There are two sides of a road with vehicles traveling in opposing directions, which are wrong ways. An effort is being made to align both the sides of the road in one single direction, with a broadening of the roads as well.
The two sides above refer to the direct and indirect tax system of our country.
This piece in particular, will cover the changes to be brought about in the Indian indirect tax system – Goods & Services Tax (GST).
Impact on the direct tax system – the result of Demonetization, is for another day. Let us focus on an idea that has made news in a whole lot lesser fashion, but a commendable idea nonetheless.
2016 has been a roller-coaster of a year politically, economically and culturally for India. Demonetization is one among many other events that hogged the headlines and still does. But among all the hullabaloo surrounding these events, a comparatively insignificant event made the headlines on a couple of days.
Goods & Services Tax Bill was passed by the Rajya Sabha on 3 August 2016, and the amended bill was passed by the Lok Sabha on 8 August 2016.
Breaking down to the basic of taxes for a while:
What are direct & indirect taxes?
The box below will give a better picture on a basic level.
|Direct Tax||Indirect Tax|
|Paid directly to the government by an individual/entity||Shifts from one taxpayer to another, ultimately paid by end consumer|
|Higher one earns, higher the tax to be paid||Irrespective of income, the tax has to be borne by all|
|Example: Income Tax, Property Tax, Corporation Tax||Example: Value Added Tax, Central Sales Tax, Customs Duty, Services Tax, all the extra taxes that appear in your regular restaurant bill|
This piece specifically deals with indirect taxes.
Note that idea is what is being talked about here, not execution. Frankly, one cannot speak about the execution since it has not been executed yet.
Now, Goods & Services Tax.
Brief Snippets of Goods & Services Tax:
- What is it?
Goods & Services Tax is an indirect tax system proposed that clubs all the existing indirect taxes into one mega system of taxation.
- Who proposed it?
In 2000, the Atal Bihari Vajpayee government set up an empowered committee to fine-tune the GST concept so that it can be adopted soon and the necessary structure required for its whole-scale implementation be developed.
- When will it be live?
Although it was said in the Budget Speech that it was expected to go live in April 2017, the most recent update on January 16 is that after a general consensus among the ministers, the roll-out of GST Bill has been deferred realistically to July 1, 2017.
This is bifurcated into the idea stage timeline and legislation stage timeline for clarity covering major events.
(1) Idea Timeline
|2000||Empowered Committee set up by the Atal Bihari Vajpayee administration to fine tune the concept so it can be adopted soon|
|2006||Reiterated by then Finance Minister, P Chidambaram, in his Budget Speech for the move to a national taxation system|
|2008||A detailed report titled “A Model and Roadmap for Goods and Services Tax (GST) in India” is published by the EC|
(2) Legislation Stage
This relates to the exact conversion of the model into implementation by means of the bill passing through the houses of the parliament.
|19th December, 2014||The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 was introduced in the Lok Sabha by Finance Minister Arun Jaitley|
|6th May, 2015||Bill passed by Lok Sabha|
|14th May, 2015||Bill enters Rajya Sabha, referred to a Select Committee|
|22nd July, 2015||Select Committee submits its report on the bill|
|3rd August, 2016||Bill passed by Rajya Sabha|
|8th August, 2016||Amended bill passed by Lok Sabha|
|12th August, 2016||Assam becomes first state to ratify/approve the bill as the Assam Legislative Assembly unanimously ratifies/approves it|
|8th September, 2016||After ratification from States, President provides his assent and the bill was notified in The Gazette of India, a public journal and an authorised legal document of the Government of India|
|16th January, 2017||General consensus among ministers to defer bill rollout date to July, 2017 instead of April, 2017, for better preparedness and groundwork for required infrastructure for execution of the bill|
In order to provide a clearer understanding and to appreciate how historic an achievement this has been so far, it is important to revisit the lawmaking process in India.
Lawmaking in India:
Proposals are brought before either house of the Parliament of India in the form of a bill.
When it is passed by both houses of the Parliament, the Lok Sabha and Rajya Sabha, and assented by the President, the bill becomes an act of parliament.
|Pass in both houses||Completed|
|Approval in both houses||Completed|
|Ratification/Approval from constituent States||Completed|
|Notification in Gazette||Completed|
|Bill becoming an Act||Completed|
Goods and Services Tax (GST) Bill is The Constitution (One Hundred and Twenty-second Amendment) Bill, 2016 which proposes one indirect tax in place of many.
It has been notified as The Constitution (One Hundred and First Amendment) Act, 2016 on September 8, 2016.
Now, having covered (1) Basics of Taxes, (2) Brief Snippets of Goods & Services Tax, (3) Timeline/Background and (4) Lawmaking in India (to appreciate this milestone), let us delve deeper into Goods & Services Tax alone.
Goods & Services Tax – The Concept:
Any new concept will be introduced only when there is a flaw in an existing one.
So, let us take a look at the flaws of the existing system of indirect taxes.
(a) Tax Multiplication:
|Levies excise duty on manufacturing and service tax on supply of services||Levies sales tax or value added tax (VAT) on the sale of goods|
|Levies central sales tax on inter-State sale of goods but is collected and retained by the exporting States||Many States levy an entry tax on the entry of goods in local areas|
When there are so many taxes levied and collected differently by the Centre and the State, it has lead to multiplicity of taxes which means the taxpayer has to maintain separate records for each kind of tax.
Rough example of multiplicity of taxes is given below.
A tyre manufactured in one state and sold in another state, the end consumer who buys the tyre may have to bear almost all the taxes mentioned in the box above. Tax on tax on tax.
The multiplicity effect of taxes has resulted in a complex indirect tax structure that causes hidden costs for the industry.
(c) Cascading of taxes:
This is the same as explained above. The phenomenon of tax on tax creating burden for the consumer.
(d) Multiple compliance for business:
All businesses have to pay taxes.
Most businesses are present in multiple states.
What if multiple businesses present in multiple states with multiple taxes with different filing dates in each state are present? This could cause compliance inconvenience, although it is the duty to pay the taxes.
These are the flaws that the GST seeks to eliminate.
It looks to subsume all indirect taxes into a unified taxing system in the times to come.
|Centre Levied Taxes||>||<||State Levied Taxes|
|Sales Tax||>||GST||<||Entertaiment Tax|
|Service Tax||>||<||Gambling Tax|
|Tax on Imports||>||<||Luxury Tax|
The tax rates would be at 4 slabs of 5%, 12%, 18% and 28%. Luxury and demerit goods will be taxed at 28% plus cess, daily needs will be taxed at 5%.
1. Exceptions – The GST is supposedly non-applicable on all petroleum products and liquor/alcohol. Now this is a major drawback because these are two of the most consumed products by the Indian on a daily basis.
2. Need of each state would be different – Having a unified taxing system for indirect taxes is good, but a main challenge will be that one good that is not taxed may not be culturally significant to one state while it may be significant to another. These complications will have to be worked out.
Demonetization is an effort to clean out the dishonesty in the direct tax segment (income tax).
GST is an effort to overcome the existing flaws and complexity in the indirect tax segment, and many governments are a part of it.
This way, there seems to be an overhaul in taxes in the country happening, which will cause incovenience in the short-run, but it does seem like a massive long-term plus.
Only time will tell, like they say.
It takes both sides to build a bridge.
The bridge is to be built over a complex river flowing in many haphazard directions.
It takes both sides to build a bridge. On the one side we have the government, and on the other side, we have ourselves.
Maybe this is what our Prime Minister meant when he famously said we need to cleanse our rivers.