India is now poised to launch the next generation reform on the indirect tax front. Fiscal policy experts and economists have confirmed that a comprehensive and broad based consumption tax on supply of goods and services, collected at each stage of value added within the supply chain, is the best method for levying and collecting indirect taxes. This momentous change is being heralded as GST in India. Goods & Services Tax or GST is a value added tax, the burden of which is ultimately borne by the final consumer. As of now hectic preparations are on to formulate and finalise the legal, procedural and institutional framework that will be required to operate, regulate and enforce the new levy including dispute resolution, and the setting-up of a comprehensive IT network, for capturing and sharing of data and information.
The dialogue and discussion around GST reform in India is now more than a decade old. Slowly and steadily a lot of ground has been covered in the positive direction. At every stage through this journey, it is the lack of political consensus that has stood in the way of faster implementation. Introducing GST, the mother of all tax reforms in India, is ultimately a political decision, which is possible only when the political support base builds up to the required level. We seem to be getting closer but yet not there. In such a scenario it may be worthwhile to take a closer look at the plus points of this method of levy and collection of tax on goods and services.
GST being a comprehensive multi-point taxation system extending upto the retail level, tax cascading is totally avoided. With multiplicity of indirect taxes removed and with the introduction of a common law, common return and common assessment procedure, GST brings about a national common market. Uniform administration and collective enforcement will result in proper compliance and lesser leakage of revenue. GST allows input tax credit on intermediate transaction between firms. Thus each business in the supply chain takes part in the process of controlling and collecting the tax and remitting the proportion of tax corresponding to its value addition. This feature of GST gives it its main economic characteristic - neutrality. In other words the right to full input tax credit at every stage in the supply chain, except the final consumer, ensures tax neutrality.
In India, Federal GST and State GST will operate in parallel and throughout the supply chain. As of today the cumulative effect of Excise and VAT on retail sale price is to the extent of 22% to 24%. Under GST the aggregate incidence of tax can be expected to be significantly lower. For the tax payers (assessees), with multiplicity of indirect taxes reduced, there is significant reduction in transaction time and compliance cost. With stability in the taxation regime coupled with neutrality as its essential character, pure economics alone will drive business decisions in the future. GST being a comprehensive broad-based consumption tax on goods and services, collected at each stage of value addition in the supply chain, is expected to bring improved revenues to the governments, enhance international competitiveness of Indian goods and services and facilitate economic growth. Thus it can be seen that the benefits and advantages of GST as a broad-based consumption tax are many.
The law and procedure followed in India for levy of taxes on goods have undergone changes very frequently throughout the pre and post independence years. The steady progress made in industrialization and in the pattern of trade and commerce, created various opportunities for Union and State governments to introduce newer concepts in tax policy and practice, and the best practices followed in other countries have always influenced and guided these changes. An important principle of taxation universally followed is that governments do not pass-on the burden of the indirect taxes levied by them on goods and services beyond their respective jurisdictions. The present reservation in certain quarters against the introduction of GST are matters that hopefully will be ironed-out through discussion and dialogue and where necessary through some sacrifices. Governments are also expected to be accountable and responsive to their citizens in matters relating to taxation, especially when it is the main source of revenue.
The introduction of GST can truly be the turning point for India, its people and its future.
[The author is Director, Lakshmikumaran & Sridharan, New Delhi]