GST and its Advantages

By Dr. Sailaja Petikam

India currently has a dual system of taxation of goods and services, which is quite different from dual GST. Taxes on goods are described as “VAT” at both Central and State level. It has adopted a value added tax principle with an input tax credit mechanism for taxation of goods and services, respectively, with limited cross-levy set-off. 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 State under the Constitution. Introduction of GST would result in the abolition of multiple types of taxes on goods and services. GST stands for “Goods and Services Tax”, and is proposed to be a comprehensive indirect tax levy on the manufacture, sale, and consumption of goods as well as services at the national level.

Its main objective is to consolidate all indirect tax levies, overcoming the limitations of the existing indirect tax structure, and creating efficiencies in tax administration. 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 prices, enhance the ability of business entities to compete globally, and possibly trickle down to benefit the ultimate consumer.

For example, take a product whose base price is Rs. 100. After levying excise duty at 12%, the value of the product is Rs. 112. On the sale of such goods, VAT is levied at 12.5%, making the value to the ultimate consumer Rs. 126. In the proposed GST system, on a base price of Rs. 100, CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) will both be charged, say at 8% each, making the value to the ultimate consumer Rs. 116. Thus, in such a case, the industry can better compete in a global environment. Therefore, GST is a broad-based and 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 it simply, 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 services, the seller or service provider may claim the input credit of tax which they have paid while purchasing goods or procuring services.

Features of an Ideal 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 the 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.
• GST is based on the principle of value added tax and either the “input tax method” or “subtraction” method, with an emphasis on voluntary compliance and an accounts-based system.
• It is a comprehensive levy and collection on both goods and services at the same rate with the benefit of input tax credit or subtraction of penultimate transaction value.
• No scope for the levy of cess, re-sale tax, additional tax, special tax, turnover tax, entry tax, octroi, entertainment tax, luxury tax, etc.
• Zero rating of exports and inter-State sales of goods and supply of services.
• A common law and procedures throughout the country under a single administration.
• GST is a destination-based tax and levied at a single point at the time of consumption of goods or services by the ultimate consumer.

Advantages of a Comprehensive GST

• Introduction of GST would result in the abolition of multiple types of taxes on goods and services.
• It reduces effective rates of tax to one or two floor rates.
• Reduces compliance costs and increases voluntary compliance. GST is levied at every stage of the production-distribution chain with applicable set-offs in respect of tax remitted at previous stages, making it fundamentally a tax on final consumption.
• Enhances manufacturing and distribution efficiency, reduces the cost of production of goods and services, and increases the demand and production of goods and services.
• Gives a competitive edge in international markets for goods and services produced domestically, leading to increased exports.
• Fosters a common market across the country and reduces compliance costs.
• 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.

Conclusion

In India, the GST model will be a “dual GST” having both Central and State GST concurrently levied on the same base. All goods and services, barring a few exceptions, will be brought into the GST base. Importantly, there will be no distinction between goods and services for the purpose of the tax, with common legislation applicable to both. For resolving disputes regarding GST, its implementation, etc., a GST Council would be set up. Given this uniqueness, the learnings of other countries cannot be directly implemented in India. Most importantly, GST will spur growth.

It has been estimated that 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.