A bird’s eye view of GST
Exactly after 25 years of initiation of economic liberalisation, on August 03, 2016, another significant milestone has been made in Indian economic reform process for more than one reason. After seven hours of deliberation, the constitution amendment bill for Goods and Services Tax(GST) was passed in Rajya Sabha – the Upper House. There were 203 votes in favour and none against. Barring All India Anna Dravida Munnetra Kazhagem (AIADMK), all the political parties, including the main opponent, Congress, supported the bill. Ms. Jayalalitha’s party, AIADMK, hailing from one of the leading manufacturing state – Tamil Nadu, staged a walkout. With the amendments, the Lower House – the Lok Sabha, has also ratified the GST bill on August 08, 2016. Incidentally, the Lok Sabha had passed the bill in May 2016, where the NDA government has the majority.
GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The unification of domestic markets through GST will alter India’s economic architecture. This indirect tax will subsume the multiple central and state taxes and reduce the cascading of tax on goods and services. The uniform consumption-based tax structure across the land will be for almost all the goods and services barring a few. The GST would be neutral in its implication, and simple to administer. It would also encourage voluntary compliance and create a single national market to enhance the efficiency of the movement of goods and services in India. In the process, this would boost the GDP further.
In 1991, the economic liberalisation was crisis-driven whereas GST is not. At that time, India was facing a balance of payment crisis. As a part of the bailout package, International Monetary Fund(IMF) insisted India to undertake a series of structural economic reform measures. Primarily out of compulsion, the then Narsimha Rao’s Government started some breakthrough reforms. The policies were formulated to de-regulate the markets, to reduce the import tariffs and to encourage the greater foreign investments, etc. Telecommunications, insurance, steel, electricity among others,which were effectively nationalised till mid 50’s, were actually started privatising from 1991 onwards. Since then the successive governments, irrespective of their political ideologies, accepted the reform process and in their own way tried to take it forward. Some had succeeded and some others had not, for different compulsions political or otherwise. As a result of these efforts, the Gross Domestic Product(GDP), which was stuck at famous ‘Hindu rate of growth’ of between 3 per cent and 4 per cent , for years at a stretch, had started growing steadily upwards. The highest growth rate of 9 per cent wasreached in 2007. However subsequently, without much fresh impetus to reforms, the rate of growth of GDP had started sliding down significantly to 5 per cent by 2012-13. The economic reform is good for India even if the French economist Thomas Piketty thinks India is broadening its inequality by doing so. He fails to observe the fact that because of economic reforms in India, per year(between 2004/5 and 2011/12) nearly 15 million poor could get the opportunity to cross poverty line.
Although presently, India’s GDP is growing at the fastest ratein the world, at 7.4 per cent , which is faster than that of China. Even then, it requires fresh stimulus. In order to sustain this level and take it further to a double-digit growth trajectory, it requires path-breaking reforms. Therefore, from time to time India needs to think of how to accelerate the reform process and thereby boosting the rate of GDP growth further. While India was celebrating 25th years of economic liberalisation celebration, IMF had suggested four important reform measures to accelerate this process. GST is one of them. According to Vijay Kelker, – “The growth in GDP can be between 2 per cent and 2.5 per cent with the implementation of a well-designed GST”. Therefore, introduction of GST is not only significant but also historic.
A well designed, single GST for all goods and services is ideal and more we deviate from this point, the lesser is the impact on GDP growth rate. To start with single GST across the country could not be implemented because of several compulsions. It reminds us of famous advice of Aristotle – “ For the things we have to learn before we can do them, we learn by doing them.” Therefore, we have “to try and to try and to try until it comes right” – says William Faulkner. Therefore, introduction of GST is important, even if it is not the ideal one. Keeping in mind the federal structure of India, to start with there will be two components of GST- Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. The tax will be levied on every supply of goods and services. Centre would levy and collect CGST and States would levy and collect the SGST on all transactions within a state. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilisation of credit would be permitted (Fig1).
PM in Lok Sabha: GST is a Great Step by Team India Great Step Towards Transformation
The Prime Minister, Shri Narendra Modi, described the Goods and Services Tax (GST) as a “Great Step by Team India,” a “Great Step Towards Transformation,” and a “Great Step Towards Transparency.” He was intervening during the debate in the Lok Sabha on the GST Bill on August 8, 2016.
The Prime Minister noted the date – 8th August – and recalled that in 1942, on this very day Mahatma Gandhi had given the call for the Quit India Movement. He said that today, the country would begin its march towards freedom from tax terrorism. He described the imminent passage of the Bill as a victory not for any political party, but for Indian democracy.
Recalling the discussions and parleys on the Goods and Services Tax, the Prime Minister said that he had invited both Ms. Sonia Gandhi and former Prime Minister Dr. Manmohan Singh to discuss the same. He noted that one of them was a Lok Sabha MP and the other was a Rajya Sabha MP.
The Prime Minister said that the consensus over GST is proving that Rashtraneeti is above Rajneeti (national issues are above politics) in India.
He described the GST as one more pearl in the necklace of Ek Bharat – much on the lines of the Railways, the All India Services, and visions such as Bharat Net and Sagarmala.
With GST, we intend to bring uniformity in taxation, said the Prime Minister, adding that the consumer would be supreme in the new dispensation. The Prime Minister mentioned the judicious use of man, money, machine, material and minutes (time) as an important principle of sound economic policy, and said GST would aid in achieving this.
