The General Sales Tax (GST), ten years in the works, when implemented, probably beginning as early as 2017, will herald the advent of the greatest indirect tax reform in independent India. From a plethora of overlapping state and Central taxes, built up over the decades, there will be instead a countrywide single tax to be collected at the point of ultimate sale to the final consumer. And this tax will be shared by the Centre and the states in a predetermined proportion, though it is only an examination of the detail that will reveal if certain states that have greater economic activity will gain more, than others where not a lot is selling.
But at a minimum, think of the cascading effect of entertainment tax, VAT, excise duties, import duties, luxury tax, Central sales tax, service tax, entry tax or octroi, and more—all gone in one fell swoop. Even though the consumer will pay the GST, he/she is expected to still find everything less expensive than before, because there is no tax on top of tax rolled up in the price. Inflation over the years could, of course, blunt the initial gains, even though it is well contained in the 5% region in the Wholesale Price Index (WPI) at present.
The infamous octroi points near state borders, with the serpentine queues of laden trucks will become history—other gatekeeper cesses, imposts on raw materials, layered onto each stage of production, service, or movement, all done away with.
Though implementation glitches, including attempts at evasion or wrong entries of sales clocked up on the real-time IT grid are expected, eventually, the supply chain is bound to become faster and far more efficient. The tax collections and disbursements on state and government works will also become faster.
Manufacturing, logistics and retail industries in particular, all of which impact the consumer, will benefit substantially. And provided they pass on a good deal of their tax savings, something that natural unfettered competition should ensure, the consumer will benefit significantly.
All the taxes the GST replaces, unbelievable as it seems, will be scrapped simultaneously. This will not only make for cost/price efficiencies, but also simplify life for both the payers and the collectors. And this GST will be contained at under 18%, probably at 15% to begin with. Congress, the original author of the bill, wants a cap at 18%. Of late, it wanted it in the constitutionally passed Act that would need two-thirds’ assent from the Centre and all the states for changes, but now is likely to agree to its inclusion in a part of the legislation not quite set in stone. The proposed new tax, grown old in the birthing, will be calculated on the final cost of production of goods and services, and not on the maximum retail price (MRP), another anomaly, suggesting administered prices, left over from socialist times under Indira Gandhi.
It is not yet clear if everything will fall under the purview of GST, but the attempt will be to have as few exceptions and exemptions as possible for its greater effectiveness going forward.
Will manufacturing heavy states be allowed to levy an extra percentage point? Are petroleum, electricity, alcohol and tobacco going to be included? Will luxury cars be allowed to benefit so dramatically with many of them imported in fully-built form? But, as it stands, mid-size cars, manufactured in India, could theoretically see a 22% price cut from the tax reduction alone.
UnionFinance Minister Arun Jaitley, to calm the jitters of states that fear a loss of revenue, has said, repeatedly, that he will have the Centre make up the difference. But for how long? Isn’t the eventual idea that competition should replace protectionism in a free market? The GST law is expected to pass in this monsoon session of Parliament. There is reportedly both the consensus and the numbers to see it through the Rajya Sabha, even if Congress, with a reduced strength of 60 seats down from 68 resists. How will the consumer gain? End-pricing, the controversial MRP, should be decidedly better, and competition—read discounts—for his rupee, keener. Consumption is, therefore, in for a boost. And this should set off a virtuous cycle, going all the way back to producers, manufacturers and service providers.
While GST will be lower than the cumulative taxes on everything prevalent now, it will also iron out anomalies of pricing where the same item is priced higher or lower, depending on where, in which state, you are buying it. With GST, there will be uniformity of pricing, less the discounting or the premium building. The government, both in the Centre and the states, will share the tax, and both are definitely expecting to gain revenue, from greater compliance if nothing else.
The economy is also likely to be bumped up by 2%-2.5% of GDP in due course, as a result of this unified tax. The good monsoons expected this year, and two years going forward, is expected to add a percentage point from agriculture too. The confidence in this arises from the effects of El Nina, following the droughts brought on by El Nino years just past, as it has proved to have a marked effect on global weather, the sea currents, etc. All this, added to the present GDP rate of about 7.5%, could well take the Indian GDP rate into double-digits for the first time. The question remains, however, that how much of a time-lag must be endured before this shows up in the statistics. Former West Bengal Finance Minister Asim Dasgupta, who headed the panel of state Finance Ministers set up to give contour and shape to the GST Bill, said, “The strength of the GST lies in avoiding the continuous levying of taxes from producer to consumer.” Much, therefore, depends on the roll-out, and how the process works in practice. There are many details that are still a matter of conjecture and anomalies will come to light gradually and have to be amended. The tax itself is expected to be around 15% at first. But since manufacturing is a complicated process, arriving at cost is difficult. So, at every stage, the GST will work on the principle of value-added. Likewise for specialised services that are also not that easy for the taxman to fathom.
Tax compliance will also increase because of GST, swelling the revenues of the states and the Centre. Exemptions will be minimised in the interest of continuity and the tax-base will expand.
Prime Minister Narendra Modi, perhaps sensing that the long journey towards enactment of this transformational law is almost at an end, recently said no political party should “commit suicide” by resisting the enactment of GST. But at the same time, he refused to be boxed into a “deadline”, and said he preferred to think of a “lifeline” instead.
The virtual isolation of the ostensibly softening, but still resistant Congress, quite capable of raising fresh obstructions means the Modi government has every chance of working with the remainder of the Opposition to finally pass the GST bill. If that happens, on this 70th year since Independence, a new modernist era will have dawned with GST as its proud symbol. One nation, one holdall indirect tax.