About Model GST Law:
The GST will replace at least 17 state and federal levies, making the movement of goods cheaper and seamless across a market holding 1.3 billion consumers, about four times the U.S. population. It would be far simpler than the current system, where a good is taxed multiple times at different rates. The underlying principle is to tax goods at the point of consumption rather than production.
Economic Impact and Obstacles:
GST can boost economic growth by as much as 2 percentage points, According to Finance Minister Arun Jaitley, Greater tax compliance has the potential to boost revenues for the government, helping narrow Asia’s widest budget deficit and allowing more funds to be allocated to schools and highways.
The government will now seek to pass the revised bill in the lower house, where Modi’s ruling party has the numbers for approval. The legislation will then need to be ratified by at least half of India’s states, which could happen over the next few months.
Once that is done, parliament needs to introduce at least one more bill detailing the structure of the tax, which includes a state GST and a central GST. The earliest this could occur would be the so-called winter session of parliament that normally starts in November.
Effect on “INFLATION”:
Prepare for a short-term spike in prices. Citigroup Inc.’s economists say countries like Canada, Australia and New Zealand saw a one-time increase in inflation after GST implementation, which normalized in a year.
Modi’s advisers say the impact on India’s consumer prices will be negligible if the GST rate is capped at 18 percent. If the rate is around 22 percent, then they project inflation to accelerate 0.3 percent to 0.7 percent mostly due to education and health services.
Present rate of Tax Vs. GST:
| PRESENT TAX | GST |
| Product sold from:
Mumbai To Nagpur • Price Rs.1,000 |
Product sold from:
Mumbai To Nagpur • Price Rs.1,000 |
| VAT @ 10% = Rs.100 | CGST @ 5% = Rs.50
SGST @ 5% = Rs.50 |
| Product sold from:
Nagpur To Chennai • Selling Price – Rs.2,100 • Cost Price – Rs.1,100 • Profit – Rs.1,000 |
Product sold from:
Nagpur To Chennai • Selling Price – Rs.2,100 • Cost Price – Rs.1,100 • Profit – Rs.1,000 IGST @ 10% = Rs.110 |
| CST @ 10% = Rs.210 | = Rs.210 —CGST—SGST |
| Total cost of the product = Rs.2,310 | Total cost of the product = Rs.2,210 |
From the above calculation it is evident that the proposed GST regime might bring down the tax burden on end user to a significant level.
Tax Rate yet to be decided:
The rate of tax won’t be announced for months. The constitutional amendment bill would create a GST Council comprising the nation’s finance minister as well as representatives from the states. This body will determine the final rate.
Modi’s top economic adviser and the main opposition Congress party want to cap the rate at around 18 percent, while some states want a higher levy. Globally, rates for similar consumption taxes range from 5 percent to 27 percent, and the median for OECD countries is about 20 percent.
Goods & Services Covered under Model GST Law:
In negotiations over the GST, some state governments have managed to exempt chief revenue-generating products such as alcohol, petroleum and real estate. The GST Council may also decide to tax certain luxuries such as a flat-screen TV, for example: at a higher rate than food staples.
Conclusion:
After learning the concept of Model GST Law, we found that the Companies will have to overhaul their accounting systems, which may involve one-time investment costs. There may also be chaos in the short term as the government gets the computer software up and running.
(The Author can be reached at giteshsulania@gmail.com)
