Thursday, August 04, 2016

A Dummy's Guide to GST

GST breakthrough a watershed moment in India's Economic History



Photo courtesy +ABP NEWS 




Article first published in +ABP NEWS  Read here


The introduction of Goods and Services Tax, or GST, is arguably the most ambitious tax reform attempted by India since Independence. It aims at transforming the country into a common market, dissolving artificial economic barriers that create differential tax regimes for similar products and services across States.

It is a destination-based tax system that levies tax at the consumer end rather than at source and various stages of value-addition – which adds  layers of taxation ultimately inflating the cumulative tax impact.

Recognising the importance of Indirect Taxation in a country like India, where the Direct Taxation base is small, GST casts the net at the point of consumption or delivery of service while rationalising the total levy, merging multiple taxes such as Excise Duty, VAT, Service Tax, etc into one composite rate.

GST is designed to give a boost to manufacturing, not only by reducing the incidence of tax (from a current compounded level of 25-26% to 18%) but also increasing the physical and bureaucratic ease of inter-State movement.

At the same time there are concerns about States that are high on manufacturing losing out to States that are essentially consumption centres. This is addressed by guaranteeing States compensation for revenue loss for up to five years.

GST will also radically change the way distribution and transportation of goods happen that should benefit both consumers and manufacturers, ultimately also expanding markets and reach.

Costs of maintaining warehouses in each State and non value-adding transhipment will practically disappear, adding to the profitability of manufacturers while making it worthwhile for organised logistics companies to invest in more efficient vehicles and systems of transportation.

However, in the process of harmonisation, taxes on services may marginally increase from current levels, which would pinch the middle-classes more palpably, as eating out, travel and mobile bills become more expensive.


Similarly, some sectors – like textiles and branded jewellery that enjoy a lower tax rate today will get more expensive. Therefore, whether it will be perceived as “Acche Din” by the common man is doubtful as they are more prone to notice the taxes on service bills (example restaurants) while taxes get easily hidden in the MRP (cost of goods).

However, what the Government is banking upon is the overall boost to the economy. If indeed the expected 1-2% spurt in GDP does materialise, all will be forgiven.

While GST would be a major political victory for the Narendra Modi Government and take away its image about not being able to push through economic reforms, its implementation is not going to be a painless process.

Therefore, putting in place a grievance redress mechanism will be as important as careful chaperoning of the process of implementation. Any setback will be a bigger embarrassment than not being able to pass the Bill.

GST will be one achievement that would vindicate Narendra Modi’s unshakeable trust in Arun Jaitley whose singular contribution it would be for getting the main Opposition to the negotiating table.

But, it will also need all of Jaitley’s legal acumen to overcome the technical minefields that are strewn in the path of the GST’s roll-out.

Interestingly, States have insisted on exemption of alcohol for “human consumption” for understandable reasons. So there is no relief for the wicked.