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GSTImpactonIndianEconomy

GSTImpactonIndianEconomy
taxguru.in/goodsandservicetax/gstimpactindianeconomy.html

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BasicideaofGST
GSTisacomprehensivetaxlevyonmanufacture,saleandconsumptionofgoodsandservicesatanationallevel.
GSTisapartofproposedtaxreformsinIndiahavinganextensivebasethatinstigatetheapplicabilityofan
efficientandharmonizedconsumptiontaxsystem.GSThasbeencommonlyacceptedbyworldandmorethan
140countrieshaveacknowledgedthesame.GenerallytheGSTrangesbetween15%20%inmostofthe
countries.
JustificationinImplementationofGST
DespitethesuccesswithVAT,therearestillcertainshortcominginstructureinthelevyofVATbothatCentrallevel
andStatelevel.TheshortcominginCENVAToftheGovernmentofIndialiesinnoninclusionofseveraltaxesin
theoverallframeworkofCENVATsuchasVAT,ACD,Surchargeetc.
Moreover,inthepresentStatelevelVATscheme,CENVATloadonthegoodsremainsincludedinthevalueof
goodstobetaxedunderStateVAT,andcontributingtothatextentacascadingeffectonaccountofCENVAT
element.Furthermore,anycommodity,ingeneral,isproducedonthebasisofphysicalinputsaswellasservices,
andthereshouldbeintegrationofVATongoodswithtaxonservicesattheStatelevelaswell,andatthesametime
thereshouldalsoberemovalofcascadingeffectofservicetax.
Further,byremovingcascadingeffect,layersoftaxesandsimplifyingstructures,theGSTwouldencourage
compliance,whichisalsoexpectedtowidenthetaxbase.ButvirtuallyeverymediareportthatmentionstheGST
saysthatthetaxreformhasthepotentialtoaddupto2percenttoIndiasGDP.
IfVATisconsideredtobeamajorimprovementoverthepreexistingCentralexcisedutyatthenationalleveland
thesalestaxsystemattheStatelevel,thenGSTwillbeafurthersignificantbreakthroughthenextlogical
steptowardsacomprehensiveindirecttaxreforminthecountry.
However,thepapermakessomecrucialassumptionsuchaspeggingtherevenueneutralrateintherangeof6.2
percentand9.4percent.TherevenueneutralrateistherateforGSTthatwillnotmakeanetdifferencetothe
overalltaxcollectionofcentreandstates.
SalientFeaturesofGST
TheGSTFrameworkcouldeasilybeoneofthemostimportanttaxreformstobetabledfordiscussioninthe
Parliament.Itdoesbringwithsomeproblems,likedivisionoftaxationpowerbetweenCentreandState.TheGST
willbeapplicableonthebasisofDestinationprinciple.
SotheGSThastwocomponents:
OneleviedbyCentre(hereinafterreferredtoasCentralGST)andTheotherleviedbytheStates(hereinafter
referredasStateGST)
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However,thebasicfeaturesoflawsuchaschargeability,definitionoftaxableeventandtaxableperson,measureof
levyincludingvaluationprovisions,basisofclassificationetc.willbeuniformacrossthesestatutesasfaras
practicable.
TheGSTwouldbeleviedin3differentforms.
CGST

SGST

ThisisapplicableinthecaseofInterStatesaleofgoods
andprovisionofservice

IncaseofsaleofgoodsIntrastatethentaxwillbe
chargedasperthisform.

Taxes/DutiesCovered
underCGST

Taxes/DutiesCovered
underSGST

CentralExciseDuty

Entrytax(notoctroi)

ServiceTax

Entertainmenttax

CVD,SAD

VAT/SalesTax

ExcisedutyonM&TPetc.

Luxurytaxetc.

