GST – Impact on Indian Economy

Samyak Sanghvi

Basic idea of GST

GST is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. GST is a part of proposed tax reforms in India having an extensive base that instigate the applicability of an efficient and harmonized consumption tax system. GST has been commonly accepted by world and more than 140 countries have acknowledged the same. Generally the GST ranges between 15%- 20% in most of the countries.

Justification in Implementation of GST

Despite the success with VAT, there are still certain shortcoming in structure in the levy of VAT both at Central level and State level. The shortcoming in CENVAT of the Government of India lies in non-inclusion of several taxes in the overall framework of CENVAT such as VAT, ACD, Surcharge etc.

Moreover, in the present State-level VAT scheme, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element. Furthermore, any commodity, in general, is produced on the basis of physical inputs as well as services, and there should be integration of VAT on goods with tax on services at the State level as well, and at the same time there should also be removal of cascading effect of service tax.

Further, by removing cascading effect, layers of taxes and simplifying structures, the GST would encourage compliance, which is also expected to widen the tax base. But virtually every media report that mentions the GST says that the tax reform has the potential to add up to 2 percent to India’s GDP.

If VAT is considered to be a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level, then GST will be a further significant breakthrough – the next logical step – towards a comprehensive indirect tax reform in the country.

However, the paper makes some crucial assumption such as pegging the revenue-neutral rate in the range of 6.2 percent and 9.4 percent. The revenue-neutral rate is the rate for GST that will not make a net difference to the overall tax collection of centre and states.

Salient Features of GST

The GST Framework could easily be one of the most important tax reforms to be tabled for discussion in the Parliament. It does bring with some problems, like division of taxation power between Centre and State. The GST will be applicable on the basis of Destination principle.

So the GST has two components:-

One levied by Centre (hereinafter referred to as Central GST) and The other levied by the States ( hereinafter referred as State GST)

However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. will be uniform across these statutes as far as practicable.

The GST would be levied in 3 different forms.

CGST	SGST
This is applicable in the case of Inter-State sale of goods and provision of service	In case of sale of goods Intra-state then tax will be charged as per this form.
Taxes/Duties     Covered under CGST	Taxes/Duties     Covered under SGST
Central Excise Duty	Entry tax (not octroi)
Service Tax	Entertainment tax
CVD, SAD	VAT/Sales Tax
Excise duty on M&TP etc.	Luxury tax etc.

Integrated GST (IGST)

• The scope of IGST Model is that centre would levy IGST which would be CGST plus SGST on all inter-state transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.
• IGST will be combination of CGST and SGST and the same will be collected by the Centre in the Origin State.

Tax Credit Mechanism

Time bound refund of credit will be allowed in cases such as exports and inverted duty structure.

It is clear that cross utilisation of CGST and SGST is not allowed generally but the IGST mechanism will make this credit fungible.

Following example will give clear idea above utilisation of credit and costing under present system & GST.

Example:-

Assumption:- (1) Rate of Excise Duty – 8%; (2) VAT Rate – 12.5%; (3) Central GST Rate – 12%; (4) State GST Rate – 8%; (5) Profit Margin – Rs. 5,000/- fixed (6)All parties are located in one state.

Particulars	Under Present Scenario		Under GST
(I)  Manufacturer (D1) to Wholesaler (D2)
Cost of Production	45000		45000
Input Tax Credit (Assuming nil)	–		–
Add : Profit Margin	5000		5000
Producers Basic Price	50000		50000
Add: Central Excise Duty @ 12%	6000		–
Add : Value Added Tax @ 12.5% on Rs. 56,000/-	7000		–
Add : Central GST @ 12%	–		6000
Add : State GST @ 8%	–		4000
Sale Price	63000		60000
(II)  Wholesaler (D2) to Retailer (D3)
Cost of Goods to D2	56000		50000
Available Input Tax Credit for set off	7000		10000
Add : Profit Margin	5000		5000
Total	61000		55000
Add : Value Added Tax @ 12.5%	7625		–
Add : Central GST @ 12%	–		6600
Add : State GST @ 8%	–		4400
Total Price to the Retailer	68625		66000
(III) Retailer (D3) to Final Consumer (C)
Cost of Goods to D3	61000		55000
Input Tax Credit	7625		11000
Add : Profit Margin	5000		5000
Total 1,32,000 1,20,000	66000		60000
Add : Value Added Tax @ 12.5%	8250		–
Add : Central GST @ 12%	–		7200
Add : State GST @ 8%	–		4800
Total Price to the Consumer	74250		72000
Total Tax Payable in All Transactions	14250		12000
Verification:- VAT @12.5% [74,250 * 12.5 / 112.5] = 8250 + 6000 (CENVAT) = 14250 – D1 (6000 +7000) – D2 (7625 – 7000) – D3 (8250 – 7625)		13,000 625 625
Verification:- GST @20% [72000 *20 / 120] =12000 – D1 (6,000 + 4,000) – D2 (11,000 – 10,000) – D3 (12,000 – 11,000)		10,000 1,000 1,000

