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GST: An Overhaul in Taxation Policy of India- Why and How
Daman Jeet
Asst.Prof., Balaji Institute of International Business, (India)
ABSTRACT
It has been termed a potential game changer; the single biggest tax reform undertaken by India in 70 years of independence, one the government says is founded on the concept of “one nation, one market, one tax.” As the country's biggest tax overhaul—GST—is about to roll out, confusion reigns not only in the business community but government quarters too. No doubt, one-tax one-nation reform is going to benefit the country, but there is confusion due to lack of preparedness. GST's anti-profiteering clause requires companies to pass on the benefit of lower taxes to consumers. But little clarity over anti-profiteering clause has led to confusion over setting of selling prices for goods.
Keywords: GST: Anti-profiteering, Goods and Services Tax
I. INTRODUCTION
Tax policies of a country play an important role on the economy through their impact on efficiency and effectiveness. A balanced tax system keeps in view both income distribution and tax revenue generation.The biggest tax reform since Independence will change the indirect tax landscape of the country, subsuming over a dozen central and state taxes. GST embodies the principle of "one nation, one tax, one market", unifying the country's $2 trillion economy and 1.3 billion people into a common market. Despite various tax rates of 5, 12, 18 and 28 per cent, and many exceptions, the new tax regime is aimed at eliminating the cascading tax structure, easing compliances and lowering tax burden on consumers. The biggest concern is the sheer complexity of different GST slabs and numerous cesses and exceptions, which are completely different from simpler, flatter and broader tax structure in other countries. Traders and shop-owners selling multiple products are concerned how they would maintain bill books due the variety of tax slabs.
GST is a multi-stage, destination-based tax that will be levied on every value addition
II. LITERATURE REVIEW
Dr.R. Vasanthagopal , (2011) “GST in India:A Big Leap in the Indirect Taxation System” and found that the positive impacts are dependant on a neutral and rational design of the GST, balancing the conflicting interests of various stakeholders, full political commitment for a fundamental tax reform with a constitutional amendment, the method. Different news articles, books and web were used which were enumerated and recorded.
Dani S (2016) A Research Paper on an Impact of Goods and Service Tax (GST) on Indian Economy, tried to understand why this proposed GST regime may hamper the growth and development of the country.
480 | P a g e Lourdunathan F and Xavier P, (2017) A study on implementation of goods and services tax (GST) in India:
Prospectus and challenges tries to understand and dig deep into the Prospectus and challenges in Implementation of Goods and services Tax (GST) in India
III. RESEARCH METHODOLOGY
The research paper is an attempt of an explanatory research based on secondary data from newspapers, articles, internet and research papers. Looking into the requirements of the objectives of the study, the research design employed for the study is of descriptive nature. Available secondary data was used extensively for the study.
IV. HISTORY
With introduction of Goods and Services Tax in 1954, France became the first country ever to introduce GST.
Its introduction as a value added tax was required because very high sales taxes and tariffs encourage cheating and smuggling. It was after France that countries like Japan, South Korea, UK and Australia implemented the GST law. There are around one hundred and sixty countries in the world that have GST in place.
V. OBJECTIVES OF THE STUDY
To understand the concept of Goods and Services Tax
To know the benefit of Goods and Services Tax to the economy and consumer
To analyze the implementation strategy of GST in India
VI. HOW INFOSYS ROLLED OUT THE CORE TASK OF GST
India’s second-largest Information Technology (IT) Company, Infosys, was selected as the managed service provider in November 2015 to roll out the Goods & Services Tax (GST) by April 1, 2017. Infosys was tasked with completing six core tasks in a span of 18 months in a contract reportedly worth Rs. 1,380 crore. These tasks covered the entire spectrum of creating an IT ecosystem required for rolling out GST in the time frame prescribed by the Modi administration.
The first task was application design, development, and its implementation.
The second task, classified as 'taxpayer one-time data porting', involved adapting the entire taxpayer data into the systems created for rolling out GST.
The third task involved procurement and installation of IT infrastructure.
Then came one of the most crucial tasks for the project that involved putting in place disaster recovery systems and providing bandwidth for the project.
The fifth job on Infosys' plate was to set up a GST help-desk for helping out those confounded by the new tax regime.
The last task included training personnel to use the system.
Goods & Services Tax (GST) is an indirect tax throughout India to replace taxes levied by the central and state governments.
481 | P a g e The One Hundred and First Amendment of the Constitution of India, officially known as The Constitution (One Hundred and First Amendment) Act, 2016, introduced a national Goods and Services Tax in India from 1 April 2017.India is going to implement the GST Law 2017 from July 1st and it has adopted the Dual GST model, the one followed by Canada.
