India’s biggest tax-overhaul-the good and service tax (GST) is under way. Not since 1947 has such a revolutionary reform like this been undertaken. It’s perhaps imperative at this point to clarify the nuts and bolts of the goods and services tax and why it’s so important for business in India. A unified GST is being touted by some as a magic bullet for India’s flawed tax code when it comes to corporates. A homogenous GST is an economically efficient solution for all stakeholders concerned whether it be multinationals or those in the unorganised sector.
The proposed reform, which will be promulgated soon, will simplify the indirect tax structure to one simplified universal rate, which can be paid by all corporate companies instead of having differential tax slabs. As per the new structure, every buyer of raw materials/intermediate goods ensures that their supplier has paid their requisite part to claim their deductions. The finance minister has clarified that the proposed sales tax would bring into sync a wide variety of state and central taxes to create a unified market. Additionally he has stated that the new tax structure would not go for a steep tax cut as that would discourage companies from filing potential tax returns.
That sounds great, but, why the introduction of the GST when we already have Value Added Tax? Isn’t the VAT framework similar to that of GST? VAT regulations and rates generally vary across states. There is a tendency, as has been observed, that states may resort to undercutting of rates to attract more investors. This generally leads to a loss of revenue to both the state and Centre. GST would introduce uniform taxation laws across states and different sectors. The taxes would be divided between the state and centre, based on a formula that would be acceptable to both. Also, it would be easier to supply goods and services uniformly across the country, as no additional taxes would have to be paid across different states. Currently, no tax credits are provided for inter-state transactions.
So do we as consumers get goods at a cheaper price? Probably not, and it is here that the GST has been attacked by the Opposition. Since taxes are distributed across the chain, the consumer prices are likely to rise to maintain the current tax revenue levels. The government has justified this by saying it would provide tax cuts across various brackets. This isn’t entirely satisfactory. First, the tax-paying population isn’t too significant a number to begin with and second, the taxpayer is likely to get a meagre tax cut for the GST he would pay for all the goods or services he purchased.
GST is clearly a long-term strategy; it would lead to a higher output, more employment opportunities, and economic inclusion. Initially, however, it is likely to trigger high inflation rates, administrative costs, and face stiff opposition from Left-centric opposition parties.