The goods and services tax (GST) that was passed in the Rajya Sabha on Wednesday will bring about the biggest tax reform since Independence as it will stitch together a common market by dismantling the fiscal barriers between states.
Under the new system brought about by the 122nd constitutional amendment bill, the states and the Centre will collect identical rates of taxes on goods and services. For instance, if 18% is the GST rate on a good across the country, the states and the Centre will get 9% each called the CGST and SGST rates.
The Centre will also levy and collect the Integrated Goods and Services Tax (IGST) on all inter-state supply of goods and services. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one state to another.
As India moves towards one common national market with the unanimous voting to the constitutional amendment bill for GST, government officials feel that the real battle to bring the tax structure into a reality actually begins now.
“Passing of GST bill: This is only end of a beginning. The real hard work starts now,” revenue secretary Hasmukh Adhia tweeted.
There are major milestones which need to be covered before April 1, 2017, when the Centre wants it to take effect.
At least 15 of India’s 29 states have to ratify the bill followed by the assent of the President. After which, the GST council will be constituted.
GST council and its tasks
There has been no agreement yet on rates of various goods and services, which remains a tricky issue. Last week, state finance ministers told the Centre that the rate should provide relief to common citizens and small businessmen while not resulting in loss of revenue to 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 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. The 13th Finance Commission headed by former finance secretary Vijay Kelkar had suggested 18% as a possible GST rate.
According to the bill, passed in the Lok Sabha in May 2015, the rates were to be decided by a GST council headed by the central finance minister with state finance ministers as members.
Apart from the rates, the GST council will also have to develop consensus on exemptions, threshold limits, dual administration.
GST legislation such as the central GST law, integrated GST law and 29 state GST laws, including allied rules and notifications, would need to be passed by the relevant legislative bodies.
During this process, there would also be a need for a substantial engagement with the industry bodies, traders, service providers and almost every local trade bodies and associations for the training and the acceptance of the new tax regime.
These steps would require a lot of time, patience and constant deliberations both at the state and central government level, only then the timeline of implementing GST by April 1, 2017, would be met.