The government on Tuesday introduced a Bill to usher in a nationwide goods and services tax (GST), but political opposition is almost certain to delay one of the government’s most ambitious reform proposals.
A nationwide GST is intended to usher in a uniform market for goods and services, cut business costs and boost government revenues. But several states and the Bharatiya Janata Party (BJP) have resisted the proposal.
How will the GST work?
The GST is an indirect tax that would replace existing levies such as excise duty, service tax and value-added tax (VAT). The states and the union government will impose the tax on almost all goods and services produced in India or imported. Exports will not attract GST.
Producers will receive credits for tax paid earlier, which will eliminate multiple taxation on the same product or service.
Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected.
What’s the rationale?
Eliminating a multiplicity of existing indirect taxes will simplify the tax structure, broaden the tax base, and create a common market across states and federally administered districts.
At the same time, GST will lower the average tax burden for goods and services companies that now pay “cascading” taxes on top of taxes through the production process. Reducing production costs will make exporters more competitive.
Why the opposition?
States are worried they will lose their fiscal autonomy if they cannot impose taxes on their own. The BJP has said these concerns must be addressed by the government, but Prime Minister Manmohan Singh has said the resistance is because of political reasons.
What are the proposed rates?
In the first year, the government proposes two rates -- 12% for essential items and 20% for others. In the second year, the higher rate would be lowered to 18%, with the goal that both rates converge at 16%, split equally between the government and the states.
Are any exemptions proposed?
Yes. The GST will not cover goods like crude oil, diesel, petrol and alcohol. These goods are major sources of revenues for most states.
Will the states lose out?
New Delhi will compensate states for potential lost revenue and finance minister Pranab Mukherjee has assured states that if needed, he would sweeten a Rs50,000 crore ($10.8 billion) fund that a government panel has proposed as an incentive for the states to buy into GST.
What happens next?
The Bill will go to a standing committee of parliament, which will make recommendations and send it back for voting. The government is not bound to accept these recommendations. It is unlikely the bill will be taken for voting before the monsoon session of parliament, likely in July.
The Bill needs the support of two-third of parliament and the approval of half of India’s states.
Will the rollout be delayed?
Revenue secretary Sunil Mitra has said the implementation is likely to miss an April 2012 deadline. It would be the third such delay.
What is the revenue impact?
The GST was initially intended to be revenue-neutral but is now expected to increase the tax take thanks to more efficient collection and increased compliance.
What about the economic impact?
Implementation of a comprehensive GST would lift India’s economy of over $1 trillion by between 0.9% and 1.7%, on top of whatever growth would otherwise be achieved, according to a report by the New Delhi-based economic think-tank the National Council of Applied Economic Research.