IntegratedGST(IGST)
ThescopeofIGSTModelisthatcentrewouldlevyIGSTwhichwouldbeCGSTplusSGSTonallinterstate
transactionsoftaxablegoodsandserviceswithappropriateprovisionforconsignmentorstocktransferof
goodsandservices.
IGSTwillbecombinationofCGSTandSGSTandthesamewillbecollectedbytheCentreintheOriginState.
TaxCreditMechanism

Timeboundrefundofcreditwillbeallowedincasessuchasexportsandinverteddutystructure.
ItisclearthatcrossutilisationofCGSTandSGSTisnotallowedgenerallybuttheIGSTmechanismwillmakethis
creditfungible.
Followingexamplewillgiveclearideaaboveutilisationofcreditandcostingunderpresentsystem&GST.
Example:
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Assumption:(1)RateofExciseDuty8%(2)VATRate12.5%(3)CentralGSTRate12%(4)StateGST
Rate8%(5)ProfitMarginRs.5,000/fixed(6)Allpartiesarelocatedinonestate.
Particulars

UnderPresentScenario

UnderGST

CostofProduction

45000

45000

InputTaxCredit(Assumingnil)

Add:ProfitMargin

5000

5000

ProducersBasicPrice

50000

50000

Add:CentralExciseDuty@12%

6000

Add:ValueAddedTax@12.5%onRs.56,000/

7000

Add:CentralGST@12%

6000

Add:StateGST@8%

4000

SalePrice

63000

60000

CostofGoodstoD2

56000

50000

AvailableInputTaxCreditforsetoff

7000

10000

Add:ProfitMargin

5000

5000

Total

61000

55000

Add:ValueAddedTax@12.5%

7625

Add:CentralGST@12%

6600

Add:StateGST@8%

4400

TotalPricetotheRetailer

68625

66000

CostofGoodstoD3

61000

55000

InputTaxCredit

7625

11000

Add:ProfitMargin

5000

5000

Total1,32,0001,20,000

66000

60000

Add:ValueAddedTax@12.5%

8250

Add:CentralGST@12%

7200

(I)Manufacturer(D1)toWholesaler(D2)

(II)Wholesaler(D2)toRetailer(D3)

(III)Retailer(D3)toFinalConsumer(C)

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Add:StateGST@8%

4800

TotalPricetotheConsumer

74250

72000

TotalTaxPayableinAllTransactions

14250

12000

Verification:VAT@12.5%[74,250*12.5/112.5]=8250+6000(CENVAT)=14250

D1(6000+7000)

13,000

D2(76257000)

625

D3(82507625)

625

Verification:GST@20%[72000*20/120]=12000

D1(6,000+4,000)

10,000

D2(11,00010,000)

1,000

D3(12,00011,000)

