The GST is a value added tax to be levied on both goods and services (except for a list of exempted goods and services), at both the center and state level (Central GST and State GST respectively). This is a single tax which will be levied on the product or service which is sold. In other words, multiple taxes like CENVAT, central sales tax, state sales tax, octroi, Service tax, etc will not exist and will be replaced by GST. This comprehensive tax covers all stages from manufacture to sale. The tax will be levied only on the value added at each stage of the life cycle.
The GST, as mentioned above is an indirect tax and will be borne by the customer. There will be a standard rate of GST across various goods and services, which could broadly be in line with international rates. World over, GST has been implemented in over 150 countries.
We may wonder why this tax reform is so important for the country and how it will help the common man. Here’s how:
Simpler tax structure: As multiple taxes on a product or service are eliminated and a single tax comes into place, the tax structure is expected to be much simpler and easier to understand. Paperwork will become simpler and there will be a reduction in accounting complexities for businesses. A simple taxation regime can make the manufacturing sector more competitive and save both money and time. Experts opine that the implementation of GST would push up GDP by 1%-2%.
Increased tax revenues: A simpler tax structure can bring about greater compliance, thus increasing the number of tax payers and in turn tax revenues for the Government. The current state of the Indian economy demands fiscal consolidation and reduction in fiscal deficit. A recent report by CRISIL states that GST is the country’s best bet to achieve fiscal consolidation. As there is not much scope to reduce Government expenditure, increasing tax revenues is the best alternative to improve the fiscal health.
Competitive pricing: GST will eliminate all other forms of indirect taxing. This will effectively mean that the tax paid by the final consumer will come down in most cases. Lower prices will help in boosting consumption, which is again beneficial to companies. The biggest positive of GST is that goods and services will be taxed on a common basis.
Boost to exports: When the cost of production falls in the domestic market, Indian goods and services will be more price-competitive in foreign markets. This can bode well for exporters, who compete with manufacturers abroad facing a lower cost structure.
The exact rate of tax levied under GST will obviously be clear only when the final announcement will be made. Irrespective of the tax rate, it is logical and apparent from examples of other countries, that GST is a critical reform needed for the country. However, many state Governments are not in favour of this move, as it will result in a fall in their tax revenues. Arriving at a suitable formula to solve this problem, making constitutional changes and considering all the dynamics in the economy has resulted in a considerable delay in GST’s implementation.
