GST: The revolutionary reform 3.0

By Atulya Singh

It took a time of 17 years, 10 Prime Ministers and 12 Finance Ministers to implement the revolutionary tax reform GST in the largest democracy of the world. The present NDA government has termed it as reforms 3.0, which follows reforms 1.0 (the liberalisation of 1991) and reforms 2.0 (various reforms from 1998-2004 undertaken by PM Vajpayee’s government). Although, the GST that has arrived today is less than perfect but it has been the outcome of a herculean political exercise, fervent negotiation and a compromise reached between the Union government,29 states and seven union territories.

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True, there will be some initial implementation problems. Yet, fairly soon, the positive impact of GST should be available. Reforms 3.0 have already transformed five macro aspects of the Indian economy and there is more to come in upcoming days.

It is dramatically transforming India’s economy and in the long term will position our economy to be a globally competitive and innovation-driven. The six structural reforms that have already been accomplished are:

(1) Ending discretionary allocations of public resources.

(2) Massive formalisation of the economy.

(3) Sweeping changes in India fiscal policies.

(4) An entirely new method for setting monetary policy.

(5) Moving from a bank led to more equity led financing approach.

(6) a revolutionary set of social security programmes.

Each of these is a macro-level change impacting virtually all sectors and industries.

So, what is GST? Goods and Services Tax is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. During manufacturing and processing, value is added at each and every step and therefore GST will be levied on these value additions- the monetary worth added at each stage to achieve the final sale to the end customers

The Indian tax structure was divided into two- Direct and Indirect Taxes. Direct Taxes are levied where the liability cannot be passed on to someone else. But in the case of Indirect Taxes, the liability of the tax can be passed on to someone else. The total tax incurred by the retailer for purchasing the product and then selling it to the customer is passed as a liability to the customer and increases the burden on the consumer.

Good and Services Tax will address this issue after its implementation. It has a system of Input Tax Credit which will allow sellers to claim the tax already paid so that the final liability on the end consumer is decreased.

A nationwide tax reform cannot function without strict guidelines and provisions. The GST Council has devised a full proof method of implementing this new tax regime by dividing it into three categories. CGST: where the revenue will be collected by the central government. SGST: where the revenue will be collected by the state government for intra-state sales. IGST: where the revenue will be collected by the central government for inter-state sales. Different taxes at the Centre and State level are subsumed into GST. At Central level, Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty and Special Additional Duty of Customs are subsumed. At State level, State Value Added Tax/Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax, Luxury Tax, and Taxes on a lottery, betting and gambling is subsumed.

The basis of Goods and Services Tax is the seamless flow of Input Tax Credit(ITC) along the entire value addition chain. At every step of the manufacturing process, businesses will have the option to claim the tax already paid the previous transaction. Earlier tax was paid on tax and along the way, the tax liability was passed on at every stage of the transaction and the final liability comes to rest with the customer. This is called the Cascading Effect of Taxes. In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input.

So essentially, Good and Services Tax is going to have a two-pronged benefit. One, it will reduce the cascading effect of taxes, and second, by allowing input tax credit, it will reduce the burden of taxes and, hopefully, prices.

Therefore, the idea behind having one consolidated indirect tax to subsume multiple existing indirect taxes is to benefit the Indian economy in many ways.

It will help the country’s businesses gain a level playing field and will put us on par with foreign nations who have a more structured tax system. It will also translate into gains for the end consumer who do not have to pay cascading taxes anymore and there will be a single tax on goods and services according to various tax slabs implemented by the government.

The Goods and Services Tax aims at streamlining the indirect taxation regime. GST will subsume all indirect taxes levied on goods and service, including State and Central level taxes. The GST mechanism is an advancement on the VAT system, the idea being that a unified GST Law will create a seamless nationwide market. It is also expected that Goods and Services Tax will improve the collection of taxes as well as boost the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.

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