Special Content

Special Article Volume-34

GST Game Changing Tax Reform

K. R. Sudhaman

The far reaching and game changing indirect tax reforms - Goods and Services Tax (GST) has the potential to push up India’s economic growth by at least two percentage points. This means that India, which is currently the fastest growing economy at over 7.6 per cent annually will grow by 9.6 per cent or even in double-digit with a small and incremental push in other areas of reforms like labour, ease of doing business, infrastructure in the next decade or two.

The rollout of GST from April one, 2017 will certainly reform the tax structure to some extent. It will simplify administration of indirect taxes thereby totally eliminating red tape, delays and better clarity on taxes. It will subsume all indirect taxes barring customs like excise, service tax, entry tax central sales tax, entry tax and state-level Value added tax. Of course, some indirect taxes like excise and other duties on petrol and petroleum products, alcohol and tobacco will be outside the purview of GST at the moment. It will also bring about unified market making the country a single market as far as indirect taxes are concerned thereby reducing corruption to a great extent, delays at every border increasing cost of logistics at manifold. One estimate suggest saving of over Rs 1.8 lakh crore due to more turnaround time for trucks and increased fuel cost due to waiting at check posts. It will also widen the indirect tax net thereby increasing revenue of both the centre and states. These advantages and reforms will still fructify with the implementation of GST even with multiplicity of rates. 

The government at the centre and states want revenue neutral rates and introduction of cess on the rate for luxuries and demerit goods over and above 28 per cent. The government argument is that the cess is required to earn revenue for compensating states which may have declined revenue in the initial years as a result of GST roll out.

The proposed GST rates are 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent. Apart from this, there will be cess, which may take the rate up to 40 per cent on items like tobacco, luxury cars, luxury, aerated water and other items luxury items like jewellery and luxury watches and pens and so on. Currently the luxury goods attract a tax of up to 31 per cent including VAT and excise.

The purpose of GST, is to lower the tax incidence, widen the tax base, minimize tax avoidance and plug tax evasion. All these are expected to improve compliance and incentivize manufacturing and services, thereby pushing growth and increased revenue to centre and states. Lowering tax rates would have pushed consumer demand and that is not going to happen but GST in the present will only simplify tax administration and improve tax compliance.

There will be no tax on essential items such as food – this is likely to beat down inflation, which has afflicted food items in particular. “I hope the indirect tax outgo for the common man will be marginally lower under the GST,” finance minister Arun Jaitley said in a media briefing after the first day of the GST Council’s meeting in New Delhi, which firmed up the rates.

 “The zero-tax rate will apply to half of the items in the CPI (consumer price index) basket, including food grain used by the common man,”  Mr. Jaitley said.   The cess, Mr. Jaitley said, will not be an additional burden on the taxpayers because the total of 28% and cess will not exceed the total of the existing levies.The collections from this cess will create a pool that will compensate states for loss of revenue as they shift from the earlier structure to GST, which will subsume levies such as excise, service tax, and VAT. That loss in revenue is expected to be Rs 50,000 crore in the first year alone. This cess will lapse after five years.

Bipin Sapra, tax head at consultancy and audit firm EY however said that the multiple rates will create issues of classification of goods and services, and throw up disputes. That apart with huge population of aspiring youth, who are not content with just buying food grains and basic essential, GST with such high tax rates in centre and states to come out with revenue neutral rates, may also push up inflation. 

 Another key area is cross-empowerment of GST authorities under the CGST and SGST. 

The recent talks over multiple rates of CESS for different peak rate products, which fall in the category of luxury or sin goods, have indeed come as a shocker for the industry and trade. The fact that a large part of the economy is going to reap the benefits of the GST, the luxury and sin goods sectors had also been entertaining genuine expectations of some fiscal relief.

There are also issues with regard to service tax on information Technology and IT enabled services. Services sector accounted for huge 59 per cent of GDP in the country and so far service tax is levied only by the central government. Now with the rollout of GST, states will also levy service tax, widening the tax base of states as well. Presently service tax is around 15 per cent including all cess. The centre gets all the amount, of which a portion is shared as it formed part of divisible pool of taxes to be shared with the states under the finance commission recommendations. The challenge in service tax under GST would be cenvat credit on service tax paid on input services, particularly on export of services on which there virtually no tax. There are indications that these services will attract 18 per cent GST rate and it would be interesting to see how cenvat refunds would be provided. This will be substantial amount for export services. It is also to be seen how GST on services will be administered. Presently only centre administers the service tax and one proposal is to ensure it remained that way. It is to be seen if this is agreed upon by states. As states are expected to get  sizeable revenue from service tax under GST as presently they get none. This portion of revenue is important particularly to those manufacturing states, which are expected to lose some revenue on manufacturing side with the implementation of GST as it is a destination based tax benefitting more the consuming states.

Overall, present GST  will help in carrying forward tax reforms. Multi-rate structure needs to be converged into single or at the most two rates without cess. After the rollout of GST, which should not be delayed any further, the central and state governments will have to move towards single rate structure as early as possible and certainly not more than five years. Along with it, government will work towards direct tax reforms weeding out all archaic tax laws and phasing out exemptions so that country’s tax structure is fully reformed to bring about stability of rates at lower levels without any exemptions so that there is equality and the tax base is widened with low tax incidence particularly to poor and middle class.


(K R Sudhaman,  has been Editor in Press Trust of India and Economics Editor in Financial Chronicle and TickerNews. He has also been a foreign correspondent in Beijing and Islamabad. Views expressed are personal)