All you wanted to know about GST

One of the biggest taxation reforms in India -- the Goods and Service Tax (GST) -- is all set to integrate State economies and boost overall growth.
GST will create a single, unified Indian market to make the economy stronger.
Finance Minister Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010.
The implementation of GST will lead to the abolition of other taxes such as octroi, Central Sales Tax, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, et cetera, thus avoiding multiple layers of taxation that currently exist in India.
Goods and Services Tax -- GST -- is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level.
Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain.
Experts say that GST is likely to improve tax collections and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate.
Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimising exemptions.
It is expected to help build a transparent and corruption-free tax administration. GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).
Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold.

How will it benefit the Centre and the States?

It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.

What are the benefits of GST for individuals and companies?

In the GST system, both Central and State taxes will be collected at the point of sale. Both components (the Central and State GST) will be charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies.
India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction.

All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services.

Which other nations have a similar tax structure?

Almost 140 countries have already implemented the GST. Most of the countries have a unified GST system. Brazil and Canada follow a dual system where GST is levied by both the Union and the State governments.
France was the first country to introduce GST system in 1954.

Will this be an extra tax?
It will not be an additional tax. CGST will include central excise duty (Cenvat), service tax, and additional duties of customs at the central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the State level.

What will be the rate of GST?

The combined GST rate is being discussed by government. The rate is expected around 14-16 per cent. After the total GST rate is arrived at, the States and the Centre will decide on the CGST and SGST rates.

Currently, services are taxed at 10 per cent and the combined charge indirect taxes on most goods is around 20 per cent.

Will goods and services cost more after this tax comes into force?

The prices are expected to fall in the long term as dealers might pass on the benefits of the reduced tax to consumers.

Why are some States against GST; will they lose money?
The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the information technology systems and the administrative infrastructure will not be ready by April 2010 to implement GST. States have sought assurances that their existing revenues will be protected.

The central government has offered to compensate States in case of a loss in revenues.

Some States fear that if the uniform tax rate is lower than their existing rates, it will hit their tax kitty. The government believes that dual GST will lead to better revenue collection for States.

However, backward and less-developed States could see a fall in tax collections. GST could see better revenue collection for some States as the consumption of goods and services will rise.

How will GST be implemented?

The empowered committee is likely to finalise the details of GST by August. But States have to sort out several issues like agreement on GST rates, constitutional amendments and holding talks with industry associations. Experts feel the drafting of legislation and the implementation of law will take time.

What are the items on which GST may not be applied?

Alcohol, tobacco, petroleum products are likely to be out of the GST regime.


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Highlights of the Economic Survey 2008-09

Finance Minister Pranab Mukherjee on Thursday tabled the Economic Survey for 2008-09 that prescribes doing away with cess, surcharges on taxes, including fringe benefit tax, and sweeping refroms in areas like petrol pricing and financial sector.

Following are the highlights of the pre-Budget Economic Survey: 2008-09.

Unleash reforms - phase out cesses, surcharges and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax).
Introduce new Income Tax Code that results in neutral corporate tax regime.
7-7.5% growth possible in 2009-10.
Allow 49% FDI in defence and insurance; permit FDI in multi-format retail starting with food.
Proposes another round of fiscal stimulus including tax cuts and increase in expenditure.
Decontrol petrol and diesel prices; end Govt monopoly in railways, coal and nuclear energy.
Lift all bans on future contracts to restore price discovery; decontrol sugar and fertiliser.
Revitalise disinvestment programme to generate Rs 25,000 crore annually, list all PSUs and auction those beyond revival.
Economic growth decelerated in 2008-09 to 6.7 per cent from 9 per cent in 2007-08.
Fiscal deficit in 2008-09 shot up to over 6 per cent from 2.7 per cent in 2007-08.
Survey indicates FRBM-II to get back to path of fiscal consolidation.
Complete the process of selling 5-10 per cent equity in identified profit-making non-'Navratna' PSUs.
List all unlisted PSUs and sell a minimum 10 per cent equity to public.
Auction all loss-making PSUs that cannot be revived.
In PSUs with zero net worth, allow negative bidding in the form of debt write-off.
Auction 3G spectrum.
The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act.
Rationalise Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver.
Reform petroleum (LPG, Kerosene), fertiliser and food subsidies to reduce leakages and ensure targeting.
Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household.
Phase out kerosene supply-subsidy by ensuring that every rural household has a solar cooker and solar lantern.
Review customs duty exemptions and move to a uniform duty structure to eliminate inverted duties.
Implement GST from April 1, 2010.
Rapid operationalisation of UID Authority within 3 months.
Agriculture growth fell sharply to 1.6 per cent in 2008-09 from 4.9 per cent.
Exports grew at 3.4 per cent to $168 billion in 2008-09 from $163 billion in previous fiscal.
Imports grew at 14.3 per cent to $287.75 bn from $251.65 bn Trade balance deteriorated to $119.05 bn from $88.52 bn.
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The key to India's economic boom

