Goods & Service Tax (GST)

GST (Goods & Service Tax): the single tax replacing a plethora of indirect taxes

The Government of India has promised to introduce a national Goods and Service Tax (GST) from 1st April 2010. This is as per the budget speech by the then Union Finance Minister P Chidambaram, in 2006.

Indian consumers and corporate houses pay a lot of taxes when they manufacture/buy/sell goods, and when they consume or offer services - Sales Tax, VAT, Excise/CENVAT, Service Tax and so on.

Taxes have been collected by both the Central as well as the State governments for many decades now. CENVAT and Service Tax have always been collected by the Central Government, while all taxes on sale of goods (such as VAT and CST) have been collected by the state governments. CST follows the “origin” concept; this means for a sale transaction, the state that levies and collects the tax is that from where the goods originated. In the case of a sale transaction where the origin and destination of goods is within one state, VAT is levied. The tax is also collected by the same state.

What will GST do? Will it be yet another tax ?
Does it mean these sets of taxes are replaced with GST?
The answer is Yes; GST is proposed to replace all the existing taxes on goods and services – CST, VAT, and CENVAT & Service Tax.

Is it so simple? Can it be achieved with a single stroke of legislation? The answer to it is No.

Very simply put, GST will greatly reduce the financial autonomy of state governments, and will make them extremely dependent on grants from the central government. As an example, states such as Maharashtra estimate tax collection to the extent of 40,000 crores of rupees annually from state level taxes.

State governments value this autonomy very dearly. They will therefore oppose this legislation vehemently unless they are (1) convinced that they are also allowed to levy GST on certain goods like petroleum products, tobacco products and alcohol, or (2) are allowed to levy VAT/CST in addition to GST, or (3) are supremely convinced of the model of funds sharing that the central government proposes, or (4) some combination that allows them to maintain their autonomy in terms of collection, rather than depend entirely on the government of India.

GST should ideally be administered by one authority. Since this tax is uniformly levied all over the country, the authority responsible for the tax administration should be under the central government. As a result, allowing states to collect GST on specific goods, or categories of goods and/or services will be very difficult to administer. For the corporate it will also be extremely painful as a compliance task.

Introducing GST, and allowing the VAT/CST to remain will infact be nothing magnificent in terms of unification of taxes. CENVAT and Service Tax will be merged; nothing more. Further, this will mean reporting to more than one tax authority for all those who have to file the returns for these taxes, and ofcourse for end consumer, there is only more tax to be paid for the commodity.

There are several administrative issues that will have to be ironed out by the government before GST is introduced.
- Definition of taxable goods and services
- A suitable, uniform tax rate
- Zero rated goods and services
- Tax Jurisdictions
- Apportioning of taxes between the centre and states
- Shift from origin based to destination based
- Handling concessions or tax exemptions bsed on region and/or industry

Now that the UPA is back in power, Prime Minister Manmohan Singh, and his new Finance Minister will want to take forward this unfinished task that began with the Raja Chelliah reforms in the early 1990s.