Indian GST: unparalleled tax reform
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The Goods and Services Tax (GST) Council, at its meeting on 3 June in Delhi, approved GST tax rates on the remaining goods and important rules pertaining to returns and transition provisions. The state assemblies of 21 states, Delhi and Puducherry have already passed state GST laws and the remaining states are in the process of doing so. All this has paved way for the 1 July rollout of the biggest tax reform undertaken anywhere in the world.
The GST Council, in its 15 meetings, has done commendable work in developing consensus over a number of issues which looked intractable at one time. The council was able to recommend draft legislations pertaining to Central GST, State GST, Union territory (UT) GST, Integrated GST and compensation to the states for loss of revenue, and a number of GST-related rules in a few meetings.
The difficult issue of cross empowerment and administrative division of taxpayers between the states and the centre was resolved in a true spirit of give and take. Despite varying rates of value-added tax (VAT) on goods in different states, all goods and services have been fitted into different slabs in a smooth manner.
It is now well documented that implementation of GST will result in numerous benefits for all stakeholders. The consumers will benefit from lower prices due to removal of cascading in taxes and efficiency gains. The trade and industry will benefit because of a uniform single indirect tax throughout the country, seamless flow of input tax credit, removal of tax-related barriers at inter-state borders, reduced logistic costs, an end-to-end information technology (IT)-enabled system and minimal interface with the tax authorities. The manufacturers will be able to take more rational decisions with regard to sourcing of raw materials, and location of manufacturing and warehousing facilities, as India will become one big common market.
The central and the state governments will witness tax buoyancy and the tax collection costs will reduce significantly. Exports will become more competitive as goods and services will be exported without any taxes embedded in them. The Make in India programme will get a major fillip due to increased ease of doing business and protection from cheap imports. All imports will be subject to integrated GST, in addition to the basic customs duty. All this will add significantly to the GDP growth. The Indian GST reform will get etched in history, not only for the immense benefits that will accrue to all stakeholders, but also for its boldness and unique design. In my view, these reforms are unparalleled on five counts.
Firstly, in the countries where GST has been introduced, barring rare exception, GST is unitary in character and is levied either by the central government or by the state government. However, India has adopted a “Dual GST” model whereby GST will be levied concurrently, both by the centre and the state. It is for this reason that all the states will have to pass a state GST law akin to the central GST law.
Secondly, Indian GST will have a unique Integrated GST mechanism to monitor inter-state trade of goods and services. It will ensure that GST is truly a destination-based consumption tax, and there is seamless flow of input tax credit, even when goods are moving from one state to another.
Thirdly, Indian GST will have a mechanism of invoice matching. Input tax credit of purchased goods and services will only be available if the taxable supplies received by the buyer get matched against the taxable supplies of the supplier. The goods and services network, which is responsible for providing IT backbone, is geared up to match more than 3 billion invoices per month. This will not only check fraud and tax evasion in a big way, but also bring in more and more businesses into the formal economy.
Fourthly, the newly created constitutional body, the GST Council, has emerged as a new model of cooperative federalism, wherein the centre and the states are willing to pool their sovereignty and give fiscal space to each other. The council has taken fiscal and tax-related decisions through consensus and is seen as an example to be followed in other spheres of cooperation between the centre and the states.
Fifthly, there is going to be a paradigm shift in the way that business is done in India. An estimated 8 million indirect taxpayers all over India will be having only a digital interface through a single portal for registration, filing returns and for making tax payments. Gradually but surely, businesses will have to shift towards digitization of their book keeping and other operations.
So, when the transition takes place from plethora of indirect taxes to a single GST on 1 July, it will be a radical change. Every change brings about some pain. The tax administrations, both at the centre and the states, are geared to minimize the pain and ensure a smooth transition to the new GST regime. The gains of this little pain are going to be many and long-lasting for the Indian economy.
Arun Goyal is an IAS officer and presently working as additional secretary in the GST Council. The views expressed are personal.