Evaluation of impact of Goods and Service Tax (GST)
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Abstract
The transition of closed Indian economy from a static public sector based, heavy industry dominated, import substituting to a dynamic open and export-led economy allocating resources according to market signals has necessitated systemic changes in the tax system. In an export-led open economy, the tax system should not only raise the necessary revenues to provide the social and physical infrastructure but also minimize distortions and adjust itself to the requirements of a market economy so as to ensure international competitiveness. The Finance Ministry of Government of India set up a Task Force under the chairmanship of Mr.Vijay Kelkar on the implementation of Fiscal Responsibility and Budget Management. It made recommendations to bring about a radical transformation of the Indian Tax System. It disagreed with the existing approach of the government to reduce government expenditure to achieve the fiscal consolidation. Dr. Prakash M. Herekar ISSN:-2230-7850 Evaluation of impact of Goods and Service Tax (GST) Dr. Prakash M. Herekar Associate Professor & Head Department of Accountancy, Devchand College, Arjunnagar, Kagal, Member of Academic Council & Faculty of Commerce, Shivaji University, Kolhapur Please cite this Article as : Dr. Prakash M. Herekar , Evaluation of impact of Goods and Service Tax (GST) : Indian Streams Research Journal (Feb ; 2012) Vol.2,Issue.I 2012 /Feb; development. The transition from a public sector based, heavy industry dominated, import substituting industrialization strategy to one of allocating resources according to market signals has necessitated systemic changes in the tax system. In an export-led open economy, the tax system should not only raise the necessary revenues to provide the social and physical infrastructure but also minimize distortions. Thus, the tax system has to adjust to the requirements of a market economy to ensure international competitiveness”.1 In India the draft of Goods and Service Tax ( GST) was presented in the parliament in August, 2009. It has been reformed over the period of previous two years considering the feedback from the various segments of society and business. Now the government has plans to enact and implement it form the financial year 2012 – 13. It represents a drastic change in the taxation mechanism and bound to have propounded impact on individuals and corporate sector. The new tax law has been prepared by taking into account internationally accepted principles of public finance and best practices to make at par with international practices as stated by the authorities. Present paper intends to highlight the various ingredients of GST and discuss its impact on the economic development and welfare of the people. 2. Meaning and Types of GST: Goods and Service Tax (GST) is a comprehensive value added tax. Through a tax credit mechanism, GST would be collected on value added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on supply of goods or services. It originated in France in 1954 and today it has spread to over 140 countries. The taxable event for the GST will be the supply of goods and the supply of services. The current taxable events such as manufacture, sale of goods, rendering of services will not be relevant for GST. GST is of two types: (a) Single GST and (b) Dual GST. Many countries have unified GST. However, in countries like Brazil and Canada there is a dual system wherein GST is levied by both federal and state governments. In India due to federal structure there shall be dual GST system. Central GST will subsume Central Excise Duty (CENVAT), Service Tax, and Additional Duties of Customs at the central level and Value Added Tax (VAT), Central Sales Tax, Entertainment Tax, Luxury Tax, Octroi, Lottery Taxes, Electricity Evaluation of impact of Goods and Service Tax (GST) Duty, State Surcharges related to the supply of goods and services and Purchase Tax at the state level. At present interstate trade of goods is subject to payment of Central Sales Tax (CST) which is origin based. However, GST is a consumption based or destination based tax. It is levied in the state where the goods and services are purchased and not in the state from which the goods and services are sold as in case of CST. With the implementation of GST the CST will be phased out. As a result, there would not be any tax on interstate sale of goods. 3. Rate of GST: The rate of tax is expected to be in the range of 14% to 16%. Today services are taxed at 10% and the combined incidence of indirect taxes on most of goods is around 20%. Further a composition/ compounding scheme under State GST (at the option of the tax payer) for tax payers with annual turnover up to INR 5 million has also been proposed. The floor tax rate p resc r ibed fo r l evy o f Compos i t ion / Compounding tax is 0.5 percent across States. 4. Exemptions from GST, Lists of exempted goods and exempted services under the GST, exemptions are expected to be minimal. Further, a common list of exemptions for both the Central and State GST with little flexibility for States to deviate there from is envisaged. 5. Implications of GST on Imports and Exports: Basic Customs Duty will continue to be there under GST system. However, additional custom duty in lieu of CVD / Excise and Special Additional Duty (SAD) in lieu of Sales Tax / VAT will be subsumed in the import GST. The import of services will be subject to Central GST and State GST on a reverse charge mechanism. In other words, the GST will be payable by the importer on a self declaration basis. Place of supply rule will determine which state will have authority to collect the tax. However, the taxes so paid will be available as Input Tax Credit and Therefore, it would be revenue neutral. Exports of Goods and Services will not be Indian Streams Reserach Journal Threshold limits for levy of GST