GST (Goods and Services Tax), refers to the tax reform which aims to bring in

efficiency and harmonise the consumption tax. This would mark the end of the
parallel system of consumption taxation by the central and state governments.

Goods and Services Tax (GST) in India has been proposed to be implemented from
April, 2011. Though initially it was proposed to be implemented from this year itself,
there was a protest from a number of states on the grounds on unresolved issues and
request from states like Orissa, Madhya Pradesh, Rajasthan and Tamil Nadu to defer
the same.

The main reason as understood by market players are that there is a state-central tussle
over the share of the revenue and the loss of the control over the tax rate by the state
governments. The finance ministry in the month of August 2010 had given the states
the freedom to decide on the tax rates applicable, though he sounded hopeful that the
right would not be exercised after reaching a consensus at the GST council.

A dual-GST system has been proposed consisting of Central GST (CGST) and the
State GST (SGST) and that both taxes would simultaneously apply on a transaction
and principally on the same tax base (though this proposal has been changed as given
above)

Speaking at the Calcutta Chamber of Commerce, the finance minister, Mr. Pranab
Mukherjee, had urged the industrialists to view the GST in line with the presently
implemented VAT (Value-Added Tax). He emphasised the necessity of reforms in
indirect taxes, as India grows between 8.50% - 8.75%. This step in the view of the
government is necessary to bring the fiscal deficit to GDP ratio to nearly 3%.

The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy
on manufacture, sale and consumption of goods as well as services at a national level.
Integration of goods and services taxation would give India a world class tax system
and improve tax collections. It would end the long standing distortions of differential
treatments of manufacturing and service sector.

The introduction of goods and services tax will lead to the abolition of taxes such as
octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence
fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of
goods and services, and eliminate the cascading effects of multiple layers of taxation.
GST will facilitate seamless credit across the entire supply chain and across all states
under a common tax base.

Recently, in July 2010, the finance minister had proposed a three-rate structure for
GST. Under this proposal, goods would be taxed at 20%, services at 16% and
essential items at 12%. The limit has been set at 10 lakh INR. Here the condition that
all central and state taxes would be rolled into the GST is of importance.

In order to garner the industry support for the bill, the finance minister has also
assured that the compensation amount as proposed by the 13th Finance Commission,
would be raised if need be. The compensation as proposed would be given for the first
four years of implementation. He has also proposed a reducing tax rate for GST in the
years to come. The total revenue would be shared equally between the centre and the
state government.

Over a period of time, the GST will have a moderating influence on prices because it
ensures that there are no taxes on the tax component in factory-gate prices. In short,
the tax is self-policing and anti-inflationary, and will make India a truly common
market with few internal trade barriers. But there are views which state that as India
progresses, financial liberty needs to be pushed to the states and GST is a step right in
the opposite direction.

The implementation of GST would have an impact on setting up of factories, buying

things locally and selecting a proper vendor. The necessity of selecting a proper
vendor would increase because in case the company higher in the value chain is not
paying the tax then the cumulative burden would get transferred to one lower in the
chain. Again on the matter of exemptions, the finance ministry has to look into the list
of exemptions for central excise duty and the state equivalent and also the 99 items
which are currently exempt from VAT.

Historically it can be said that the full benefit has never been passed to the consumer.
Thus the present high inflation rate (double digit) clubbed with the GST would only
increase the burden on the consumer. The main objective is increasing the number of
tax payers under indirect taxes so as to have a healthy ratio of tax to GDP – in the
vicinity of 30% as for the developed nations.

How will this new system impact the consumers or the industries are highly debatable
and the GST council along with the committee to suggest changes have been formed.
The final impact still needs to be analysed.

The author is a participant at Indian Institute of Management, Indore.

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