GST: What you need to know about it

India will see a new indirect tax system, Goods and Services Tax, replace the current one on July 1.

"A moment comes, which comes but rarely in history when we step out from the old to the new"

These were the words of India's first prime minister Jawaharlal Nehru during the speech made by him in Parliament to the Constituent Assembly on the eve of India's independence on 15th August 1947.

While he spoke nearly 70 years ago, his words might closely resemble those Prime Minister Narendra Modi might say during the midnight session of Parliament when the new tax regime of the Goods and Services Tax (GST) is to come into effect from July 1.

Only a handful of events, in India's history since independence, have had a direct impact on the population of the India as a whole. These include independence itself, the wars fought, the liberalisation of the economy in 1991 and the recent Demonetisation. GST too fits into such a list.

Though definitely not on the same scale as independence, the complete rejig of the tax system in the country is going to be a monumental change in the country's financial structure and the biggest tax reform ever.

And like Independence, which was clearly the right step, but was right expected to throw up a number of major challenges, the GST too can be seen in the same light.

The change it brings

The new tax regime is meant to replace the current system in place for indirect taxes such as VAT, Service, Sales, Luxury, Entertainment etc., which apply to different goods and services throughout the country, and out which some are levied by the centre and other by states. It has no relation to direct taxes like Income Tax, Wealth Tax, and Corporate Tax etc., whose liabilities cannot be transferred.

In order to help simplify the tax system in the country, unlike the current scenario where a host of different rates and taxes are applied on various services to everyday use items such as food to cars and banking services, GST will have four slabs of 5, 12, 18 and 28 per cent. Out of more than 1200 categories of items, some such as petroleum products, alcoholic drinks, electricity have been kept out of GSTs purview for now, along with sectors such as education and health.

These will take effect all over the country including all states and union territories, and there will be no different tax rates depending on which part of the country goods and services are manufactured in or their final destination, as is the case currently.

The decision on the tax and other issues related to will be taken by the GST Council which comprises of finance ministers of all states and will be chaired by the Union finance minister. In the case of any issue requiring voting, the centre's vote would count for one-third of the total with the states getting the other two-thirds.

Such a system of common taxes and the body of governance are in line with the tax systems found in most developed countries around the world and are expected to usher in a new era for India's economy.

The expected benefits

It will lead to a simplification of the tax system, as a whole range of taxes some of which were levied by the Centre and others by the states will not apply anymore. GST regime will have a simple federal structure where this single tax and its dual components are levied by both (CGST and SGST) and collected by both keeping in line with the federal structure of the country.

Along with the Central GST and State GST, a third component called Integrated GST will be applied on goods moving from one state to the other and there will no longer be any need for entry barriers on the state borders. This will turn the country into one single market instead of being divided into states which made travel of goods from one state to the other more complicated and difficult. Thus giving credence to the claim of 'One Nation One Tax.'

But the major difference that the new tax regime is set to bring and what should ultimately lead to a fall in prices of goods and services in the country is the elimination of the cascading effect of taxes, that is, tax on tax, that took place till now. For example, out of the general four steps of production of goods- Manufacturing, Distribution, Wholesale, Retail- tax was imposed at every step including on the amount paid by the previous one which raised the cost of all materials.

Tax will now be imposed only on the value added at each step instead of the whole. The current system is considered as one of the reasons behind high prices. And its elimination will reduce the cost of tax at each step which is expected to lead to a fall in prices.

To make sure that manufacturers pass on the benefits to the consumers, an anti-profiteering provision has been put in place which mandates them to do so. A five-member National Anti-Profiteering Authority is to be set up to ensure that companies comply, and strict penalties will be imposed on those which do not.

The other major advantage of the GST is a push in the overall growth of the country as the new tax system is expected to increase the Gross Domestic Product (GDP) of India by around two per cent. A major part of this comes from the improvement in tax compliance as it will more difficult for businesses to stay out of the tax net. And the reduction in the taxes to be paid is also set to deter companies from finding ways to get out of paying them.

It's not without flaws

Though the list of benefits accruing from GST system seems impressive, it is not without flaws. A number of criticisms have come to light after the government announced its intention to implement it.

The first and foremost being that it does not go far enough and though it is being hailed as One Nation One Tax, it does not comply with the notion. As while such a unifying tax is supposed to ideally have a maximum of one or two tax slabs, the Indian version has four.

The process though simpler than the previous is still not in line with what should have ideally been done. The vast diversity of people and the demands that exist in the country are thought to be the reason for a failure on this front. Also, the fact that the system was designed by ministers who have a tendency to maintain the status-quo, and not economists, who could have gone the extra mile, has been blamed for this.

A major criticism being levied is the distribution of different items under various slabs which go contrary to conventional wisdom. A few examples of this being the rate for gold, considered a non-productive investment in economics and with governments including India's asking people not invest in it, is lower than that on an item such as matchboxes. Another example is the rate that makes little sense is that imposed on cars such as SUV's which use up high amounts of fossil fuels but have the same tax incidence as environment-friendly hybrid cars.

Along with this, the fact that a slab as high as 28 per cent goes against the very basic economic thinking of lower the taxes, higher the compliance.

Despite the system itself having issues, another major concern that has come out is related to the handling of the system itself. It is to be done by the Goods and Services Tax Network which is a private company, and not government owned, that will be handling the countries entire indirect tax network. This is even more troubling given the fact that though the union and state governments hold a minority share in the company and it is going to have all the information and control of running the network, it has been kept out of the purview of the Right To Information Act.

Member of Parliament and BJP member Subramanian Swamy had termed the company a "shady organisation" and while speaking in the Rajya Sabha he said, "I wish to bring to the notice of this House a grave national security matter which should receive precedence before we consider the GST Bill, and that is a body private limited company which was created in 2013 called GSTN,"

Another point that government's opponents have made is related to the timing of the implementation. It is being termed as being rushed in when businesses especially small ones are not prepared for the sudden shift and would lead to a high compliance burden. Concerns related to a high number of tax returns that may be required to be filed are also widespread.

Small business owners, traders and unorganised players have been protesting against the GST citing issues relating to being brought under a particular tax slab, its implementation, and the confusion the sudden imposition of the new system will bring.

Politics of GST

Though most of the criticism regarding it has come from those getting directly affected by it and economists. Like every other major decision made by any government, the GST too is enveloped by political gamesmanship.

And the decision of the Modi government to hold the program to launch the new tax regime at midnight seems to have just added to it. While parties like Bengal Chief Minister Mamata Banerjee's Trinamool Congress is unlikely to attend it, the government invitation to the former Prime Minister Manmohan Singh has put his party in a dilemma.

Especially so as it was under his leadership that the first major push for implementing GST had come and he is a strong supporter of the need for the bill. But his party, the Congress, has been against the BJP government's method of implementation.

Given the history of the GST since the inception of its idea in India, this is hardly surprising. Though Singh's government wanted to bring in the change to the country's tax system during its tenure, it was unable to do so given its failure to bring about a consensus on the matter. For which it has blamed the BJP and the state governments it controlled.

But all said and done about the rights and wrongs of it, the fact that GST is the new reality of the country is beyond doubt now, as the Modi government staying true to its style of marking significant developments with grand events, is set to bring in a new tax era for the country.

And as Nehru said, India will awake.

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