1,000

CostBenefit
InthecurrentTaxscenariocreditofsurcharge,VAT,ACDisnotavailablewhichincreasescost.Withtheintroduction
ofGSTcreditofthesetaxesisavailablewithcascadingeffectwhichwillhelpinreductionincost.Fromtheabove
exampleiswillclearthatTaxPayableinGSTislessthanCurrentSituation.
StockTransfer
Anotherimportantaspectisstocktransfer.BecauseinGST,taxwillbeleviedonthedispatch.Everydispatchwillbe
taxableunderGST,soateverystagei.e.factory,warehouseetc.registrationisnecessary.
PlaceofSupply
ThemainchallengeinintroducingGSTisdefiningtheplaceofsupplyinrespectofcertainservices.Inexistingtax
regimeitisnotaproblemasServiceTaxischargeablebyCentreonly.ButinGSTplaceofsupplyhastobedefined
clearlytoavoiddisputeamongstatesandincaseofinterstatetransaction.
PlaceofTaxationInterStateTransactions
AnimportantquestioninthecontextoftheDualGSTiswhethertheserulesforinternationalcrossbordersupplies
canbeadoptedfordomesticinterstatesuppliesalso.Itisrecognizedthattheplacewherethesupplierorthe
recipientisestablishedcannotbedefineduniquelyatthesubnationallevelwithinacommonmarket.
PositiveimpactonIndianeconomy
SpeedsupeconomicunionofIndia
BettercomplianceandrevenuebuoyancyReplacingthecascadingeffect[taxontax]createdbyexisting
indirecttaxesTaxincidenceforconsumersmayfallLowertransactioncostforfinalconsumers
Bymergingallleviesongoodsandservicesintoone,GSTacquiresaverysimpleandtransparentcharacter
Uniformityintaxregimewithonlyoneortwotaxratesacrossthesupplychainasagainstmultipletax
structureasofpresent
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Increasedtaxcollectionsduetowidecoverageofgoodsandservices
Improvementincostcompetitivenessofgoodsandservicesintheinternationalmarket
Pointstobereviewed
Taxationofinterstateservicesandtheirmethodoftaxation
DifficultiesindefiningPlaceofsupply,placeofdelivery
RoadPermitandCheckposts
StockTransfer
IntegrationofcertainCentralandStatetaxes(VariousCess,Electricitydutyetc.)
Constitutionalamendmentauthorizingstatetocollectandretaintaxonservice
GroupHealthInsurance
Consultingservices
HowevermostoftheB2Bservicesnotaproblembecauseofavailabilityofcredit
Disputesevenwithregardtoclassificationofgoods
JurisdictionalIssueswithregardtoregistrationandSCN/Assessments
LatestupdatesonGST
Constitutional(115thAmendment)billontheGST
Automaticcompensationmechanism
ConceptofGSTCouncil
DisputeSettlementAuthority
Conclusion
Inthelightoftheempiricalconclusionsdevelopedinthispaper,itseemsappropriatetoconcludebybrieflynoting
thepolicyimplicationsoftheresults.
Inthefirstplace,themacroeconomicimpactofachangetotheintroductionoftheGSTissignificantintermsof
growtheffects,priceeffects,currentaccounteffectsandtheeffectonthebudgetbalance.
Secondly,inahighlydevelopedopeneconomywithahighandgrowingservicesector,achangeinthetaxmixfrom
incometoconsumptionbasedtaxesislikelytoprovideafruitfulsourceofrevenue.
Thirdly,theaggregateconsumerpriceimpactoftheintroductionoftheGSTinIndiaonthemacroeconomywas
bothlimitedandtemporary.Finally,despitefallingoutsidethelimitedfocusofthisshortnote,weshouldrecordthat
someimpacthasalsooccurredintheadministrativecomponentofthecompliancecostoftheGSTaswellasa
likelyincreaseintaxrevenuefromtheundergroundorblackeconomy.
Thetaskoffiscalconsolidationforthisgovernmentwillnotbeeasy.Therewillbelittlescopetocutoverall
expenditure,asithasalreadybeentrimmedsharplyinthelast2years.Thegovernmentmustinsteadfocuson
switchingexpenditurefromunproductivesubsidiestowardsspendingonsectorsuchashealth,educationand
infrastructure.Theonlywaytoreducefiscaldeficit,therefore,istoraiserevenuesasashareofGDP.Todoso,the
governmentmustimplementstructuraltaxreformssuchasGST,improvetaxcomplianceandwidentaxcoverage.

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Thescopetolowerfiscaldeficitinfiscal2015islimitedgivenlargerolloverofsubsidiesfromlastfiscalandlittle
possibilitiesofimplementationofGSTwithinthisyear.Beyondthat,however,implementationofGSTcouldfacilitate
amuchneededcorrectioninfiscaldeficit.Inthebasecase,itisbelievedthatpartialGSTonethatexcludes
petroleumgoodsismostlikely.Evenwiththis,fiscaldeficitcouldcorrectto3.3%ofGDPbyfiscal2017.Onthe
downside,acompletefailuretoimplementGSTwouldresultinthefiscaldeficitbeinghigherataround44.2%in
fiscal20162017.

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