The Prime Minister said GST would also help bring in real time data, as its strength was in technology. He said most of the things that can impact consumer inflation have been kept out of the ambit of GST. He said GST would help reduce corruption in collection, as well as the cost of collection.
The Prime Minister asserted that small businesses will also gain tremendously from GST, and will feel more secure with GST.
He said that the Government is focusing on economic and educational empowerment of the poor, so that we can mitigate poverty.
In the case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services. The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-state seller would pay IGST on sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State (Fig 2).
GST Journey So Far
2000- In 2000, the Vajpayee started discussion on GST by setting up an empowered committee. The committee was headed by Asim Dasgupta ( Finance minister, Government of West Bengal)
2002-04- The Kelkar Task Force on the implementation of Fiscal Responsibility and Budget Management (FRBM) Act. 2013, and suggested a comprehensive Goods and Service Tax ( GST).
2006- A proposal to introduce a national level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Budget speech for the financial year 2006-07.
May 2007 – Empowered Committee of State finance ministers, on this request, started worked on GST roadmap.
Nov 2007 – The Joint Working Group submitted its report to the Empowered Committee on November 19, 2007.
April 2008- Empowered committee finalized views over GST and submitted report “ A model and roadmap for Goods and Service Tax ( GST) in India.
NOV 2009 – First Discussion paper on released by empowered committee.
Feb 2010 – Mentioned in the speech of the then FM – GST to be introduced in April 2011.
March 2011 – The constitution 115th amendment bill introduced in Lok Sabha for levy of GST on all goods or services expect for the specified goods.
August 2013- Standing Committee submitted its report on GST
NOV 2013- EC rejected the proposal of include petroleum products.
The constitution 122th amendment bill passed in Lok Sabha for levy for GST which enables the introduction of GST probably by April 2016 on 17 the December, 2014.
03 Aug 2016- The Constitution (122nd Amendment) Bill was passed by Rajya Sabha.
In order to reach a political consensus, certain amendments were made. These amendments include getting rid of a 1 per cent tax that the Centre was to levy on interstate trade, and compensation to states for the loss they would incur in the first five years once the GST is implemented. GST will not include electricity duties, excise duty on alcohol and stamp duty on immovable property in its purview. Because these taxes would generate substantial amount of revenue to the state governments, they want them to be excluded. The petroleum is to be excluded from the GST’s ambit at a zero percent rate. It will continue till the proposed GST council would reach an agreement acceptable to the States and the Centre.
The unification of domestic markets through GST will alter India’s economic architecture. However, the new structure will bring its own complexities to start with, which all the stakeholders needed to be acclimatized. Setting up nation-wide IT backbone for the administration of the GST tax regime is one of the challenging tasks. For the implementation of GST in the country, the Central and State governments have jointly registered Goods and Services Tax Network (GSTN), a non-government company to provide shared IT infrastructure and services to Central and State governments, tax payers and other stake holders. The key objectives of GSTN are to provide a standard and uniform interface to the taxpayers, and shared infrastructure and services to Central and State/Union Territory governments.
Arun Jaitley, Union Finance Minister
We had earlier three major differences on the GST. We worked out the differences. There is one issue which is the 18 per cent issue and we feel it is a very important issue, because we are worried about inflation resulting from no cap. So, now that discussion (will be) in December.
Rahul Gandhi, Vice President, Congress
Are we going to reduce the states to come to Centre with begging bowls to ask for money? How do we protect the rights of states? The interest of the people is supreme. Without a cap, it will increasingly be a regressive tax, which will become a burden on people.
Sitaram Yechury, General Secretary, CPM
Nitish Kumar, CM,Bihar
I, on behalf of my party, loudly and clearly demand that the standard rate of GST, which applies to over 70 per cent of the goods and services, should not exceed 18 per cent and the lower rate and the demerit rate can be worked on that 18 per cent.
P Chidambaram, Member of Parliament, Congress
PM Narendra Modi had opposed the GST Bill when the UPA was in power. The then Gujarat Chief Minister had termed it “anti-states”. He ruled Gujarat for 13 years. If you had agreed about the merits of GST earlier, it would have been implemented long back and the country would have benefited long back.
Mallikarjun Kharge, Congress Leader in Lok Sabha
It’s often confusing whether the BJP and Congress are supporting or not supporting the GST Bill, unlike our party, which has promised the GST in its manifestos. I feel like a teenager in the presence of these senior lawyers.
Derek O’Brien, Trinamool Congress MP
According to the council’s rule, if the states get 75 per cent and above votes, then the matter will be passed. Besides that the Centre gets 1/3rd of the vote, while the states get 2/3rd of the votes. In that case, the Centre will have veto powers. This will affect the federal structure.
Satish Chandra Mishra, BSP MP
The legislative issues are still in progress. Now that the Lok Sabha has ratified the bill, it will have to be approved by the majority of the State Assemblies before it can be sent to the President for assent. The tasks ahead are the drafting of the specific Central and State GST laws that will need to be passed in Parliament and State legislatures. Apart from the legislative issues there are some other issues as well.
It is indeed one of the significant game changing reforms that India has been looking forward for a decade. But more than that it is the “best example of cooperative federalism” – as indicated by the Prime Minister. The fact that the bill was passed by the thumping majority was unprecedented. Never before in India, there was so much of consensus across the political parties, across the varied ideologies, across the states and union territories. This is what, in my mind, created history. With this kind of consensus across the board, even land and labour reforms seems to be doable. As I mentioned before, GST is certainly another significant milestone in Indian economic reform process for more than one reason.
by Madhumanti Sen Gupta