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GST being a destination tax, there is a direct correlation between consumption and tax revenue
GST being a destination tax, there is a direct correlation between consumption and tax revenue

Opinion | GST helped restate Centre-state relationship

  • GST replaced a plethora of state and central taxes. Further, it is a destination-based tax being levied on value addition

The goods and services tax, or GST, is perhaps the biggest fiscal reform that the government has embarked upon post-independence. It restated Centre-state relationship, changed the way business is being conducted and how governments are operating.

One Nation-One Tax

GST replaced a plethora of state and central taxes. Further, it is a destination-based tax being levied on value addition. The tax is collected in the state where consumption occurs (under the pre-GST regime VAT was being collected by the state of origin). The taxes charged on purchases is set off against output taxes, resulting in tax being imposed only on value addition by the taxpayer. This has the following impact:

Reduction of the cascading impact of taxation through the economy.

Movement towards an efficient supply chain, primarily designed to suit market needs and optimize efficiencies. This has meant reduction in stocking points and economies of scale in logistics infrastructure.

Removal of check-posts and abolition of state entry taxes, or local octroi duties, has resulted in significant improvement in efficiencies and certainty of logistics.

Improvement on the above parameters will continue and will make the Indian industry more competitive.

Incentive Schemes Redesign

GST being a destination tax, there is a direct correlation between consumption and tax revenue. Encouraging and competing for additional economic activity, especially the ones that promote local consumption is warranted. Given the direct impact on revenues—competition for investments in services sector, such as logistics, IT/ITeS and tourism—traditional manufacturing between states is increasing.

Digitization of Compliances

The compliance landscape has radically changed under the GST regime. Now, all business-to-business (B2B) transactions, as also input tax credits, are digitally reported and monitored. At one level, digitization has had an immediate impact on the tax administration’s ability to reduce evasion and pushing taxpayers to be tax-compliant. At another level, digitization is enabling taxpayers to automate a number of finance, commercial and tax-related processes. Furthermore, there is a lot of potential for the use of analytics on the wealth of data available for private and public use.

Cooperative federalism

To enable implementation of GST, the Constitution of India was amended, whereby central and state governments ceded their individual exclusivity of powers of taxation. At present, under the shared powers of taxation, an eligible supply is taxed by both governments. This kind of federal cooperation is unprecedented. The Constitution also established the GST Council—a body made up of the finance ministers of states and the Centre. Every aspect of legislative administration is dealt with jointly by all the disparate state governments and the central government. While the involvement of so many constituents makes the entire process of administration and policymaking a bit chaotic, the cooperation is working well. This has heralded a new wave of interaction and coordination between all governments.

GST 2.0

GST is a work in progress. There is an urgent need to simplify and rationalize the legislation. There are several steps that also need to be taken to improve the tax administration framework. As of date, taxpayers are conceptually exposed to multiple assessments, inquiries, audits, etc., in every state. If this is not checked, it will lead to a material upsurge of litigation, which in turn will increase uncertainty to directly impact the investment climate.

The Mahatma said: “The future depends on what we do in the present." GST has had a decent beginning in driving the nation towards competitiveness and compliance, but a great future depends on how we handle and improve the present.

Uday Pimprikar is tax partner and national leader, indirect tax services, EY India.

Views expressed are personal.

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