GST a big push to economic growth

The proposal to introduce a unified indirect tax regime across the country through the Goods and Services Tax (GST) has now become operational. With the enthusiasm of successful implementation and the impressive performance of almost all the States with Value Added Tax at the States and the CenVAT, the union government mooted the idea of introducing GST in India.

Implementation of GST in India, with its federal democratic structure is not as easy as in a unitary government. However, the lofty objectives of elimination of cascading effects, abolition of multiplicity of taxes, a unified common market, promotion of exports and ‘Ease of Doing Business’ etc., made the States come around the Centre extending their full cooperation taking one more step towards cooperative federalism in India.

Andhra Pradesh, a forerunner of fiscal reforms in 1990s, is second to none in welcoming this great tax reform. Its move to convene the special Assembly session on Tuesday to approve the SGST is appreciable.

Advantages of GST

The first advantage is that the new tax replaces multiplicity of taxes at the Centre and in the States. At the Centre, it subsumes taxes and duties like central excise duty, additional excise duties, the excise duty levied under the Medicinal and Toiletteries Preparation Act, service tax, additional custom duty which is otherwise known as counterveiling duty, special additional duty on customs, surcharges and cesses.

At the State-level, GST subsumes VAT/Sales tax, entertainment tax (unless if it is levied by local governments), luxury tax, taxes on lottery, betting and gambling, cesses and surcharges, entry tax imposed not in lieu of octroi. The subsumation of taxes and duties are only indirect taxes and the introduction and the design of GST is nothing to do with the direct taxes. Secondly, GST will reduce the net tax burden due to reduction in cascading effects and compliance cost, thereby benefiting the consumers in terms of reduction in prices.

The prices of some goods may increase while others may decline resulting in an overall advantage to consumers depending upon the graduated rate structure, the essential goods being exempted and/are subject to floor rates. The consumers will also be benefited due to the phasing out of Central Sales Tax.

Thirdly, the trade, industry, and agriculture will be benefited by a more comprehensive, transparent and wider coverage of input tax credit and service tax set-off and a consequent reduction in tax burden. Fourthly, GST will give a big boost to exports as exports are zero rated under GST regime. Similarly, GST regime is small-trader friendly as it benefits and protects by enhancing the threshold limit for both goods and services.

Another important advantage is that the tax system would become simple and easily understandable in tune with the canons of taxation and increases tax compliance. It also promotes ‘Ease of Doing Business’ making the entire country a single common market. The states will also be benefitted in the long run with enhanced tax revenue mainly because of the widened tax base due to empowering States to impose tax on services.

However, States may sustain revenue loss in the initial years of implementation of GST. In fact, this is the most important contentious issue that has stalled the formal approval of GST by the States for several years. The proposed GST Act contains enough provisions to compensate 100 per cent of revenue loss of the States by the Union government for a period of five years as recommended by the GST Council. This is over and above what was recommended by the Fourteenth Finance Commission regarding compensation.

Challenges in implementation

Though necessary procedures and systems are put in place for the rollout of this important tax reform from July 2017 and the States and the Centre have come to a consensus on the rules of the game of GST, there exists several challenges to its implementation. First and foremost is the impending design of rate structure by the GST Council. It is a tough job for the GST Council to adopt a rate structure which is revenue-neutral. It is the responsibility of the GST Council to strike a balance of rates that is agreeable to all stakeholders, especially the States.

There is no uniformity about the rate structure or exemptions, floor rates etc., and differ widely across the world. A cross-country comparison shows that the maximum rate of GST ranges between 20-25 per cent. Just to mention a few cases, Australia, France, Canada, Germany, Japan, Singapore, Sweden and New Zealand have adopted GST rates of 10 per cent, 19.6 per cent, 5 per cent ,19 per cent, 5 per cent,7 per cent, 25 per cent and 15 per cent respectively.

Let us hope that rational and reasonable tax rates for different goods and services will be decided in the ensuing meeting on 18-19 May 2017 scheduled to be held in Srinagar. The GST Council may adopt a flexible mechanism of trial and error method over the medium term as far as the tax rates and exemptions are concerned.

Besides, estimation of revenue loss and its timely distribution among States, the 1% additional tax levied for two years for the benefit of manufacturing States, establishing GST Network and undertaking capacity building programmes to provide necessary knowledge and skills relating to the GST law, design, rate implications, filing of returns, refunds and accounting systems etc., are all future challenges that the GST Council, Centre and States should solve with a missionary zeal.

No doubt, GST Council has been established as a formidable institution with adequate statutory provisions. It is expected to address the grievances of the industry, trade, agriculture, consumers and the services sector and resolve all the problems in a friendly environment to ensure its grand success in India. Then only GST will help in boosting economic growth at least by an additional 2 per cent in the immediate future. (Writer is Former Head, Dept. of Economics, Andhra University)

By Prof Rokkam Sudarsana Rao