GST in India: An indirect tax system with greater transparency and rationality
India warms up to the prospect of a nation-wide goods and services tax (GST) Photograph: (Getty)
The Indian Parliament passed the 122nd Constitutional Amendment Bill, ushering in the regime of goods and services tax (GST) in the country. This tax regime seeks to introduce a uniform rate of taxation for all goods and services that are being bought and sold in India. It is supposed to be designed in such a way that, irrespective of the location of the point of sale for any particular goods or services, the buyer will be paying the tax at the same rate.
Currently, the picture is just the opposite. Different kinds of state and local taxes make the rate of taxes vary across regions. Often locally produced goods enjoy favourable tax treatment compared to goods brought from other states. The proposed GST regime is supposed to wither away that kind of differential treatment. Therefore, no doubt, passing of this bill marks a milestone in India's fiscal history.
The concept of value-added tax (VAT), also known as the GST, was first floated in 1918 by a German industrialist Wilhelm von Siemens. However, it was first implemented as a comprehensive tax regime in France in 1954. Great Britain and Australia introduced the VAT in the 1970s. Canada introduced it in 1991. All countries in the Organisation for Economic Cooperation and Development (OECD) and in the European Union have imposed VAT on money spent by people for consumption purposes. Now almost 160 countries have embraced VAT/GST as the preferred mode of consumption tax. The latest one to board the bandwagon is Malaysia who introduced the GST in 2015. India is expected to join them from April 1, 2017. However, the USA has not shown much enthusiasm to join the league yet.
In the theoretical economic literature, the VAT/GST regime is generally commended because it brings fewer distortions compared to its close competitor sales tax or turnover tax. The VAT seeks to collect taxes at every stage of value addition in the production cycle of the goods or rendering of services. Thus, if a seller buys a shirt at Rs 500 and sells it to the ultimate buyer at Rs. 600, the tax liability for the seller would be calculated on the basis of the difference of Rs. 100 instead of the entire sum of Rs. 600. Therefore, it avoids the worst vice of the sales tax, namely, the cascading effect. In preventing the cascading-effect, the VAT/GST regime causes less distortion in the economy. If the concept of VAT was not introduced, every person involved in the trade would have paid taxes on selling price without having taken credit of tax paid earlier by them; this results in double payment of tax.
GST in India has reached its culmination through a series of reform measures aimed at rationalizing the indirect tax structure in the country. In 1976 the Indirect Taxation Enquiry Committee was constituted under the chairmanship of Dr. L.K. Jha. Its report hinted at the GST. In 1985-86 budget, the then Finance Minister Mr. V.P. Singh proposed to introduce modified value added tax (MODVAT), which became effective from April 1, 1986. Dr. Raja J. Chelliah, the chairman of the Tax Reforms Committee, strongly advocated for VAT at the manufacturing level covering all goods. The Indian government partially honoured the proposal in its 1993-94 budget.
In 1999, the then Finance Minister Mr. Yashwant Sinha took the initiative for the introduction of VAT in all the states of India. An Empowered Committee of State Finance Ministers was formed to deliberate on state- level VAT under the chairmanship of Dr. Asim Dasgupta, the then finance minister of the Indian state of West Bengal. Subsequently, a task force was formed with Dr. Vijay Kelker at its head which recommended GST as the indirect tax system in India.
In 2006, the then Finance Minister P. Chidambaram made the case for GST in his budget speech. He said, “The world over, goods and services attract the same rate of tax. That is the foundation of a GST.” However, in 2009 the Empowered Committee of State Finance Ministers called for a two-tier GST as the ideal solution for a country like India with a strong federal structure. Fearing revenue loss, the India states were not agreeing to a single GST levied by the centre alone. Now there will be the central GST as well as goods and service taxes imposed by various states. The present draft legislation has this provision.
It is quite clear that the GST is going to put in place an indirect tax system with greater transparency and rationality. This is in tune with best global practices. This destination based tax regime would integrate markets all over the country. The consumers will benefit from less uncertainty as there will be no need to search for places with low taxes and, hence, low prices.
Is there any criticism against the GST? Of course, there are. The GST, like any indirect tax regime, is regressive. Critics of the goods and services tax argue that under this system, the poor pay more, as a percentage of their income, than the rich. Also, there is the fear that GST may add a newly modified virus of inflation to the Indian economy.