VII. CONFUSIONS OVER GST 7.1 Confusion over GST return forms
According to GST rules, businesses will have to file 37 forms in a year—three each month for CGST, IGST and SGST, and one at the year's end. For a company with operations in 20 states, it means 740 annual returns.
Though Revenue Secretary HasmukhAdhia has clarified that the number of forms will be only a dozen, but there is still no clarity over the number of returns to be filed under GST regime.
7.2 Confusion among tax officers
Last but not least, even those who will implement the GST guidelines on the ground—the tax officials—are also a confused lot. After dismantling of indirect taxation system and rollout of GST, there still little clarity about work and assignments of state and central tax officers. Thousands of tax officers will have to be relocated or assigned new job descriptions, but this has still not happened. There are also confusions over tax assessments.
For instance, 90 per cent of assessments in turnovers under Rs. 1.5 crore are to be carried out by state officials and the remaining by the central officials. In cases of assessments over Rs. 1.5 crore, Centre and state officials will share the work equally. This will lead to functional ambiguity.
7.3 Lack of clarity on anti-profiteering rule
GST's anti-profiteering clause requires companies to pass on the benefit of lower taxes to consumers. But little clarity over anti-profiteering clause has led to confusion over setting of selling prices for goods. The law doesn't clarify how the costs incurred on account of transition from GST to non-GST era are to be factored in. It also doesn't specify how loss-making units pass on the benefits. More clarity will emerge only when the National Anti-Profiteering Authority determines the methodology and procedure for taking up cases. Under this law, businesses can be closed down by government if it finds that companies are not passing on the benefits of lower tax slabs to the consumers.
Industry and traders are concerned about tax terrorism and arbitrary reasoning of profit and loss in a pre- and post-GST era. Such anti-profiteering laws were introduced in Malaysia and proved to be a disaster.
VIII. HOW GST SHALL IMPACT US?
The biggest game changer in GST is input tax credit, where credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. This means that the end consumer will thus only bear the GST charged by the last point in supply chain, with set-off benefits at all the earlier stages.
To ensure that manufacturers and service providers pass on the benefit to the final customer, the government has included an anti-profiteering clause in the GST law. Under this, it becomes mandatory to pass on the benefit tax reduction due to input tax credit to the final customer.
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Petroleum products such as petrol, diesel and aviation turbine fuel have been kept out of GST as of now. The GST Council will take a decision on it at a later date. Alcohol has also been kept out of GST.
The implementation of the GST is not expected to have a material impact on overall inflation, the Reserve Bank of India said in its latest monetary policy statement. Economists also predict a benign inflation regime with global crude prices remaining soft and forecast of normal monsoon. Though the tax rates in some select services categories go up, overall inflation may not be impacted significantly who say the overall tax burden will get lowered over time.
The change in service tax rate will get reflected from Day 1 of implementation. Some services will get costlier as financial services and telecom have been put in the 18 per cent rate slab under GST, from 15 per cent earlier. Education and healthcare will continue to be exempt from taxation. "The impact of GST on service sector in the short term could be inflationary as the tax rate would immediately shoot up to 18 per cent.
However, going forward, it is expected that due to reduced cost because of availability of GST credit on items hitherto not available, the price of services will come down which will benefit the consumers.
However, prices of many common goods at the stores are likely to remain unchanged in the initial days despite change in tax rate after the GST rollout, say experts. Manufacturers may wait for a few weeks to gauge the net impact of GST on them as well as on wholesalers and distributors and may revise the prices accordingly later.
In earlier regime, on goods having an MRP, the excise duty was paid by manufacturers on MRP based on a certain formula. However, in GST, there is no such concept and tax will be charged only on transaction value for all goods, he adds.
Domestic stock markets have come off recent highs in the run-up to the GST amid some cautiousness over its implementation. In the near term, the markets are looking at the implementation of GST, which sees Nifty hitting new highs this fiscal year. Analysts say that markets will need some time to adjust to the GST implementation process, which could partially hurt corporate earnings in the short term but will boost earnings over the long term.
Small traders with annual turnover less than Rs. 20 lakh are exempt from GST registration.
In further relief to small businesses, under the composition scheme, they will benefit from not having to meet with detailed compliances under GST. However, they will not get the benefit of input tax credit. If businesses opt for the composition scheme, traders with turnover below Rs. 75 lakh will have to pay 1 per cent tax on turnover. Manufacturers will have to pay 2 per cent while restaurant businesses will have to pay 5 per cent.
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IX. DEPICTING BOTH SIDES OF THE SAME COIN
Products on which tax burden comes down:
Products on which tax burden goes up:
**GST compensation cess
Services on which tax burden goes up:
484 | P a g e The GST Council will consider inclusion of hydrocarbons in the new tax regime once state revenues stabilize.
