GST & it’s implications

GST & it’s implications

GST has become a matter of debate in recent times. India is currently taxed with the task of assessing if this value added tax would be beneficial or not. GST or Goods and Services Tax is a type of value added tax which is to be levied on the supply of goods and services.

France was the first nation to introduce this VAT system in 1954. The debate has always revolved around whether India should implement a single or unified GST. Due to lack of consensus between the Centre and the States, a dual GST model has been proposed for India. Many countries across the globe are single tax nations with a unified GST system. But in most federal countries including Canada and Brazil, a dual GST system operates.

Impact:

1. GST is aimed to increase efficiency in the economic system thereby lowering cost of supply of goods and services.

2. The aggregate incidence of dual GST is lower than indirect taxation system currently in force.

3. Implementation of GST is aimed towards cutting down on the prices of goods and services in the long term.

4. Dealers will start transmitting the benefits of reduced tax incidence to consumers following the implementation of this tax.

Models of GST

There are three prime models of GST:

1. CGST/GST at Central Level : This tax is levied by the Union Government only

2. SGST GST at State Level : This tax is levied by the State Government only

3. Dual GST : Concurrent levying of GST by Centre and State

What About Other Major Federal Nations?

Canada has GST at Union level to cover goods and services at all stages of value addition. Alongside this, there is a tax at province or state level in different forms such as retail sales tax, VAT and so on. EU follows a classic VAT system.

Central GST : A Single Tax Nation

Currently, Constitution of India reserves the power to impose tax on specific activities as per the specific level of Government. Tax on import of goods can be imposed by the Union government and sale of goods within state by State governments as per current system. Under CGST, both Centre and State would combine levies in terms of a single National GST and appropriate revenue sharing arrangements are made between the two. A national GST or CGST has been levied and collected by Centre with proceeds for States in countries like Australia.

With respect to CGST, Centre collects the country’s total tax revenue leaving less for single national governments. Single nation VAT will go a long way in promoting a common market in India. The issue of accountability in sub national governance of this scheme and loss of control of the States over tax design are predominant concerns. Revenue sharing is also an issue. Centralisation of taxation powers were not favoured by Bagchi report either. The advantages of this taxation system lie in its economic merits.

State GST : More Resources for the State

Second model of State GST is where States alone levy GST and Centre withdraws from this type of BAT completely. This system has benefits for states given the variance in resources and responsibilities. State GST will work as a positive mechanism for redistribution. Centre will offset its losses by making suitable compensation subtractions in fiscal transfers to State governments. This would enhance the revenue capacity of the States. US is one of the countries where the system is followed. But lack of harmonisation in implementation of SGST remains a major hurdle.

Dual GST : Best of Both Worlds

This includes concurrent and non-concurrent dual DSTs.

Under non-concurrent dual GST, Centre and State taxes apply concurrently to supplies of services and goods. Cascading can be prevented through states permitting input credit for tax on service levied by Centre. Padder Ahmed Working Paper suggested GST on goods can be levied by states and on services by Centre to circumvent problems in implementation. Centre would play a coordinating role. But the Centre and States may not be amenable to this form of VAT. Under concurrent dual GST, (which is going to be followed in India), GST will be levied by both tiers of the government on a concurrent basis. This variant is akin to the formula suggested by the Kelkar committee in 2002.

Conclusion

GST is being hotly debated but the ice breaker in the Parliament is likely to be an agreement with regards to dual or concurrent models of taxation. Whether single or dual GST is implemented, the implications will be massive for India as a one tax nation.