Tuesday, August 3, 2010

GST and its implications

Finance Minsiter P.Chidambaram announced in the 2007-2008 budget that the government would try to introduce the Goods and Services Tax (GST) by April 2011. The GST can go a long way in making indirect taxation within the country more efficient.

GST is an indirect tax which would replace existing duties such as service tax, VAT and Excise Duty. It would be levied on almost all goods produced within India or imported.

Producers would earn credit for taxes paid by them earlier, thereby avoiding multiple taxation. GST is, in fact, very similar to the VAT, with the primary difference being that services are also taxed in case of the GST.

It is planned that GST would initially be implemented with a separate rate for the Centre and State, and eventually converge to a single rate. The tax would then be shared by the Centre and the State in a decided proportion.

GST would make the taxation process more transparent and lead to increased compliance and a broadened tax base. Moreover, with fewer exemptions that currently exist for the multiple taxes in place, GST is also likely to boost tax collections.

For companies, where cascading taxation is a significant, GST would lead to reduce the tax burden. It would encourage a more competitive business environment and is likely to boost GDP. According to a recent statement by the Indian Finance Minster Pranab Mukherjee, "Well-designed GST will see an increase of 2 to 2.5 per cent in the GDP."

Moreover, it would lead to harmony in the systems of taxation across the country and would end distortion in differential treatment of the manufacturing and service sectors.

However, there are several concerns regarding the implementation of GST. The exact rate of GST needs to be decided as would the proportion in which the tax would be shared between the Centre and the State would need to be decided. The VAT, Central Excise and Service Taxes, would need to be phased out. Moreover, variations exist in the definition of inputs, capital goods etc across Indian states. This leads to companies, especially those with a national presence, providing for these inconsistently. It is pertinent to deal with issues such as these before GST is implemented across the country.

1 comment:

  1. The political implications of GST are also very important. What is happening is the all important state VAT which constitute almost 60% of state tax revenues will be subsumed into GST and will then come back to the states depending on the tax devolution formula. Hence, there will be a lot more resources spent by the states in convincing the centre to have a devolution formula suiting themselves.

    Akshay Ravi aka Chirkoot