Business Today

A taxing resolve

The Central government pushes ahead with India's most ambitious indirect tax reform, the Goods and Services Tax, but it will not be smooth sailing.

twitter-logo Manu Kaushik        Print Edition: March 20, 2011

What will happen?
The chances of a faster roll-out of the Goods and Services Tax, or GST, have brightened with the government indicating that it will introduce a Constitutional amendment Bill in the Budget session to facilitate the transition to GST. The passage of the Bill in Parliament will see GST replacing excise and service tax at the central level and valueadded tax, or VAT, at the state level. The new indirect tax regime, which will treat India as one market, aims to dismantle the fiscal barriers between the states and create a unified tax system covering consumption of all goods and services produced or imported into the country.

The obstacles
So far, the differences between the Centre and the states over issues such as loss of autonomy and compensation for revenue loss have delayed GST's implementation. As many as 10 states have opposed the latest draft Bill, the third in the past eight months: they fear they will lose revenue if they relinquish their right to levy central sales tax on the interstate movement of goods.

Its advantages…
GST is expected to result in a simplified tax system, uniform pricing of products across the country and lower working capital requirement for companies. Currently, there are multiple taxes on commodities and services at both central and state levels. The complex nature of taxes not only increases the transaction costs for the taxpayer but also acts as a deterrent to widening of the tax net. According to Finance Minister Pranab Mukherjee, GST will double the Indian economy to $2 trillion faster than it will happen without it.

… and limitations
"There is no uniform rule or law that can be applied to all 28 states. The state-specific issues such as tax procedures, processes and return formats will remain even after its implementation. Also, GST is biased towards consumption states as producing states will have no authority to claim taxes on their production," says Pratik Jain, Executive Director at KPMG India. Analysts also feel that GST could be inflationary in the short term. "Since GST is collected on the value added at each stage of sale or purchase in the supply chain, the prices go up," says Jain.

GST will also affect millions of small and medium enterprises, or SMEs, in the country. They are presently exempted from excise duty if their annual turnover does not exceed Rs 1.5 crore but this limit is expected to come down under the new regime.

Global experience
GST has been implemented in some 130 countries, with over 40 models currently in force, each with its own merits and demerits. While Singapore and New Zealand tax virtually everything at a single rate, in Brazil and Canada the rates vary among the provinces. The success of GST depends on keeping exemptions to the minimum - New Zealand has the least number of exemptions and the most comprehensive coverage of GST.

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