The goods and services tax (GST) is a comprehensive value-added tax (VAT) on goods and services.
France was the first country to introduce this system in 1954.
Today, it has spread to over 140 countries.
Through a tax credit mechanism, GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax.
Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both federal and state or provincial governments.
In India, a dual GST is being proposed wherein a central goods and services tax (CGST) and a state goods and services tax (SGST) will be levied on the taxable value of a transaction.
The central and state governments are discussing the GST system proposed to be implemented in India from April 1, 2010.
Representing the states in the discussions is the empowered committee of state finance ministers.
Here are some questions on GST and their answers:
Will dual GST be levied in addition to the existing taxes?
No. It is proposed that the CGST will subsume central excise duty (Cenvat), service tax, and additional duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the state level.
What will be the rate of GST?
The combined GST rate is currently being discussed by the Centre and the EC. The rate is expected to be in the range of 14-16 %. Once the total GST rate is determined, the states and the Centre have to agree on the CGST and SGST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.
Will prices go up after the implementation of GST?
In fact, the prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods.
What are the implications of GST on imports and exports?
Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.
What are the benefits of shifting to a dual GST system?
Dual GST is expected to be a simple and transparent tax structure with only one or two rates of taxes. The result would be a reduction in the number of taxes at the Central and state levels, cut in effective tax rate for many goods, removal of the current cascading effect of taxes, reduction of transaction costs for taxpayers through simplified tax compliance, and increased tax collections due to wider tax base and better compliance.
How will dual GST affect the fiscal health of states?
Being a consumption-based tax, dual GST will result in better revenue collection for states with higher consumption of goods and services.
The backward and less-developed states would see fall in collections. The Centre is expected to put in place a mechanism to compensate states for any revenue loss due to GST.
The introduction of the GST system is by far the most important tax reform in India. Consensus and coordination among states is required for it to succeed. Before it can be introduced, the Centre and states have to sort out issues like agreement on GST rates, constitutional amendments empowering states to tax services, taxation on inter-state transactions of goods and services, drafting of CGST and SGST laws, consultation with all stakeholders including trade and industry associations before finalisation, administrative preparedness to implement the new tax regime and resolution of all other issues under discussion.
This is a formidable challenge given that we have only limited time left. The Union Budget, which is to be presented on July 3, should lay down a clear roadmap with defined timelines for GST to become a reality on April 1, 2010.