A brief introduction to Goods and Service Tax (GST)

After long years of battle GST has finally been introduced on July 1st, 2017. GST bill is focused to remove tax barriers between states and creates a single market i.e. ‘One nation One Tax’. In the pre-gst regime, multiple indirect taxes were levied by centre as well as state governments. Now, all these taxes (CST, VAT, Excise, Entertainment etc.) have been subsumed into GST making tax compliance simple and lean. All taxes will be collected at the point of consumption; consumers will not end up paying ‘tax on tax’ which is what happens in the pre- gst regime. More than 150 plus countries implemented GST and none of them rolled it back as inefficient or weak to the economy.

State Worries Post-GST

As GST is the destination based tax in case of interstate sales the revenue will accrue to the states which consume the goods. However, in Pre-GST scenario Central sales tax as well as VAT is also charged on supply of goods, CST being origin based tax which is replaced by Destination based tax. Due to this the manufacturing state is going to lose its portion of revenue from interstate sales. States autonomy has also been curtailed due to implementation of GST. Rolling of GST by states is very challenging, at one hand it has to take care of its revenue on the other hand state has to maintain the balanced rate on goods and services.

Impact of GST on state revenues after 5 years   

It is very difficult to ascertain the impact of GST on the revenue of states after 5 years but as per the various reports of government and the renowned economist of the country GST perhaps will have the positive as well as negative impact on the state finances.

‘GST is good in the medium to long run. Even in the short term the impact of GST on individual states varies across states’.

– India ratings firm

So lets analyze the positive and negative impact of GST on the revenue of states after five years :-

Positive impact of GST

  • GST will reduce the costs of goods and services which were charged to double taxation with elimination of cascading effect it will reduce the compliance cost also. In fact reduction of 1% of the cost will bring about 9-10% increase in profit as asserted by CA Vineeta Sharma[1]. Therefore, more profit will subsequently increase the share in revenue.
  • Lean and simple tax system will attract more investors to India, thus increase in investment brings more business across the states, thereby ultimately result in increase of the tax collection by the states.
  • GST revenue of all states combined will grow at a Compound annual growth rate (CAGR) of 16.6% in Fiscal Year 2018 over Fiscal year 2016, according to India Ratings It may result in the prosperous or increased revenue for the states in the near future.
  • Competitiveness among businesses increased, gains to the government by GST are considered to be higher as compared to the other taxes the benefit of which accrues for the total development of the state in the medium term.
  • Due to simple tax structure GST is easier to administer, it will eventually help in the tax recovery and with most of the work online reducing paperwork and only one type of tax return the service and the industry sector will flourish thus increasing the states revenue.
  • The average shortfall immediately after GST revenue collected by states declined to 28.4% in august, 24% in September, 17.6% in October, 2017. Therefore from the figures we can conclude that the figures are falling every month e. revenue collection is increasing in every subsequent month, no matter how trivial it is.

‘The tax rate cuts may cause a revenue shortfall initially, but if the demand for such products as well as compliance by businesses pick up, it could help to offset the revenue loss over a period’

– R.Muralidharan (senior director Deloitte India)

Negative impact of GST

  • Although at the recent 25th GST council meet the council has cut rates for 29 goods and 53 services it perhaps did not have any effect on inflation which is constantly rising after the implementation of GST. As India follows the Canadian model of dual GST and in Canada the GST rate reductions of 2006 from 7% to 6% and again in 2008 to 5% did not have any effect on inflation, thereby reducing tax revenue collection.
  • According to Wall Street firm Goldman Sachs in a note ‘ India: question and answer on GST growth impact could be muted’, has put out estimates that the Modi governments GST model will not raise growth, will push consumer price inflation and may result in increased tax revenue collection[2].
  • There is less revenue collection under GST in the short term as can be deduced from the fact that within four months after the roll out of the GST states are facing a revenue shortfall of over Rs.39,111 crore and the revenue shortfall for the full fiscal year could be closer to Rs.90,000 crore against the estimated Rs.55,000 crore as said by Amit Mishra(West Bengal Finance Minister) while addressing the annual general meeting of FICCI[3].
  • The centre has agreed to compensate the manufacturing states for any deficit in their revenue for the period of five years. However, in case states revenue still fall short after the period of five years who will borne the deficit occurred by the states and such compensation also destabilize the centre’s budget.

[1] https://blog.saginfotech.com/how-gst-will-affect-indian-government-revenue-system

[2] The Hindu 2015

[3] http://www.thehindubusinessline.com/economy/gst-states-facing-revenue-shortfall-of-rs-39111-cr/article9993067.ece

(Author- Abdullah Tanveer, B.A.L.L.B – Vth year, Jamia Millia Islamia, jamia nagar Okhla, New Delhi)

Compiled by GSTstreet for #GSTManthan

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