One of the reasons to go the GST way is to facilitate seamless credit across the entire supply chain and across all States under a common tax base. The current framework allows limited inter-levy credits between CENVAT (tax on manufacture) and service tax. However, no cross credits are available across these taxes and the sales tax/VAT paid (on input) or payable (on output). Introduction of GST would thus rationalize the tax content in product price, enhance the ability of business entities to compete globally, and possibly trickle down to benefit the ultimate consumer.
Example: - A product whose base price is Rs.100 and after levying excise duty @ 12% value of the product is Rs. 112. On sale of such goods VAT is levied @ 12.5% and value to the ultimate consumer is Rs. 126. In the proposed GST system on base price of Rs.100 CGST and SGST both will be charged, say @ 8% each, then the value to the ultimate consumer is Rs. 116. So, in such a case the industry can better compete in global environment.
Therefore, GST is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. GST is levied at every stage of the production distribution chain with applicable set offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. To put at a single place, GST may be defined as a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service. Internationally, GST is a single levy for all transactions related to goods and services. In India, however, currently the power to prescribe the taxation framework, and levy and collect taxes has been segregated between the Centre and States under the Constitution. For resolving disputes regarding GST, its implementation etc. a GST Council would be setup. Given this uniqueness, learnings of other countries cannot be directly implemented in India.
Features of GST
GST is a comprehensive value added tax on goods and services. It is levied and collected on value addition at each stage of sale or purchase of goods or supply of services based on input tax credit method but without State boundaries. There is no distinction between taxable goods and taxable services and they are taxed at a single rate in a supply chain of goods and services till the goods / services reach the consumer. The administrative power generally vests with a single authority to levy tax on goods and services. The main features of GST are as under:-
- GST is based on the principle of value added tax and either “input tax method” or “subtraction” method, with emphasis on voluntary compliance and accounts based system.
- It is a comprehensive levy and collection on both goods and services at the same rate with benefit of input tax credit or subtraction of value of penultimate transaction value.
- Minimum number of floor rates of tax, generally, not exceeding two rates.
- No scope for levy of cess, re-sale tax, additional tax, special tax, turnover tax etc.
- No scope for multiple levy of tax on goods and services, such as, sales tax, entry tax, octroi, entertainment tax, luxury tax, etc.
- Zero rating of exports and inter State sales of goods and supply of services.
- Taxing of capital goods and inputs whether goods or services relatable to manufacture at lower rate, so as to reduce inventory carrying cost and cost of production.
- A common law and procedures throughout the country under a single administration.
- GST is a destination based tax and levied at single point at the time of consumption of goods or services by the ultimate consumer.
Advantages of Comprehensive GST
- Introduction of GST would result in abolition of multiple types of taxes on goods and services.
- It reduces effective rates of tax to one or two floor rates.
- Reduces compliance cost and increases voluntary compliance.
- Removes cascading effect of taxation and also distortion in the economy.
- Enhances manufacturing and distribution efficiency, reduces cost of production of goods and services, increases demand and production of goods and services.
- As it is neutral to business processes, business models, organization structure, geographic location, product substitutes, it promotes economic efficiency and sustainable long term economic growth.
- Gives competitive edge in international market for goods and services produced in a country, leading to increased exports.
- Reduces litigation, and corruption.
- Results in widening tax base and increased revenue to the Center and State.
- Reduces administrative cost for the Government.
According to Dr. Vijay Kelkar, Chairman of the 13th Finance Commission and former Union Finance Secretary and Adviser to the Finance Minister, GST has a number of advantages, including:
- Brings a phase change on the tax firmament by redistributing the burden of taxation equitably between manufacturing and services.
- Lowers the tax rates by broadening the tax base and minimizing exemptions.
- Reduces distortions by completely switching to the destination principle.
- Fosters a common market across the country and reduces compliance costs.
- Provides a fiscal base for local bodies to enable them to fulfill their obligations.
- Facilitates investment decisions being made on purely economic concerns, independent of tax considerations.
- Promotes exports: - A recent study on the impact of GST on foreign trade indicates that the rate of growth of exports will be significantly higher than that for imports.
- Promotes employment.
- Most importantly, it will spur growth. It has been estimated that the GST implementation increased Canadian GDP by 1.4 percent. In India, a similar kind of positive impact is expected. This means gains of about 15 billion dollars annually. Discounting these flows at a modest 3 percent per annum, the present value of the GST works out to about half a trillion dollars.
Models of GST will Be discussed in next Post