Fact sheet: Good & Services Tax (GST)
The introduction of the GST system is the most important tax reform in India till now.
- What is GST ?
- How GST will be collected?
- Also called as Last Point Retail Tax
- What is Dual GST ?
- What will be Rate of GST ?
- What will be possible Impact on Prices?
- What will be implication on Imports & Exports?
- What will be Impact on Revenue Collection at states?
- What is required for successful implementation?
- Why some states worried over revenue collections?
- What is the biggest Challenge Today ?
What is GST ?
The goods and services tax (GST) is a comprehensive value-added tax (VAT) levy on manufacture, sale and consumption of goods and services at a national level. This makes India a single, unified market and expected to create a stronger economy.
How GST will be collected?
Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain. The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain. GST is likely to improve tax collections and boost India’s economic development by breaking tax barriers between States and integrating India through a uniform tax rate.
Also called as Last Point Retail Tax
This tax can also be called last point retail tax. It is paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax.
What is Dual GST ?
Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both federal and state or provincial governments.
In India, a dual GST is being proposed wherein a Central Goods And Services Tax (CGST) and a State Goods And Services Tax (SGST) will be levied on the taxable value of a transaction.
The central and state governments are discussing the GST system proposed to be implemented in India from April 1, 2010. Representing the states in the discussions is the empowered committee of state finance ministers.
CGST will subsume central excise duty (Cenvat), service tax, and additional duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the state level.
What will be Rate of GST ?
The combined GST rate is currently being discussed by the Centre and the EC. The rate is expected to be in the range of 14-16 %. Once the total GST rate is determined, the states and the Centre have to agree on the CGST and SGST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.
What will be possible Impact on Prices?
The prices of commodities should come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods.
What will be implication on Imports & Exports?
Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.
What will be Benefits of GST ? Dual GST is expected to be a simple and transparent tax structure with only one or two rates of taxes. The result would be a reduction in the number of taxes at the Central and state levels, cut in effective tax rate for many goods, removal of the current cascading effect of taxes, reduction of transaction costs for taxpayers through simplified tax compliance, and increased tax collections due to wider tax base and better compliance.
What will be Impact on Revenue Collection at states?
Being a consumption-based tax, dual GST will result in better revenue collection for states with higher consumption of goods and services. The backward and less-developed states would see fall in collections. The Centre is expected to put in place a mechanism to compensate states for any revenue loss due to GST.
What is required for successful implementation?
Consensus and coordination among states is required for it to succeed. Before it can be introduced, the Centre and states have to sort out issues like agreement on GST rates, constitutional amendments empowering states to tax services, taxation on inter-state transactions of goods and services, drafting of CGST and SGST laws, consultation with all stakeholders including trade and industry associations before finalisation, administrative preparedness to implement the new tax regime and resolution of all other issues under discussion.
Why some states worried over revenue collections?
Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the information technology systems and the administrative infrastructure will not be ready by April 2010 to implement GST. States have sought assurances that their existing revenues will be protected.
The central government has offered to compensate States in case of a loss in revenues.
Some States fear that if the uniform tax rate is lower than their existing rates, it will hit their tax kitty. The government believes that dual GST will lead to better revenue collection for States.
However, backward and less-developed States could see a fall in tax collections. GST could see better revenue collection for some States as the consumption of goods and services will rise.
What is the biggest Challenge Today ?
This is a formidable challenge given that we have only limited time left. The Union Budget, which is to be presented on July 3, should lay down a clear roadmap with defined timelines for GST to become a reality on April 1, 2010. (now shelved to April 1, 2011)