Goods and Services Tax – A Paradigm Shift in Indian Taxation

  • August 15, 2016

The Indian system of taxation of goods and services is characterized by cascading, distortionary tax on production of goods and services which leads to misallocation of resources, hampered productivity, and slower economic growth. To remove this hurdle, the Goods and Service (GST) Tax had been proposed. Finally, after a decade since its first proposal, the Constitutional Amendment Bill (to implement the GST) was passed in the upper house of parliament on August 3, 2016. The government is now committed to rolling out the GST by April 1, 2017.

The GST will be a game changing reform for the Indian economy as it will develop a common Indian market and reduce the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization, and reporting, leading to a complete overhaul of the current indirect tax system.

The GST will have a far reaching impact on almost all aspects of business operations in the country, for instance, the pricing of products and services; supply chain optimization; IT, accounting, and tax compliance systems.

The GST will replace most indirect taxes currently in place, as mentioned in the table below.


Salient Features of the Indian GST System:

  • GST is defined as any tax on the supply of goods and services other than on alcohol for human consumption.
  • The power to make laws in respect to supplies in the course of inter-state trade or commerce will be vested only in the Union government. States will have the right to levy GST on intra-state transactions, including on services.
  • GST will subsume both central taxes (central excise duty, additional excise duty, service tax, additional custom duty and special additional duty) and state level taxes (VAT or sales tax, central sales tax, entertainment tax, entry tax, purchase tax, luxury tax, and octroi tax).
  • Provision for removing imposition of entry tax / Octroi across India.

Benefits of GST:

  • GST will broaden the tax base, which is necessary for lowering the tax rates and eliminating classification disputes.
  • Elimination of multiplicity of taxes and their cascading effects.
  • Equalization of tax structure and simplification of compliance procedures.
  • Harmonization of Center and State tax administrations, which will reduce duplication and compliance costs
  • The GST structure will follow the destination principle. Accordingly, imports will be subject to GST, while exports will be zero-rated. In the case of inter-state transactions within India, state tax will apply in the state of destination, rather than state of origin.

The following table reflects the expected changes after the GST regime.

The following table estimates the impact of the GST regime on selected sectors.

Conclusion

After decade long deliberation on the GST, the passage of the Constitutional Amendment Bill in the upper house has reinstated hope for a uniform system of indirect taxation, which could lead to improved business efficiency and economic growth. The performance of GST/VAT in countries that have introduced this form of taxation have shown progressive economic growth as well as an increase in the collection of taxes by their respective governments. While the government has passed the GST bill in parliament, several roadblocks remain.  The passage of the amended bill will need to be approved by the lower house of parliament, followed by the ratification of the bill by minimum prescribed states governments, and finally, agreement on the threshold of taxation, GST rates, sharing of administration and adjudication powers, and the implementation of the Goods and Services Tax Network (GSTN) infrastructure.

This article was first published August 2016.
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