What Aches GST ?

The Goods and Services Tax implementation is an ambitious reform exercise. The envisaged GST regime completely reinvents the exisiting Indirect Taxes system into a more comprehensive, and, hopefully, efficient avatar. Before attempting to understand the proposed GST structure, let us take a brief look at the exisiting indirect taxes architecture.

Indirect Taxes, in India, are levied at three levels; centre, state and local bodies.

Central Government levies taxes on:

1. Manufacture of goods in form of Excise Duty or CENVAT,

2. Rendering of Service in form of Service Tax

3. Import/Export of goods in form of Basic Customs Duties, Countervailing Duties and other allied duties under the Customs law

4. Interstate sale of goods in form of Central Sales Tax

State Government Levies Tax on:

1. Intra-state sale of goods in form of VAT (Value Added Tax)

2. Entry of goods in form of Entry Tax

3. Entertainment/Luxury goods in form Entertainment or Luxury Tax

4. Sale of Property in form of Stamp Duty

5. Excise duty on Alcoholic Liquor

6. Vehicles in form of Motor Vehicle Taxes

Local Bodies Collect Taxes on:

1. Entry of goods in form of Octroi duties

2. Properties in their respective jurisdiction in form of Property Taxes

3. Usage of Water in form of Water Tax

There are underlining restrictions in the Indian Constitution on the powers of Union/State/Local Governments in levying taxes. The constitution prohibits central government from levying excise duty on electricity, alcoholic liquor, and narcotics. It further prevents the central government from taxing intra-state sale of goods. Constitution restricts the state government from levying excise duties on manufacture (except on alcoholic liquor), duties on import/export of goods/services into/from India, taxes on services rendered in India. Hence, there are many allegations on the vertical imbalance in the centre-state devolution of revenue powers in India. The exisiting system is ridden with several inefficiencies like cascading effect (tax on tax) of Excise/Customs duties, low base, poor compliance, unhealthy tax competition between states etc. Another important feature of this system is that the jursidictions of state and central government are ineptly designed.

The proposed GST attempts to plug some of the loopholes existing in the current system and improve the over all efficiency of India's indirect tax system. GST proposes to bring about a uniform dual levy regime across India. It basically attempts to intergrate indirect taxes at all levels and effectively reduce the cascading effect of taxes on the consumer. GST, as the task force report indicates, is not necessarily regressive as the benefits drawn from this exercise will actually reduce the effective tax on various goods and services.

However, a comprehensive Goods and Services Tax will also imply that both central and state governments will have concurrent jurisdiction to levy taxes right from manufacture/import/rendering of the service till the final consumption at retail level. This scale of an Indirect Tax regime overhaul would require constitutional amendments, passage of legislations in the parliament and all state legislatures. Beyond the legal and legislative aspects of passing the GST enactment there are many issues, in this deal, waiting to be resolved. First of them will be fixing the revenue neutral rate (RNR), i.e. the rate of GST levy at centre/state level which will be neutral to the revenue being generated in the existing system at current compliance levels. The other herculean tasks ahead of the empowered committee (given the idiosyncracies of its members) include agreeing on compensation for revenue losses by state governments in the initial years, fixing uniform/semi-uniform exemption thresholds for small players, subsumation of different state level and local body level taxes into the GST net, deciding on uniform concessions/exemptions to priority industries/products etc.

The GST implementation indeed has got multiple aches, thankfully, not all of them are political. The empowered committee of finance ministers has indeed got an ardous challenge ahead of them, however, let us hope, for our own good, that the GST should be a implemented at the earliest.