JOIN USThe most significant reform in indirect taxes in India since Independence has been the Goods and Service Tax (GST), ushered in on July 1, 2017, after many a twist and turn over more than a decade. It is a historic achievement of Indian federalism, wherein the Centre, states and union territories joined hands on a common platform. There has been global appreciation for the reform, which provides a solid structure for the economy.
‘One tax, one nation’ was the motto, thereby subsuming all indirect taxes into GST. It is a single destination-based indirect tax levied on sale of goods and services. The GST is essentially a tax only on value-addition at each stage, ensuring thereby that the consumer will bear only the GST paid by the last dealer in the supply chain, with set-off benefits at all previous stages.
Indian GST has four rates — 5, 12, 18, and 28% — while most countries around the world have a single rate of GST. As per a World Bank Report, 49 countries use a single rate, 28 countries use two rates. India, Italy, Luxembourg, Pakistan and Ghana use four rates. The India Development Update, the bi-annual publication of World Bank, states that the GST rate of 28% is the second highest among 115 countries that have a GST (value-added tax, VAT) system.
In the course of implementation, a lot of hurdles came up. But these have been resolved quickly at least to some extent. The government is striving hard to simplify it. Though GST has reduced the complexity of indirect taxation in the country, the GST system itself appears to be the most complex one after China’s in the Asia-Pacific region.
At every GST Council meeting, the common issues, including the tax rates and the procedural requirements, have been deliberated and reduced to a great extent. Introduction of the e-way bill with effect from April 1, is expected to smoothen the process. In July 2017, the portion of GST returns filed on time stood at 57.69%. That improved to 66.81% by December 2017 but dipped to 62.63% in March 2018.
The core purpose of bringing GST is uniformity of tax rates and structures, easy compliance, improved competitiveness and gains to manufacturers and exporters, removal of cascading taxes, thus paving the way for reduction in prices. For the government, it’s simple and easy to administer, and allows it to better control leakage and ensures higher revenue efficiency.
As we approach a year since the introduction of GST, it is necessary to gauge how far its objectives have been achieved. Uniformity of taxes, removal of cascading tax and transparent system of taxes have been achieved to a great extent. But the core object of reduction in prices is yet to be achieved. Anti-profiteering rules have been provided; thereby the authority concerned can exercise power if reduction in taxes is not passed on to consumers.
Competitiveness in the global market, by virtue of GST, is still to be achieved — Consumer Price Index of March 2018 stood at 136.50, whereas it stood at 136.40 in March 2017. Industrial production is at a five-month low at 4.4% compared to 7% in February 2018, as per the Central Statistical Organisation. Mining is at 2.8% now compared to 10.1% last year.
The experience on introduction of GST has been different in different countries. In countries such as Australia, Canada, Japan, China and Singapore, there was an increase in inflation post-GST implementation. In India, the inflation rate for March 2018 was 4.28%, down from 4.44% a year before. As per a HSBC report, inflation is set to rise to 5.1%. But GST may not be a significant threat in this regard as the CPI basket does not show it to be adversely impacting inflation. The Malaysian government is set to scrap its single-rate (6%) GST, introduced in 2015, on June 1, 2018, zero-rating it for three months before bringing in a sales and services tax (SST) in September.
On course
A Finance ministry statement said that the total GST revenue collected between August 2017 and March 2018 was Rs 7.19 lakh crore. These collections include Rs 1.19 lakh crore of central GST, Rs 1.72 lakh crore of state GST and Rs 3.66 lakh crore of Integrated GST. IGST collections include Rs 1.73 lakh crore tax on imports and Rs 62,021 crore of cess.
As there is stability and steady progress in GST collection, there is much scope for rationalisation of rates, particularly for reducing the 28% items to the 18% rate. If petroleum products come under the purview of GST, there will be higher buoyancy in collections.
The pre-Budget Economic Survey predicted that India’s GDP growth will accelerate from 6.75% this year to 7-7.5% in 2019. Therefore, buoyancy of tax collection would increase. It is not certain if the projected GDP includes the impact of GST on the economy. Some countries — Australia, Malaysia, Canada and Singapore —took a hit after introducing GST. In Singapore, GDP growth fell 3.3% from 10.2% to 6.9%. In India, in the second quarter after roll out of GST, GDP growth accelerated to 6.3% from 5.7%.
Under the GST law, the Centre has to compensate the states for loss of revenue on account of GST. It has budgeted Rs 90,000 crore as compensation to states for 2018-19, rising 47% from Rs 61,300 crore for 2017-18. It accounts for 3.6% of the 2018-19 Union Budget. To meet the challenge of compensating the states, the cess collected on luxury vehicles will be used. About Rs 62,000 crore was collected through cess and an estimated Rs 41,000 crore paid in compensation to states till February 2018.
In a nutshell, the core objectives of the GST seem to be within sight.
(The writer is a chartered accountant)