CA Vinay Gandhi Billapati
In the introduction paragraph to Chapter 1 to the Economic Survey 2016-17 which was released on January 31, 2017; it said “GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth; It is also a bold new experiment in the governance of India’s cooperative federalism.”
Chapter 11 of the Economic Survey 2016-17 discussed about One India, One Market, One tax. Study is based on Based on a novel source of Big Data—invoice level transactions from the Goods and Services Tax Network (GSTN). India’s internal trade-GDP ratio at about 54 percent is comparable to that in other large countries implying that interstate trade in India is 1.7 times larger than international trade.
Economic Survey commented that India’s internal trade in goods seems surprisingly robust. This is true whether it is compared to India’s external trade, internal trade of other countries, or gravity-based trade patterns in the United States. For example, the effect of distance on trade seems lower in India than in the US. Hearteningly, it seems that language is not a serious barrier to trade.
Economic Survey discussed on major distortions in internal trade in the existing tax system and also hoped that GST will normalize the situation. Major distortions identified are:-
♥ No CST Credit under existing tax regime – It discouraged the inter-state trade or commerce since the dealers in a state preferred buying within the state so that they can claim Input tax credit instead of purchasing from another state paying CST which is non-creditable. Purchasing Goods out of State would mean foregoing any input tax credits accrued, thereby raising costs and making it a less attractive proposition.
♥ Lesser Rate of CST compared to VAT – In cases of consumer goods, petroleum, construction material where the credit is not used by the ultimate consumer; the dealers preferred CST compared to VAT since CST rate is 2% only while VAT rates ranged from 5% to 14.5%. This led to discouragement of above referred items to manufacture or sell within the state.
♥ Restrictions on availing ITC in VAT – Some states have negative list even in eligible items to avail ITC. This encouraged imports into the state rather than encouraging manufacturing within the state since CST will be a lower cost than VAT since credit is not available even purchased within the state.
For Example, This negative list of items represents at least 22% of imports in Andhra Pradesh. Within this negative list, automobiles and automobile parts alone constitute 16% of the value of imports into Andhra. ITC non-eligible items constitute at least 30% of imports in Odisha.
♥ Area based exemptions in Excise – Under Excise, there are area based exemptions to north eastern states, Jharkhand, Kutch region of Gujarat. This created manufacturing hubs in specific states where exemptions are available leaving the other states.
These distortions created setbacks to trade in Goods in present indirect taxation regime. Economic Survey hoped that GST will normalize the internal trade within India and make the dream of One India, One Market, One tax come true.