GST Bill: Why we need it in INDIA

GST bill stands for Goods and services tax. Officially it is known as The constitution (122nd amendment) bill, 2014. Till now 160 countries have already implemented VAT/GST. India implemented VAT on 1 April 2005. Now, implementing GST in INDIA would be one of the greatest reform in taxes since 1947.

OK now let's introduce you with several taxes that we pays in order to understand GST.

Excise duty on manufacturing of various products which are intended to sale or production of goods for some specific tasks across India is levied and collected by central government.

Service tax is implemented on Services provided by the central government and is levied and collected by the central board of excise and custom. Services like gym, restaurant, beauty Spas etc. are liable to this tax.

There are many more taxes levied on several products according to the service it provides. like, entertainment tax on movie tickets, central sales tax (CST) for interstate trade, stamp duty, VAT, SAD, CVD and many more.

To get rid of all those taxes Indian parliament passed the bill on  August 2016. In his budget speech, P.Chidambaram, the then finance minister, set the date of GST implementation to be 1 April 2010 and formed a committee to empower and design a roadmap for GST. the committee consist of majority of finance ministers of different states. The committee submitted its report in April 2008 and finally in 2009 the first discussion paper on GST in India released in Indian parliament. But it was until 19 December 2014, the constitution bill (122nd amendment) finally introduced in lok sabha by the current finance minister Arun jaitley. the house passed the bill on 06 may 2015.the bill then passed by the rajya Sabha on 03 August 2016 after studying the proposal report which was submitted by the select committee of rajya sabha. The amended bill then passed by lok sabha on 08 August 2016.

The bill is in accordance with article 368 of India which also states that the bill should be ratified by at least half the state legislature of a state. Till today three states have already ratified the bill with Assam being the first on 12 August 2016. The other two are Bihar and Jharkhand. 

Why it is necessary:

To understand why there was a huge need to introduce GST. Let us go back to date when there was sales tax implemented across India and how from there onwards multiple reforms in taxation system took place to eliminate indirect taxes in India. 

Let's assume a person A sells a product to a person B for 1000 Rs. Applying sales tax on it that is, let's say, 10% it cost person B 1100 Rs. Now if he wants to sell the product to another person, let's say C, for a marginal profit of 200. So the total amount to be paid by the person C will be:

1300 + (10% of 1300) = 1430 Rs.

You can see from the above example that the end person had to pay tax on tax. That is he had to pay tax on (1000 + 100 + 200) in which Rs. 100 is already a paid tax. This is known as cascading.

To get rid of this, VAT was implemented. I am not saying cascading completely gone as there were still no solution of cascading in chain of manufacturing.

Let us understand this from the following example, to manufacture a bike, Suzuki need tyres and tyres generally manufactured by another company, let's say, Ceat. So Ceat company had to pay excise duty for tyres and when these tyres are used in manufacturing of Suzuki bikes, the already paid tax on tyres doesn't credit back but Suzuki had to pay excise duty on the bike which includes even tyres. So there is still cascading effect.

to get rid of this VAT modified into Modified VAT (MODVAT). the VAT taxation system was amended to remove the cascading effect entirely but still due to complicated taxation system and indirect tax system in India cascading effect still remains a major problem as service tax wasn't included in MODVAT. So, eliminating this cascading, CENVAT was introduced with the same provision as MODVAT but with integration of service tax being rendered into CENVAT credit rules. So with the implementation of CENVAT, cascading effect on both, excise duty and service tax have been eliminated almost completely. But as I said earlier India has a very complicated taxation system, the central government and state government can't offset each other that is they don't cross subsidize each other. If you have paid VAT which is levied and collected by state government , you won't get any credit for excise duty and service tax which is levied and collected by central government. So this is the only cascading remains on the modern taxation system in india plus VAT is different in different states thus a non-uniform tax regime.

With the implementation of  GST all the cascading will be eliminated and makes a uniform, transparent, simplified tax regime in India as it subsumes all kind of indirect taxes like service, stamp duty, excise etc. GST will be administered by both state government (SGST) as well as central government (CGST). But, if the product moves across the country than the tax will be levied by Integrated GST (IGST) which is later shared by both SGST (The importer state) and CGST. Another significant aspect of GST is that it is destination based collection system which means the producing state like Gujarat, Maharashtra etc will experience loss but the consuming state like Bihar, Up will gain from this. So a common economic prospect can be achieved in future. But on a long run it is not suitable for the producing state so to compensate this the bill empowers the centre to levy an additional 1%  tax on the inter-state supply of goods for two or more years. This will be accrue to the producing state.

So basically, GST has its pros and cons as it is very good for the state which imports goods from other states but the more industrialised states fear losses of revenues with the movement of their goods to other states.

There are many more salient features of GST economically and many more thing to learn politically. That we will cover in our next post on GST.
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