Importance of Goods and Services Tax: All You Need to Know about the Tax Reform

Union Budget 2014 Tax Reform: Goods and Services Tax (GST)

In the run up to Budget 2014, there is hardly a write up or conversation that does not make a reference to the GST introduction. GST or Goods and Services Tax, in its purest form, is a harmonized tax on both goods and services, which permits set off of tax paid on purchase of inputs and input services seamlessly. Most countries have some form of GST or VAT, with USA being the notable exception.

In the Indian context, the clamour for GST stems from the inability of all constituents of the supply chain to set off input taxes paid on purchase of goods and services, thereby resulting in cascading of taxes. Since manufacturers pay both Central and State level taxes (excise duty and VAT/CST), their ability to utilize input taxes is the highest.

However, in the case of traders and services, who have only State and Central level taxes respectively, their ability to claim set off of input taxes is limited, since there is no inter-sectoral set off of these taxes.

Ideally, indirect taxes ought to be a pass-through cost for any participant in the supply chain. Since the current system does not permit seamless set off of input taxes, these costs are finding their way to the consumers' pocket as part of 'price' and not as 'tax'. This is the reform that industry seeks, which will bring with it simplicity in compliance, against the present system, which is mired in complexity.

Given the federal polity, the most palatable form of GST is the concurrent dual GST for both goods and services, one levied by the Central government (called Central GST/CGST) and the other by the State Governments (called the State GST/SGST). CGST will replace excise duty and service tax whereas SGST will replace VAT/CST, entry tax, luxury tax and entertainment tax.

All products with the exception of a few (alcohol, petroleum) will be covered under the GST. Input CGST and SGST will be permitted for set off against respective output taxes. The manner of taxing inter-state sales is yet to be finalized, but perhaps it is easiest to tax B2B transactions at destination and B2C transactions at origin, provided there is a strong IT infrastructure to track movement of goods across States.

The GST is a destination-based regime, against the current regime which is origin-based and therefore, the concern of the producing states is that they will lose revenue; more so when they will have limited ability to unilaterally increase tax rates for meeting their revenue needs.

Unkept promises of the Central Government on payment of compensation for reducing CST rates have hindered progress in GST talks with states. While the Union Government cannot on its own make any announcement on the GST introduction, it can set the tone to overcome the trust deficit of the states, by addressing the CST compensation issue and setting aside adequate funds for the same, in the Budget.

It is estimated that the GST would add about 1.5 percent to the GDP, and cumulatively, we have already lost one whole years' growth, if we count the delay from 2010 alone. A much smaller economy like Malaysia is jumping onto the GST bandwagon in 2015. Even if we are able to achieve Phase I of GST in the next couple of years, it will mean a lot to the industry.

GST introduction will support the Government's effort to make India a business-friendly destination, since it affords simplicity, ease of transaction and transparency.

Source: FirstPost