This is my understanding of the proposed GST across India, to be effective April 2016:
1. There will only be two GSTs: A Central Good and Service Tax and a State Goods and Service Tax will be levied on taxable value of transaction.
2. Applicable on Goods and services.
3. few like alcohol, tobacco and petroleum are exempt for the moment. The reason is that on the "vices" there is an obscence % of taxes at the moment, and applying GST on them will result in dramatic reduction in prices, which will bring down collections at the state exchequers, apart from "encouraging vices". Most states dont want GST on Petroleum for the same reason at the moment ( taxes collection).
4. There will be no distinction between goods and services - uniform rate.
5. These taxes are widely expect to REPLACE a plethora of taxes at the moment- 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. In other words, just two taxes now instead of a heap.
6. How will it benefit prices? The idea is to tax every goods and services in such a manner that the producer at each stage of the value chain can credit for tax paid on his inputs.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. Having said that, if things work ideally, then the end prices will come DOWN, mainly due to set-offs, benefiting producers and consumers alike, hopefully spurring demand.
7. So then, why do states object, if it is good for the producer and the consumer? Two reasons. One- tax collections are FEARED to come down. Two - politics. Three - Lobby from middlemen, who now have to produce invoices and pay tax, in order for getting those set-offs.
8. What is the Govt hoping for? One - better tax compliance, curbing those invoiceless transactions, resulting in a dramatic increase in tax collections, with which they hope to compensate the states? This tax is in line with all Developed countries' system, with local flavours added in ( eg. 1% extra duty to continue until states want it).
9. What is the risk in this proposal? One - some states not "falling in line". Two - need time to iron out any wrinkles in the roll out ( can expect issues at the start). I was in Australia in the late 90s/ early 2000s and had seen a lot of issues when they had implemented the VAT/ GST there... which were subsequently ironed out.
10. Will is help the common man? If implemented properly, it certainly will, by bringing down end user prices.
11. What is unclear at the moment? - How those huge cashless transactions will come into the GST fold - eg, food, those vegetable guys, small merchants etc.. for this, even the developed countries have not found a solution yet. For example, a plumber's service for home repairs in Australia is still done in cash, and does not get covered by GST, unless he declares those transactions by issuing invoices. Hopefully, those goods and services coming under GST fold will be significantly bigger, as a % of GDP, and hence this portion may have minimal impact?
12. Is this is perfect system? - far from it. But this is the best model availale globally.
1. There will only be two GSTs: A Central Good and Service Tax and a State Goods and Service Tax will be levied on taxable value of transaction.
2. Applicable on Goods and services.
3. few like alcohol, tobacco and petroleum are exempt for the moment. The reason is that on the "vices" there is an obscence % of taxes at the moment, and applying GST on them will result in dramatic reduction in prices, which will bring down collections at the state exchequers, apart from "encouraging vices". Most states dont want GST on Petroleum for the same reason at the moment ( taxes collection).
4. There will be no distinction between goods and services - uniform rate.
5. These taxes are widely expect to REPLACE a plethora of taxes at the moment- 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. In other words, just two taxes now instead of a heap.
6. How will it benefit prices? The idea is to tax every goods and services in such a manner that the producer at each stage of the value chain can credit for tax paid on his inputs.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. Having said that, if things work ideally, then the end prices will come DOWN, mainly due to set-offs, benefiting producers and consumers alike, hopefully spurring demand.
7. So then, why do states object, if it is good for the producer and the consumer? Two reasons. One- tax collections are FEARED to come down. Two - politics. Three - Lobby from middlemen, who now have to produce invoices and pay tax, in order for getting those set-offs.
8. What is the Govt hoping for? One - better tax compliance, curbing those invoiceless transactions, resulting in a dramatic increase in tax collections, with which they hope to compensate the states? This tax is in line with all Developed countries' system, with local flavours added in ( eg. 1% extra duty to continue until states want it).
9. What is the risk in this proposal? One - some states not "falling in line". Two - need time to iron out any wrinkles in the roll out ( can expect issues at the start). I was in Australia in the late 90s/ early 2000s and had seen a lot of issues when they had implemented the VAT/ GST there... which were subsequently ironed out.
10. Will is help the common man? If implemented properly, it certainly will, by bringing down end user prices.
11. What is unclear at the moment? - How those huge cashless transactions will come into the GST fold - eg, food, those vegetable guys, small merchants etc.. for this, even the developed countries have not found a solution yet. For example, a plumber's service for home repairs in Australia is still done in cash, and does not get covered by GST, unless he declares those transactions by issuing invoices. Hopefully, those goods and services coming under GST fold will be significantly bigger, as a % of GDP, and hence this portion may have minimal impact?
12. Is this is perfect system? - far from it. But this is the best model availale globally.
