A major step towards implementing a comprehensive Indirect Tax reform in the country has been taken with the introduction of the Constitution (115th Amendment) Bill, 2011 by the Government on March 22 in the Lok Sabha.The bill, commonly referred to as the Goods and Services Tax bill seeks to pave the way for the introduction of a nationwide Goods and Services Tax that would subsume all indirect taxes like excise duty and service tax at the centre level and value added tax (VAT) at the state level. The bill intended to usher a nation wide common market for goods and services will simplify the indirect tax structure, broaden the tax base and lower the average tax burden on goods and services companies through the removal of “cascading effects.”
Taxation in
Apart from removing the restrictions that curtailed the efficient functioning of the private sector, economic reforms carried in
Indirect tax reforms
Tax reforms aimed at greater collections to finance developmental needs have been a priority to the government since independence. A comprehensive Indirect Taxation Inquiry committee was set by the government in 1976 under the chairmanship of L.K.Jha. The committee drew government attention towards lack of integration between different indirect taxes leading to distortion in allocation of resources. It noted that the taxation on the inputs of production distorts the production structure in the economy-phenomena called in mainstream economics as “cascading effect” .These taxes also lacked built-in flexibility and often tax rates needed to be raised to enhance collections. The committee recommended for a movement towards the taxation of final products by introducing a modified form of value added tax. In committee’s opinion a major obstacle to indirect tax reform in the country was multiplicity of taxing authorities-centre, state and local providing opportunities for evasion.Some, major reforms in taxation system of the country were introduced in the country with the announcement of Long Term Fiscal Policy in 1985.A modified form of value added tax named MODVAT was introduced by the government in the place of Union excise after a reduction in the number of effective rates and harmonization of tax structure. A value added Tax is essentially an indirect tax levied at every stage of the value addition chain with tax-payers receiving credit for taxes already paid on the procurement stage of the raw-materials. Say, we have a manufacturer who buys raw-materials worth Rs.100 and after doing some value addition on it sells it for Rs.120 to a retailer, the retailer sales it to the final consumer for Rs.150.Now with a GST rate of 10 percent in place the total tax paid by the manufacturer would be Rs.2, i.e. 10 percent of Rs.20 (manufacturers value addition).Similarly the retailer would be charged with Rs.3,10 percent of his value addition of Rs.30.
Chelliah Committee further simplified the MODVAT structure in the country with three rates of taxes of 10,15 and 20 percent under the MODVAT regime. The multiple rate MODVAT was finally replaced by a single Central Value Added tax (CENVAT) IN 2000-01.A system of value added tax on services at central government level was introduced at central level in 2002.Sales tax reforms at the states level received a significant boost with the introduction of Sales Tax Value Added Tax (VAT) effective from April1, 2005. The proposed move intended to remove the unhealthy sales tax war among the states, removing the cascading effects and increase compliance. Two basic rates of 4 percent and 12.5 percent operate under VAT beside an exempt category and a special rate of 1 percent for a few selected items.
Goods and Services tax
A government task force headed by Vijay Kelkar for implementing the Fiscal Responsibility and Budget Management Act,2003 suggested for an all India Goods and Services Tax(GST) which would help achieve a common market ,widen the tax base improving the revenue productivity and enhance welfare through improved resource allocation. The finance minister made an announcement in the budget, 2007-08 for the introduction of a comprehensive Goods and Services tax from April 1, 2010. An empowered group of state finance ministers was created to chart out the necessary roadmap for the introduction of GST. Goods and Services Tax as intended to be introduced in the country is a tax on goods and services with continuous chain of set -off benefits from the producer’s point and service provider’s point up to the retailer level. It is essentially a tax only at value addition in each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism the GST paid on the purchase of goods and services. The final consumer thus bears only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. Thus, after the introduction of the value added tax in the country GST forms the next logical step towards a comprehensive indirect tax reform.As,noted earlier the introduction of CENVAT at the central and sales tax VAT at the state level have removed the phenomena of multiple taxing and cascading but they still show certain incompleteness. The shortcoming in CENVAT at the centre lies in non-inclusion of several Central taxes like additional customs duty, surcharges etc in the overall framework of CENVAT thus keeping the benefits of comprehensive input tax and service tax set-off out of reach for manufacturers. Besides, no steps have yet been taken to capture the value-added chain in the distribution trade below the manufacturing level in the existing scheme of CENVAT. Thus, introduction of GST at the central level will not only include more of central taxes and integrate goods and services tax for the purpose of set-off relief, but also lead to revenue gain for the centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance. Similarly, at the state level several indirect taxes like entertainment tax, luxury tax etc are yet to be subsumed under VAT. More importantly value load of CENVAT continue to be included in the states calculation of VAT contributing to the cascading effect. Moreover, production of a good requires inputs of both goods and services. States have no power to levy taxes on the services and to that extent there is need to achieve integration of VAT on goods and services at the state level as achieved at the centre for removing the cascading effects of CENVAT and services tax.
Proposed model for GST in
Federal nature of Indian constitution with separate power for centre and states to levy and collect taxes to carry out the development activities calls for an introduction of dual-GST in the country.Thus, GST in India will have two components one levied by the centre, Central GST and another levied by the state-State GST.However,the basic features of the law like chargeability, definition of taxable persons and events, valuation provisions and basis of classifications are intended to be similar. Both the taxes would be applicable to all transactions of goods and services except those exempted, outside the purview and below thresh-hold limit. The proposed central GST will include central excise duties, additional excise duties, service tax, counter-vailling duties, surcharges and cesses among others. The state GST will subsume VAT/sales tax, entertainment tax, luxury tax, taxes on lottery, gambling etc, and state cesses and surcharges among others. A two rate structure of taxes will be adopted under GST,a lower rate for necessities and goods of basic importance and a standard rates for goods in general. There would also be a list of exempted items and a higher rate for precious metals. Exports will be zero-rated. The GST will not cover petroleum products and alcohol but will allow the Centre to levy taxes on supply of goods in inter-state trade.
Conclusion
Movement to a flaw-less Goods and Services tax regime is expected to be a big leap in the Indirect tax reform in the country giving a new impetus to its economic growth. The finance ministry has estimated a net vale gain from GST amounting to half a trillion dollar. The thirteenth finance commission has estimated of an increase of prices of agricultural goods under the Goods and Services tax benefitting farmers and reduced production cost for manufactured goods increasing their competitiveness. The proposed reform would also lead to greater tax collections through increased compliance and greater tax base.GST is the preferred tax model in more than 140 countries across the world and an early implementation of GST will go a long way in increasing our international competitiveness.
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