Cost Benefit

In the current Tax scenario credit of surcharge, VAT, ACD is not available which increases cost. With the introduction of GST credit of these taxes is available with cascading effect which will help in reduction in cost. From the above example is will clear that Tax Payable in GST is less than Current Situation.

Stock Transfer

Another important aspect is stock transfer. Because in GST, tax will be levied on the dispatch. Every dispatch will be taxable under GST, so at every stage i.e. factory, warehouse etc. registration is necessary.

Place of Supply

The main challenge in introducing GST is defining the place of supply in respect of certain services. In existing tax regime it is not a problem as Service Tax is chargeable by Centre only. But in GST place of supply has to be defined clearly to avoid dispute among states and in case of inter-state transaction.

Place of Taxation – Inter-State Transactions

An important question in the context of the Dual GST is whether these rules for international cross-border supplies can be adopted for domestic inter-state supplies also. It is recognized that the place where the supplier or the recipient is established cannot be defined uniquely at the sub-national level within a common market.

Positive impact on Indian economy

• Speeds up economic union of India
• Better compliance and revenue buoyancy Replacing the cascading effect [tax on tax] created by existing indirect taxes Tax incidence for consumers may fall Lower transaction cost for final consumers
• By merging all levies on goods and services into one, GST acquires a very simple and transparent character
• Uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present
• Increased tax collections due to wide coverage of goods and services
• Improvement in cost competitiveness of goods and services in the international market

Points to be reviewed

• Taxation of inter-state services and their method of taxation
  • Difficulties in defining Place of supply, place of delivery
• Road Permit and Check posts
• Stock Transfer
• Integration of certain Central and State taxes (Various Cess, Electricity duty etc.)
• Constitutional amendment authorizing state to collect and retain tax on service
  • Group Health Insurance

    Consulting services

  • However most of the B2B services not a problem because of availability of credit
• Disputes even with regard to classification of goods
• Jurisdictional Issues with regard to registration and SCN / Assessments

Latest updates on GST

• Constitutional (115^th Amendment) bill on the GST
• Automatic compensation mechanism
• Concept of GST Council
• Dispute Settlement Authority

Conclusion

In the light of the empirical conclusions developed in this paper, it seems appropriate to conclude by briefly noting the policy implications of the results.

In the first place, the macroeconomic impact of a change to the introduction of the GST is significant in terms of growth effects, price effects, current account effects and the effect on the budget balance.

Secondly, in a highly developed open economy with a high and growing service sector, a change in the tax mix from income to consumption-based taxes is likely to provide a fruitful source of revenue.

Thirdly, the aggregate consumer price impact of the introduction of the GST in India on the macro-economy was both limited and temporary. Finally, despite falling outside the limited focus of this short note, we should record that some impact has also occurred in the administrative component of the compliance cost of the GST as well as a likely increase in tax revenue from the “underground” or “black” economy.

The task of fiscal consolidation for this government will not be easy. There will be little scope to cut overall expenditure, as it has already been trimmed sharply in the last 2 years. The government must instead focus on switching expenditure from unproductive subsidies towards spending on sector such as health, education and infrastructure. The only way to reduce fiscal deficit, therefore, is to raise revenues as a share of GDP. To do so, the government must implement structural tax reforms such as GST, improve tax compliance and widen tax coverage.

The scope to lower fiscal deficit in fiscal 2015 is limited given large roll-over of subsidies from last fiscal and little possibilities of implementation of GST within this year. Beyond that, however, implementation of GST could facilitate a much needed correction in fiscal deficit. In the base case, it is believed that partial GST – one that excludes petroleum goods is most likely. Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On the downside, a complete failure to implement GST would result in the fiscal deficit being higher at around 4-4.2% in fiscal 2016-2017.