Nearly 40% of state revenue is estimated to be from petroleum products.
For example, multiple rates have been fixed for restaurant services based on different variables—AC or non- AC, turnover amount, luxury category, etc. Restaurants with turnover of less than Rs. 50 lakh will charge 5 per cent GST, while those with turnover of more than Rs. 50 lakh with no ACs will have to pay 12 per cent GST.
Restaurants with AC facilities will pay 18 per cent. For luxury five-star hotels, the rate will be 28 per cent.
The tax rate will change according to the place you sit at, outdoor or indoor; temperature you feel - AC or non- AC; and whether you are enjoying a meal in a luxury or a non-luxury hotel.
9.1 Akin to a free trade agreement
Finance minister ArunJaitley said on 20 June that with GST, the economy will become more efficient and revenue receipts will go up as more of the informal economy becomes a part of the formal economy. This, he said, will improve the spending capacity of both the central and state governments, accelerating the gross domestic product (GDP) growth rate.
GST seeks to move away from a system in which tax is added on to the post-tax value of goods from the previous stage in the value chain, which has led to a compounding effect of tax-on-tax on commodities and services. The reform seeks to remove this anomaly by giving full credit for taxes paid at the previous stage. At present, states try to maximize their revenue by denying full tax credit in case of inter-state commerce. Under GST, interstate supplies will be taxed across the country at a uniform rate specified for the item with full credit settlement.
GST could also reduce avoidable litigation. A large part of tax litigation in India is around tax exemptions, which the new system seeks to minimize.
If the reform succeeds, it could improve the ease of doing business in India. Putting an end to a multilayered tax system, dismantling border check posts and eliminating the need for face-to-face meetings between executives and field officers of the tax department, will contribute to that.
9.2 Ushering in transparency
Consumers, on the other hand, will for the first time get a measure of the total central and state taxes levied on a product, bringing to an end the host of hidden and embedded taxes they were paying so far.
However, many believe there is some hype around the anticipated benefits since the current version of GST is a diluted form of what was originally considered ideal—a low, single tax rate with few exemptions. The current form has four rates for goods and services—5%, 12%, 18% and 28%—and excludes five hydrocarbons—crude oil, petrol, diesel, jet fuel and natural gas—as well as liquor, real estate and electricity from the purview of GST.
Oil and liquor are among the biggest tax revenue sources for the federal and state governments. The authorities insist most items are placed in either the 12% or 18% slab and only a few are in the highest 28% slab.
Despite the imperfections, indications are that GST is going to benefit the system. Jaitley said on 20 June that indirect tax revenue had increased in April and May from a year ago, suggesting that goods which previously used to enter the value chain undeclared are now being traded legitimately. Agriculture markets are already witnessing a reduction in dodgy cash transactions.
485 | P a g e In the pre-GST regime, the federal government taxed production of goods and supply of services, while states got to tax sale of goods but not supply of services. In GST, this barrier is removed and both the federal and state governments get to tax the entire value chain of goods and services, increasing compliance.
9.3 Discounts and supply concerns
On their part, producers of items such as apparel and shoes, which have a seasonal market, are offloading their entire summer stock before 1 July by offering large discounts.
While most tax experts ruled out the possibility of supply disruptions, an industry executive, who spoke on condition of anonymity, said some firms may optimize their stocks in the run-up to 1 July. Seeking to prevent any supply disruption, the government has clarified tax credits on the pre-GST stocks will not be a problem after 1 July.
XI. CONCLUSION: A TALE OF COMPROMISE
Rolling out GST on 1 July is the result of more than a decade of discussions, tussles among states, and between states and the Union government, instances of give and take, lobbying and compromise. The highlight of the reform is the creation of the federal tax institution, the GST Council, which has state ministers as members and the Union finance minister as chairman and gives every state a say in the country’s indirect tax policy. The GST that is being rolled out is far from ideal. The guiding principle for the government while trying to secure consensus amid competing interests of various stakeholders was that it is better to have a good GST instead of waiting endlessly for the best one.Introduction of GST is a very good start. Reforms, however, do not end here.
Certain features can be further streamlined.
REFERENCES
[1] India, P. T. (2017, June 30). GST Is India's New Tryst With Destiny: CII President. econominctimes.com.
[2] Manish, S. (2017, June 29). Six core tasks in 18 months. Business Standard.
[3] Prasad, G. C. (2017, June 30). GST:A game changer for the Indian Economy. livemint.
[4] Sanyal, P. (2017, June 29). What is GST? Times of India.
