Benjamin Franklin, one of the Founding Fathers of the United States of America once quoted, “In this world, nothing can be said certain, except Birth, Death and Taxes.” It is these taxes which the citizens of a country pay that go towards development activities in a nation. Taxes in India are levied by the Central Government, the State Governments and the local authorities like Municipalities. India has abolished multiple taxes with the passage of time and has imposed many new ones. Over the years, India has experienced unprecedented rates of economic growth. In an effort to keep in line with the changes in global economy, Indian tax system has undergone remarkable reforms during the last decade with rationalization and simplification of tax laws
One such major milestone was achieved by The Constitution (One Hundred and First Amendment) Act, 2016 which introduced a national Goods and Services Tax (GST) in India with effect from 1st July, 2017. GST replaced a slew of indirect taxes with a unified tax and is therefore set to dramatically reshape the country’s $ 2 trillion economy.
GST, however is being criticised for its near term impact on inflation and to some extent impacting states’ autonomy in deciding tax rates and declining revenues. Some of the State-level taxes subsumed in GST are- Value-added Tax (VAT), Central Sales Tax, Purchase tax, Luxury Tax, Entertainment Tax, Taxes levied on advertisements, Entry tax, Taxes levied on lottery and Cess and Surcharge levied on Goods and Services by State Government.
Contentious issues over revenue-
The issues with the GST acceptance are mainly about safeguarding the powers of states in taxation matters. Since the indirect taxes are major source of revenue for state governments so any change in this tax structure can impact the state governments adversely. Some states may have positive impact, while others may have negative impact and the impacts will not be uniform. These differential impacts have to be taken care of in the tax structure design The states wanted a guarantee of reimbursement from the federal government in case their revenue decreases.
State compensation for revenue loss under GST-
GST Council has approved a bill for State compensation for revenue loss arising out of GST in the country. Goods and Services (State compensation for loss of revenue) bill shall provide for compensation to the states for loss of revenue arising on the account of implementation of the Goods and Services Tax for a period of 5 years. States will receive provisional compensation from Centre for loss of revenue from implementation of GST in each quarter but the final annual number would be decided only after an audit carried out by CAG. The compensation would be met through the levy of a cess called ‘GST Compensation Cess’ on luxury items and sin goods like tobacco, for the first 5 years. Any excess amount after the end of 5-year tenure in the ‘GST Compensation Fund’ so created, would be divided between the Centre and states.
Impact to be witnessed-
However, taxes on income, property and capital transactions, petroleum products, state excise and electricity duty are not still part of GST and the states continue to levy and collect these in the same manner as earlier. At an aggregate level, the state taxes that are subsumed in GST account for 55% of states’ own tax revenue.
The government has however agreed to compensate the states for any downfall in revenue for the first five years (2017-22) of the GST rollout. The growth has been assumed for 14% from 2015-16 (The revenue growth from the subsumed taxes in the states rose by 14% in between 2010-11 and 2015-2016). However, there are wide variations across states, for example, with subsumed GST taxes growing at just 8.47% for Punjab during 2012-17 but 39.70% for Telangana. Like the State VAT which was rolled out from April, 2005 to January, 2008, implementation of GST will also bring in some efficiency gains.
GST revenues of all states combined are expected to grow at 16.6% in 2018-19 over 2016-17. However, since the picture at the individual state level differs, states like Andhra Pradesh, Chhattisgarh, Gujarat, Madhya Pradesh, Tamil Nadu etc. would need compensation from the central government for any revenue loss under baseline scenario. This would cost ₹ 56 billion to the central government in fiscal year 2018.
As post introduction of GST, input tax credit is available on both goods and services, the growth of GST component of states’ own tax revenue for all states in such a case would drop to 15.5% after 5 years or so (base line scenario being 16.6%). This is only based on the assumption that in the final production of goods and services, service tax accounts for mere 10%.
GST is, thus a giant leap for the country in tax reforms with its main objective of making tax laws simple to make life easier for the individuals and companies. In the longer run, GST is expected to attract foreign investment reducing the cost of capital goods; raising manufacturing and exports and most importantly- create jobs, the need of the hour. Implementation of GST will definitely have a positive impact on State Governments’ finances in the medium to long term. To be able to absorb the positive impact of GST on state finances, states will have to keep a constant vigil on the buoyancy of taxes that are outside the purview of GST as also their own non-tax revenue .
Seven months is a very small period to judge the effectiveness of this new tax reform. However, as far the developments of the past months suggest, since its inception, GST is all set to change the rules of the game and play a decisive role in the market in future years to come. It can be rightly said, “GST is not the end, but the start of a journey for a developed and new India with a larger boost in GDP”.
Author- Sakul Garg, Bachelor of Technology in Mechanical Engineering (4th year), Faculty of Engineering and Technology, Gurukula Kangri Vishwavidyalaya, Haridwar (Uttarakhand)