As India implements its biggest and most ambitious tax reform, DNA explains how it will shore up revenue, cool inflation, and spur growth
After years of dithering, the Goods and Services Tax (GST) will finally roll out in less than a week, amid hopes that the country's biggest and most ambitious tax reform will shore up tax revenues, cool inflation and accelerate growth.
On July 1, the new nationwide sales tax will unify all 29 states and seven Union Territories (UTs) with 1.3 billion people into one common market for the first time. It will tear down trade barriers by replacing a mosaic of 15 different central and state levies.
The five-slab GST structure exempts or imposes a low rate of tax on essential items, while the top rate of 28 per cent applies to so-called demerit (or sin and luxury) goods (see main graphic). About 160 countries, including Russia and China, have implemented GST. The government has assured that the reform will not be inflationary.
How will it help?
The new tax regime will allow businesses to get offsets for taxes paid at different stages of the supply chain, mitigating the dangers of double-taxation. They will have to pass the benefits to the consumer under an anti-profiteering law that's being put in place. GST will apply to all goods other than alcoholic liquor for human consumption and five petroleum products: petroleum crude, motor spirit (petrol), high-speed diesel, natural gas and aviation turbine fuel. It would apply to all services barring a few which are yet to be specified.
The long journey
India has a federal form of government. The Centre collects most taxes, including central excise and service (indirect) and income and corporate tax (direct). States collect indirect taxes such as Value Added Tax (VAT) on sales of goods, state excise, besides entry and lottery levies. The VAT system ignited a debate. Why cannot such a system be implemented at the national level? India started clamouring for GST, but forging a political consensus has been a bruising process. The Atal Bihari Vajpayee government started discussions on GST by setting up an expert panel headed by former West Bengal Finance Minister Asim Dasgupta in 2000. In 2006, then Finance Minister P Chidambaram first announced, in his Budget speech, plans for a GST. The UPA government tabled a Constitution Amendment Bill in the Lok Sabha in 2011 but could not take it forward. The Bill lapsed in 2014.
The situation changed after NDA's prime ministerial candidate Narendra Modi swept to power in 2014 promising to nurse India's then faltering economy back to health. Finance Minister Arun Jaitley introduced another Constitution Amendment Bill in the Lok Sabha the same year. Next year, in his Budget speech, he said GST would roll out on April 1, 2016. The Lok Sabha approved the Bill. But it got stuck in the Rajya Sabha as the Congress demanded GST rates must be capped at 18 per cent.
Parliament finally ratified the Bill to overhaul indirect taxation in August 2016, and passed all GST-related legislations in April this year in a major legislative victory for PM Modi. "The world will witness a transformation...how all political parties of different ideologies united for the implementation of GST," PM Modi then said.
The GST Council — headed by Jaitley and comprising all state finance ministers — has since held 17 meetings to iron out rough edges. All states have passed their respective Bills and are ready for a smooth rollout. The Council will meet once again before GST kicks in on the midnight of June 30 and July 1. Out of the 80 lakh taxpayers, 66.60 lakh have signed up.
"GST has been finalised after a collaborative and consultative approach, and we look forward to its introduction," said Chandrajit Banerjee, director-general of the Confederation of Indian Industry.
The impact
GST will boost government tax collections as the VAT experience suggests. The short-term impact of GST is likely to be mixed as it could temporarily slow growth due to an increase in taxes on services, which account for 60 per cent of India's GDP. It could drive up inflation in the year of implementation due to incomplete pass-through of tax savings by firms. However, the government is putting in place anti-profiteering systems to keep an eye on such anomalies.
"When you go in for reforms, the first principle is that you should never blink. If you do, you get derailed," Jaitley said recently.
Criticism
Senior Supreme Court advocate Arvind P Datar said that GST, in its present form, was highly unsuitable for India. "Multiple rates of tax, highly complicated laws and complicated procedures will affect both the manufacturing and service sectors. The problems facing small and medium enterprises (SMEs) will increase manifold," he said.
He said GST would slow growth in the next two quarters.
"Commerce and industry are still recovering from the blow of demonetisation. All investments are now on hold because of the impending uncertainty". The government should have implemented GST on a trial basis first.
Recently, Assocham said GSTN was not ready for the new unified indirect tax regime.
Illustration: Gajanan Nirphale
Graphic: Ganesh Gamare
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