It seems that notwithstanding the global financial crises, India is set to become a high-growth state and more of a welfare state under the new government.
The so-called work programme of 2009-2014 has already been chalked out in the Congress party manifesto and there should be no political or other constraints in pushing it through.
There is a good chance then that by 2014, the economy would be comfortably chugging along towards a double digit GDP growth rate or may even have reached it. At the same time, the footprint of the state would be much larger in the welfare space.
Here are the key elements of that journey to 2014:
The GST boost
While there may or may not be another stimulus package, the move to a "moderate" goods and services tax (GST) in about ten months would provide a big boost to the economy.
As much as $15 billion of additional output could annually be added to India's trillion dollar economy as a result of the tax which would subsume all other central and state level indirect taxes and lead to the all-India common market.
The productivity push
The plan to invest Rs 30,000 crore (Rs 300 billion) or a whopping $6 billion on a nation-wide skill development programme focused on the youth of the country should enhance national productivity, even if one assumes a low efficiency of the spend.
Similarly, the plan to connect each and every one of the 600,000 odd-villages of the country to a broadband network within three years would yield productivity gains even if one takes into account the fact that many of these villages continue to be denied the most basic facilities like electricity and water.
There is also the odd chance that broadband connectivity would expedite the provision of other basic support infrastructure.
A welfare state
Having sensed that its aam aadmi thrust has yielded results, there is going to be no holding back the Congress government on its welfare agenda. There is a plan for enactment of a Right to Food law. There is a commitment to provide 25 kilograms of rice or wheat monthly at Rs 3 a kilogram for families below the poverty line.
Subsidised community kitchens are proposed to be set up in all cities for the homeless people and migrants. And of course, the rural employment guarantee programme is to be strengthened.
There is also a plan to extend rural health insurance to every family living below the poverty line in three years. Social security cover for urban homeless, elderly and backward communities is proposed. Educational loans or scholarships are to be extended to all students.
There is talk of more schools with better trained teachers. There are special incentives planned for survival of the girl child aimed at correcting the adverse sex ratio.
There are also plans to take forward the scheme of monetary incentives to female students on the completion of various levels of schooling. The spends on these initiatives are certain, even though the outcome may not be.
Welfare agriculture
In the case of agriculture, what is proposed to be done to boost industralisation of agriculture is not so clear though the welfare aspects of the government's agricultural plan are clearly marked out.
All small and marginal farmers in the country will have access to soft loans. To check the moral hazard that arises from the massive loan waiver programme, there is a plan to extend interest relief to farmers who repay their loans on schedule.
Crop insurance, direct income support to farmers in ecologically vulnerable areas and procurement at the doorstep of farmers are some of the other measures that are proposed in this term.
Missing the SME beat
The one sector which would boost employment and growth together would be the small scale industry, which contributes 40 per cent to the national manufacturing output and accounts for about a third of the country's exports.
The small scale units are among the worst hit by the financial crunch though they are yet to get a serious relief package.
The Congress party has however promised a "new deal" for the small units, as well as first generation entrepreneurs, which would include access to collateral-free credit and freedom from multiplicity of laws and inspectors.
There is also a plan for a cluster-based approach to growth of SMEs though one needs to see how quickly it would be put in place.
Plugging the Infra gap
The new government needs to work out a focused plan for the infrastructure sector if it is to meet its overall objective of high growth.
It is not immediately clear how much of the targeted $500 billion investment planned in the current five year plan has been managed in the two years that have passed, though one can be sure that it is inadequate.
Investment in infrastructure needs to be enhanced and tracked, even though it is not part of the work programme. The only thing mentioned there is the aggressive target of adding 12,000-15,000 Mw of power generation capacity every year without any explanation of how it will be done.
What is nevertheless welcome though is the stated intent of creating a new model of urban administration with financially-viable self-government institutions.
Land @ market rates: Market rates for agricultural land required for industrial projects and an option for the farmers to become stakeholders in the industrial ventures on their land, which is part of the work programme, would finally set to rest the controversies on land acquisitions.
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