HT Explains: All you should know about Goods and Services Tax

  • Gaurav Choudhury, Hindustan Times, New Delhi
  • Updated: Jul 28, 2016 13:26 IST
What is GST? What about tax rates? What is the price impact? (Shutterstock)

Union finance minister Arun Jaitley met his counterparts from states on Tuesday as the Centre stepped up efforts to iron out differences on the proposed goods and services tax bill that is stuck in Parliament for want of political consensus.

The Centre and states have agreed on the broad principles to fix the tax rate and not fix a cap on the GST rate in the Constitution Amendment Bill. This has triggered hopes about the bill’s passage in the Rajya Sabha as early as next week.

Few sticking points, however, remain including the mutually agreeable standard GST rate, and the compensation structure to states for a hedge against potential revenue loss.

An explainer:

What is it? 

· GST is India’s most ambitious tax reform plan

· It aims to stitch together a common market by dismantling fiscal barriers between states

· It is a single national uniform tax levied across the country on all goods and services

What’s on now?

· The Centre and states levy multiple taxes such as excise duty, octroi, central sales tax (CST), value added tax (VAT), octroi, entry tax among others.

What happens after GST?

· GST will replace all local and central indirect taxes with a single tax

· The states and the Centre will collect identical rates of taxes on goods and services

· For example, if 18% is the GST rate on a particular good across the country, the states and the Centre will get 9% each called the CGST and SGST rates

Why amend the Constitution?

· GST requires a constitutional amendment to empower states to collect service tax

· Under current laws, only the Centre can impose a tax on services

· GST will empower states to collect service taxes

Bill status

· Constitution amendment requires at least of two-thirds majority in both houses of Parliament

· Lok Sabha passed the 122nd Constitution Amendment Bill in May 2015

· Stuck in the Rajya Sabha where the ruling NDA is in a minority

· The bill will also have to be passed in half of the state assemblies

The main hurdle

· The Congress has been insisting on capping the GST rate at 18% and specified in the Constitution Amendment Bill itself.

· The bill passed in the Lok Sabha in May 2015 has not specified any rate or cap

· The government is against fixing the rate in the legislation

· It would require a constitutional amendment, each time the cap need to be raised

· It would also imply that ‘sin’ goods like alcohol and tobacco will attract far lower rates.

· This would hurt states as these are major revenue spinners.

Tuesday movement

· Jaitley met state finance ministers on Tuesday to iron out differences on GST

· The Centre and states agreed on the broad principles to fix the tax rate

· The meeting discussed the demand for capping the GST rate at 18% in the Constitution Amendment Bill itself.

· States agreed that capping the rate in the Constitution Amendment Bill will make the system rigid

· The supplementary legislation—the GST bill—may specify a cap within which the rates should ideally be maintained.

· It is an enabling legislation that is necessary for rolling the new tax system

· This can be legislated only after the Constitution Amendment Bill is passed

What about tax rates?

· No agreement yet on rates of various goods and services

· On Tuesday, state FMs told the Centre that the rate should provide relief to common citizens and small businessmen while not resulting in loss of revenue to the states

· A panel under chief economic adviser Arvind Subramanian has recommended a revenue-neutral rate of 15-15.5%, with a standard rate of 17-18% be levied on most goods and all services

. A revenue-neutral rate is a single rate at which there will be no revenue loss to the Centre and states in the GST regime

· The panel has recommended a three-tier rate structure wherein some essential goods will be taxed at a lower rate of 12%; so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40%; and all remaining goods at a standard rate of 17-18%.

· The National Institute of Public Finance and Policy (NIPFP) favoured a standard rate in the range of 23-25% if goods are taxed at three different rates—a special rate for precious metals, a lower merit rate for some important goods as well as a standard rate that will be applicable to most goods.

· It had also suggested a GST rate of 18-19% in case of a single GST rate—that is all goods are taxed at the same rate.

Compensating states

· States want a stronger legal assurance on compensation in case of revenue loss after migrating to GST

· In the original bill, the Centre had proposed 100% compensation for first three years, 75% and 50% for the next two years

· A select committee of the Rajya Sabha has recommended 100% compensation for probable loss of revenue for five years

· States want 100% compensation for the first five years and want this specified in the main law through “fool proof” wording

· On Wednesday, the Cabinet approved a proposal to fully compensate states for five years change the wording in the modified Constitution Amendment Bill likely to be moved for passage in the Rajya Sabha next week.

Other sticking points

· States want small businesses with turnover up to Rs 1.5 crore in a year to remain within their control, while larger businesses can come under the dual control of states and the Centre. No agreement yet on this aspect

· Congress wants the so-called “entry tax” of 1% scrapped. An 1% entry tax for two years has been proposed to protect revenues of producing states like Maharashtra, Gujarat or Tamil Nadu.

· On Wednesday the Cabinet approved a proposal to drop the 1% levy in the modified bill

· Congress also wants an independent redress mechanism with statutory status, unlike the proposed GST council. More discussion on this expected. The government has not yet accepted this demand.

What next?

· More discussions likely between Centre and the Congress on changes agreed with states in the coming days

· Modified Constitution Amendment Bill expected to be moved in Rajya Sabha next week

What will be its impact?

· The impact on prices is unknown

· The 13th finance commission estimates prices of agricultural goods will increase by between 0.61 % to 1.18% while those of manufactured items would fall by 1.22-2.53%

· It could increase India’s GDP somewhere within a range of 0.9% to 1.7%

· It will lower the overall tax inputs and make exports competitive

· Experts reckon that GST will make most services costlier

By when?

It has missed several deadlines including the last one of April 1, 2016

The government hopes to roll out GST by April 1, 2017.

GST: A chronology

2006- 07: Proposal for GST first mooted in the Budget Speech for the financial year; negotiation with states start soon after

2008: Empowered committee of state finance ministers (EC) engaged

2009: EC released its First Discussion Paper

2011: Constitution Amendment Bill on GST introduced

Aug 2013: Parliamentary Standing Committee submits its report; recommendations of Standing Committee incorporated in the bill

Sep 2013: Revised bill sent to EC for consideration

Mar 2014: Incorporating recommendations of EC another revised bill sent to EC

Dec 2014: Constitution Amendment Bill introduced in the Lok Sabha

May 2015: LS passes Constitution Amendment Bill for GST

August 2015: Congress insists on capping GST rate at 18% and specified in the Constitution Amendment Bill

July 2016: Centre and states agree against capping GST rate in the Constitution Amendment Bill

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