The GST law may take some more time to get passed.
Tax Structure in India
- Direct Taxes
- Income Tax
- Wealth Tax (Now abolished)
- Indirect Taxes
- Central Excise Duty
- Customs Duty
- Value Added Tax
- Service Tax, etc.
So, in effect, all the taxes coming under the indirect taxes list shall now be subsumed under the new GST. This, however, may be effective from 1St of April next year (depending on the time taken for the law to come into effect). Mind you, the taxes on income shall continue to exist.
The Constitutional Frame Work
The Constitution of India provides for a federal structure of governance i.e. the division of power between the State & Central Governments. In line with the federal principle, the seventh schedule to article 246 of the Constitution entails the division of powers between Centre & the state. Entre numbers 82 to 92C of Union List 1 & Entry numbers 45 to 63 of State List 2 (of the seventh schedule) grants power to the Central & State Government to levy taxes respectively. The levy of income tax other than the tax on agriculture is the exclusive prerogative of the Central Government. The question of division comes in the levy of indirect taxes. Say for example the Central Excise Tax, Customs duty, etc are levied by the Central Government. Value Added Taxes (VAT) & Excise Duty on Alcoholic liquor used for human consumption is taxed by the states. The Constitutional amendment to GST empowers the government of India to have a single uniform indirect tax system. As a consequence, the tax sharing between Centre & States also becomes an issue (which shall be addressed by the GST Law).
Ease of doing business
The ease of doing business factor or the index as such has been a very sorry state for India. Part of this is because of the complex tax structure in this country. Added to this is the harassment of assesses (taxpayers) by the departments. So any businessman is now assured that instead of a plethora of taxes viz. Excise, Customs, VAT, Service Tax, etc, he is required to comply only with a single tax namely the Goods & Services Tax (GST). So naturally more businessmen are inclined to invest in India. This picks up the investment cycle in India. It is not just a feel good factor for business sentiment in India, but also an assurance of a predictable and an easy taxation system.
The Salaried Class
The salaried class and/or the middle class has always something to crib about. This GST too is not an exclusion. It comes as a set of advantages and disadvantages. With the introduction of GST, generally, the cost of goods is set to come down. However, the cost of services may take a toll. My hint is construction costs, the cost of fast moving consumer goods, rates at multiplexes, retail prices etc will come down marginally. However, the cost of services viz. banking, insurance, telephone, internet, air conditioned restaurants etc. may raise to some extent. It all depends on the rate of tax which the government wishes to levy. At rate around, 18% will ensure reduced rate of goods and higher rates for services. The price of alcohol, tobacco, and other addictive substances is bound to go high (As has been the same case in the history of taxation).
I shall take an example of Commodity X to make this simple. Let us say the price of commodity X is Rs 100/-. For the sake of simplicity let us take Rs 100/- also to be the taxable value (in reality it need not be the same). Also we shall take the rate of Excise Duty (ED) as 12.5%, Value Added Tax as 14.5% (though there are varied rates viz., 1%, 2%, 5%, 14%, 15% etc.) and Service Tax as 15%. I am ignoring all exemption and abetments as the same shall continue in the new GST regime with a minimal or no impact on the ultimate tax payable.
- Price of the Commodity X = 100/-
- Added ED = Rs 12.5/-
- New Price = Rs 112.5/-
- Add VAT = 16.3125/- (112*14.5%)
- Final Price of the Commodity X = Rs 128.8125/- (or Rs 129/-)
- Even if the rate of VAT is taken as 5%, the ultimate price will be Rs 118.125/-
Hence, in a GST regime, any rate of 18% (or below) shall be beneficial to the common man. Anywhere between Rs 1/- to Rs 11/- on a variety of goods will be the benefit.
Now let us look at services. Take for example the telephone services. A typical telephone bill of Rs 500/- per month. The rate of Service Tax 15% (I am ignoring abetments and exemptions).
- Telephone Bill – Rs 500/-
- Service Tax – Rs 75/-
- Total Bill Amount – Rs 575/-
Under the new GST regime with 18% rate, the new bill value shall be Rs 590/-.
This is a very simplified form of how GST will work. Mind you, a very simple calculation of an increase of Rs 15/- in services and reduction of Rs 11/- in goods may not suffice the actual findings. It ultimately depends on how many goods are having a reduced rate and how much of services are getting increased. We cannot avoid basic services like telephone, banking, insurance, etc. Mind you, the cost of the bill in air-conditioned restaurants is bound to increase.
Any government will be naturally inclined to increase its revenue. Some estimates say that the revenue to the governments will increase by 15 billion. Though the collection from goods is reducing, I see two reason why the revenue loss shall not just be compensated by also increase.
- Increase in rates of service.
- Increased compliance by tax payers i.e. more people is willing to pay taxes in a simplified tax regime. Also, the chances of evading taxes are less in a GST regime.
Another issue is of the state governments. Those state governments who have high income through state levies shall take a bit of a beating. Those states that consume more (or buy more in simple terms) shall be beneficial, say for example Uttar Pradesh. The central government has however assured to make good the losses of the losing state governments for 5 years after the GST comes into the picture.
When I say market, I do not refer to the stock markets. The stock markets work on business sentiments, global factors, oil prices, terrorism, political environment and a host of other issues. Taxation is just one aspect of it. Here, when I refer to market, I refer to the market for goods and services i.e. the tangible market. With a unified indirect tax regime, India is also set to become a one market for all goods and services. This helps in the free movement of goods and services within and among the states of India.
The Challenges Ahead
The major challenge ahead for the Government is to convince the people and take them on board in this new taxation. All the economic and taxation experts are talking about many things save for this. For any new law and system that comes in place, at least in a democracy what matters the most is the people’s participation. So I think this is the major challenge ahead – to convince, to convey, and to communicate the new language of taxation to the people of India.
The other challenges include:
- The rate of tax to be levied.
- Exemptions and abetments available in the new tax regime.
- The availability of infrastructure to create a new tax regime. Will they just merge the existing indirect tax departments or will subsume the existing ones into the new GST council is a matter in question. What will happen with the state commercial taxes department and the Central Board of Excise and Customs is a major challenge ahead.
- The level of expertise required to manage the new system is another question that needs an answer.
- A new administrative system may come to a place. So taxpayers who have been adjusted to the old system need to re-align themselves.
Any revolutionary measure as big as the GST will come with a set of opportunities and challenges. There is no doubt that the GST is a game changer for the Indian economy. What matters most is how the Government, the businesses, and common man respond to the challenges ahead for this new system. Some estimates say that GST may boost the GDP of our economy by 1-2% in the coming years. So the dream of a 10% GDP growth rate may be achieved. Also, the investment is set to increase, people are also hopeful of increased employment generation, and also many others aspects of the economy is set to have a positive impact. Let us all hope that this new law which is ready to come in force shall help build and boost our economy and take our country to newer heights in the days to come.