Sacchidananda Mukherjee, PhD, Associate Professor, National Institute of Public Finance and Policy, New Delhi
A version of this article was originally published in Chinese as ‘商品和服务税对在印经商的影响’ [Shangpin he fuwu shui (GST) dui Yin jingshang de yingxiang], Diyi Caijing, 15 May 2015. This is part of a series by Indian scholars in China’s top business affairs news portal facilitated by the ICS. The English version follows below the Chinese text.
在经历漫长的等待之后，印度终将于2017年7月1日起推出商品和服务税（GST)，实现统一税制。在四项法案（Central GST、Integrated GST、Union Territory GST、GST Compensation to States）通过印度两院批准后，将会形成GST征税行政框架以及执行规则。
The long wait for a harmonized indirect tax system in India will soon be over with the introduction of Goods and Services Tax (GST) from 1 July 2017. After the passage of four GST Bills (Central GST, Integrated GST, Union Territory GST and GST Compensation to States) by both the houses of the Indian Parliament, the GST rules and regulations will be framed and notified. The last piece of legislation related to GST, i.e., State GST Bill, needs to be passed in the legislatures of the States and Union Territories too.
It is expected that a GST Council will assign tax rates for commodities in May 2017. Distributional aspects of tax burden across different socio-economic strata will largely depend on careful fitment of commodities and services under different tax rates. As already decided by the Council there will be four different GST rates (5%, 12%, 18% and 28%) and it is expected that the Council will come out with a short list of exemption comprising some essential goods and services. There will be additional GST compensation cess over and above the highest GST rate on some demerit goods (e.g., tobacco products, aerated drinks) and environmentally harmful goods (e.g., coal). The proceeds of the cess will be used to compensate States for any revenue loss on account of introduction of the GST during first five years. The Council has also decided on the highest rate of GST compensation cess for different categories of commodities, e.g., 135% for paan masala (槟榔), 15% for luxury cars, Rs.400 per tonne of coal. However, the actual rate for GST compensation cess for different commodities is yet to be decided. Due input tax credit will be provided against the GST compensation cess and there will be no cascading of taxes on account of the cess.
The emergence of common market in India will be contingent upon harmonization of GST rate across States for a specific commodity. Any deviation from the common rate by any state may lead to higher compliance burden for businesses having pan India operation. Harmonization in rules and regulation as well as GST rate is desirable from a business point of view.
Given the diversity involved in design and administration, an Indian GST will be unique. It would be a multistage comprehensive value added tax (VAT) encompassing both goods and services. Given the federal structure of India and the fact that taxation powers have been constitutionally assigned to different governments, the introduction of GST would be a major indirect tax reform, as both the Centre (the Union Government) and State Governments will get rights to tax goods as well services at every stage of value addition in production and distribution. Major benefits of GST would be substantial reduction of cascading of taxes (due to removal of definitional differences between goods and services and that of manufacturing and distribution/ trade) and transaction costs associated with inter-State movements of goods. Moreover harmonization of tax rules and regulation across States and uniform online system of tax compliance will reduce transaction costs associated with doing business in India.
The present system of taxation of goods can best be described as an origin-based tax system where the manufacturing (origin or exporting) State collects Central Sales Tax (CST) on goods being sold inter-State. Since it is a tax collected by the State of origin, the destination (importing) State does not allow input tax credit against CST. Therefore, CST remains a stranded cost for inter-State dealers and manufacturers using goods procured from other States. Depending on the State of operation, inter-State purchases also attract entry tax and some States allow input tax credit against the entry tax for inputs. Entry tax remains a stranded cost for those States where input tax credits are not allowed. Therefore, the removal of CST and entry tax from inter-State movements of goods will transform Indian indirect taxation system from origin-based to destination-based system.
Moreover in the GST regime, seamless movement of GST credits under the Integrated GST (IGST) framework will allow continuation of input tax credit chain and therefore, facilitate businesses carrying out seamless transactions across States. The GST regime will provide a pan-India market for businesses located in any part of India and encourage efficiency improvement and achieving specialization in production and distribution of goods as well as services.
In the present indirect taxation system, some sectors are taxed more than others. For example, manufacturing is taxed by both Centre and State Governments whereas services are taxed once. Some states tax agricultural produces and often, selectively. Therefore, the present indirect taxation system not only provides unequal tax base between Centre and State governments but also distorts consumer choice by differential taxation of goods and services. In the GST regime, it is expected that effective tax rate for manufacturing goods will go down while it will go up marginally for services. Imports will attract Integrated GST (IGST) in addition to Basic Customs Duty / Tariff but if imports are used as inputs for further value addition due input tax credit will be allowed. All exports will be zero rated. These provisions will facilitate ease of doing business in India and make Indian exports competitive in the global market.
The success of the GST system in terms of tax compliance and revenue mobilization will also depend on modernization and simplifications of tax administration, provision of incentives for tax invoice-based transactions, facilitating voluntary compliance by simplifications of rules and regulations, provisions of tax payers’ services, and tax coordination and automatic exchange of information across tax jurisdictions.