After 16 years from the conception of the idea, in August 2016, the Indian parliament finally passed the much awaited Constitution Amendment Bill for the introduction of Goods and Services Tax (GST) which is set to replace almost all indirect taxes in the country by April 2017, effectively simplifying India’s tax system. GST, a value added tax, is a single tax levied on the supply of goods and services from the manufacturers to the end consumers. As per this new tax regulation, the dealer of the product will be liable to pay tax only on the value added by him in the supply chain, thereby offsetting tax credits paid on inputs. Thus, the consumer will bear only the GST charged by the last party in the supply chain.
Under the previous tax regime, the state and the central governments levied different charges such as income tax, sales tax, excise duty, central tax, and security transaction tax separately. The GST is set to replace this procedure of implementing multiple indirect taxes with a single comprehensive tax regime under the GST umbrella. The new regime will have a dual structure with the central government and the state government having administrative powers to charge GST across the supply chain. It will include three kinds of taxes: the central GST, the state GST, and an integrated GST to handle inter-sate transaction.
This new tax reform is said to have far reaching impact on the Indian economy. It aims to eliminate the shortcomings of the current way of applying taxes across the supply chain involving numerous multi-layered policies and to remove the ‘cascading effect’ of multiple taxes on goods and services. The old regime of imposing separate taxes on goods and services and dividing transaction values for taxation purpose led to administrative complications and high compliance costs. The new system of uniform and integrated tax rates is likely to facilitate ease of doing business in the country, while the removal of inter-state taxes is likely to reduce time and logistics cost of the movement of goods. In addition, the integration of taxes and removal of Central Sales Tax (CST) is expected to lead to a decline in prices of domestic goods and services. Lower transaction costs combined with the removal of CST are likely to facilitate a rise in the competitiveness of the country’s goods and services in the international market and boost exports.
A robust IT infrastructure will be the backbone of the GST system, initiating ease of tax administration for the government and transparent and easy conduct of tax services, such as payments and registrations, for the citizens. Only a comprehensive IT infrastructure is likely to enable smooth transfer of tax credit across the supply chain, keeping a check on leakage. The new system is also expected to lead to a decline in the cost of tax collection, thereby generating high tax revenues for the government.
The GST system is also believed to be of significant importance to the consumers. Multiple indirect taxes levied by the central and state governments led to incomplete input tax credit availability which had to be adjusted against tax payable leading to the inclusion of various hidden taxes in the cost of goods and services. The GST system will levy a single tax from the manufacturer to the consumer, providing transparency and clarity of taxes paid. Further, efficient business conduct and reduction of leakages will lower the tax burden on the goods.
While the GST promises to streamline the indirect tax regime with a single tax, it has to overcome various challenges to be successful. Since the country is adopting a dual structure with the central and state governments, the main issue would be the coordination between different states. The central and state governments will be required to come to an agreement regarding the GST rates, administration efficiency, and the implementation of the GST, which might prove to be a cumbersome procedure. Further, IT infrastructure, which is said to be the foundation of the GST regime, will be a critical factor affecting the success of the new system. A strong technology support connecting all state governments, banks, industry, and other stakeholders on a real-time basis will be required for the efficient conduct of business. In addition, since the working of the GST tax regime is different from the indirect tax system, proper training will be required for the tax administrative staff at central and state levels regarding legislation and procedures within the GST. Another factor the government will need to consider is to adjust the new tax in a way that the tax revenue remains at least same without any revenue loss. For this purpose, a Revenue Neutral Rate (RNR) will need to be calculated and critically evaluated, as such a rate is likely to have a great impact on the Indian economy.
GST is a much awaited revolutionary tax reform in the Indian economy. If implemented properly, it is believed to add 2% to 2.5% to the nation’s GDP in the long run. It promises ease of doing business, economic growth, and higher tax revenue. Even with the diverse challenges the new tax regime is likely to be faced with, the GST has the potential to be a game changer for the Indian economy in the near future and is said to pave the way to a ‘one nation, one tax’ system.