Goods and services tax is finally running its last lap. But it has not reached this stage without hurdles. It has been facing various problems to get implemented right from the time it was mentioned in the 2006 budget for the first time.
In India, the powers to levy taxes is divided between the states and the centre. There are lists which define who is to levy taxes. In some cases the entity comes under a common list thus creating multiplicity of taxes and substantially adding to the compliance and administrative costs for businesses. All of this calls for the need of a comprehensive way of taxation which is being brought in the form of GST.
Goods and services tax is a single tax rate on any supply of goods or services or both. The GST will wipe the indirect tax slate clean, replacing around a dozen indirect taxes and excise levied by the state and the centre. It is a courageous step to reduce the current tax complexities, encourage tax compliance, and streamline the system of tax credits. Although courageous, we are pretty late in implementing this reform compared to the rest of the world. More than 100 countries have already implemented these.
GST, as far as the implementation is concerned, will be decided on the basis of a tax rate to be levied. This tax rate to be levied is termed as the Revenue Neutral Rate (RNR). RNR is the rate at which there will be no revenue loss to the states after GST implementation. RNR is decided, bill is passed, everyone is happy right?? That does not seem to be the case so far. Calculating the RNR and finalizing a value which is acceptable to all the stakeholders seems to be a challenge. The Ministry of Finance had given the task to a few committees to come up with a rate for the same, bifurcated as state rate and central rate. The picture looked something like the given below table.
The suggestions of empowered committee were void since the RNR of 27% is too high, while the 13th finance commission rates were way too low. If the rates are too low or too high, they would have to face opposition from states as well as consumers and industries. Mr. Finance Minister has so far indicated, based on a consensus, that the GST rate will be somewhere in the range of 21-27% which will be subject to agreement by all the states. Many experts believe that RNR less than 25% might lead to revenue loss. Despite what the RNR is decided, GST will definitely reduce the cascading of taxes to a great extent and would help in increasing the GDP by 0.9-1.7% from the current growth rate.
Although GST, India’s most ambitious tax reform, is being implemented with slow pace and is likely to be rolled out next year, a lot of roadblocks still remain as a challenge. Following are a few :
- Passage of the bill in the Rajya Sabha (as it is already is cleared in the other house) and ratification by at least half of the states.
- Arriving at a RNR and a minimum threshold level
- Deciding on the goods and services and exclusions if any.
- Formulating “place of supply”, so as to determine the point at which tax is to be charged
- Most important and crucial, is the designing of an effective information technology infrastructure and enable the credit flows
India is a country that thinks too much and is hesitant to implement it. There are around 132 countries who have implemented the GST with different names and in different forms. But are all those GST reforms perfect?? As a matter of fact, they are not. They have implemented them with certain predefined form and are improving based on the experiences witnessed. Sometimes the best way to achieve something is to just implement it first, and then go on improving the same. Anyway, despite all the roadblocks, it’s always important to be optimistic enough to believe that the GST will be rolled out next year and India will become the fastest growing emerging economies, probably. Lets hope the bill is passed in the monsoon session of the rajya sabha where the NDA Govt will have to face some more opposition stunts.
Thank you. 🙂