INDIA MOVES

TOWARDS GST.
ARE YOU READY ?

INDIA keeps its

DATE WITH DESTINY
When the history of modern India is written, three events will stand out. The
first of course is the 15th of August 1947; the day India awoke to life and
freedom. The second happened in 1991 when India dusted the cobwebs of
socialism to marry market economy. But the biggest breaking news of the 21st
century, its most defining moment, is the GST, which when handled well, can
dramatically alter the landscape of India’s taxation.

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ACROSS THE SPECTRUM, the new legislation found a warm welcome. Captains of industry, opinion
makers, lawyers, and chartered accountants gave their thumbs up. There were, of course, other well-
meaning voices, not voices of dissent, but voices of caution that suggested that many things needed
ironing before GST can be rolled.

SLAYS TAXES
The GST Act kills a number of other taxes: at the least five at the Central level and five at the state level.
At the Centre, the key taxes are the Central Value Added Tax (CENVAT or Excise Duty), the Service Tax, the
Central Sales Tax (CST), the Countervailing Duties (CVD) and the Special Additional Duty of Customs
(SAD).
There are a few state taxes also that will become museum pieces. The most significant taxes include the
state Value Added Tax (VAT), the sales tax (in some states), the entry tax, the luxury tax and the
entertainment tax.
But hold on. This does not mean that we are going to become a tax haven. Taxes will not disappear
overnight. They will come with a different name: Goods and Services Tax, aka GST. On a transaction, both
the centre and the state will levy a tax. The centre’s levy is called Central GST. The state’s tax is called
State GST. In the case of interstate sale the tax is called Integrated GST and will be collected by the Centre.
So what is the big deal in it?

WHY DO WE NEED GST

There are at least three compelling reasons to have GST.
One, it is psychologically far more appealing to pay one tax instead of ten taxes even if the rate of the one
tax is higher than the cumulative rate on the ten taxes. With many taxes, you get the feeling of being taxed
ad infinite.
Two, today an identical product is taxed at different rates in different states. This is a tad sad. GST shifts
this and ensures that the tax on a single product is the same across the length and breadth of India. While
the jury is out on whether this is the best way for making states competitive, this gives the feeling of
oneness in the country as an identical product gets taxed at an equal rate, across India, leading to the
chorus ‘one nation, one tax.’
And three, like internationally, GST will shift the collection of tax from the producing state to the
consuming state. Suppose, a laptop is produced in UP and sold in Maharashtra. Earlier, the excise duty
went to UP and the sales tax to Maharashtra. Now, the entire GST will go to Maharashtra. The producing
state will get nothing.
This is good for developing states who consume more than what they produce. In India, these consuming
states have been historically backward. The view is that by shifting the collection points, these states will
gain and could use that money for development. All economists are not agreed on this point. Their
argument is that the best countries of the world are producing countries and a shift to rewarding
consuming states with more cash, could make them consume rather than produce. There is a point there.

TECHNOLOGY TRACKS
What makes the GST a revolution? At the heart of the game-changing GST legislation is technology. This

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is how the platform works.
When a seller company sells or renders services, it will have to uploads its transaction on the GSTN, and
will have to give a laundry list of details about the buyer like his name, GSTN number, PAN, UID Number,
quantity sold, the price at which sold, and the GST collected. Immediately, the GSTN will automatically
populate the purchase register of the buyer. In a GST audit, armed with this information, the audit team
could question the buying company as to how it disposed of its purchase.
The portal will be accessible to the government, which will track down every transaction while the
taxpayers will file their returns and taxes and maintain the details. Mark it, close to 3.4 billion invoices will
be uploaded every month. Yes, the government will be sitting on a pile of information.
The registered reseller can claim full credit for taxes paid on earlier stages, as long as it is for further sale
or manufacturing of goods or provision of service. These GST tax credits can be used to pay the GST
liability on further supply.
If a vendor fails to upload his sales, it would be at the cost of the buyer losing the tax credit and hence, the
customer will stop buying from a vendor who does not declare his sales. In a nutshell, the system drives
the tax evader out of business, as no one will be willing to do business with him. The act of policing is now
handed over to the citizens of India.
Thus, GST strikes at the root of where black money gets generated.

BENEFITS OF GST
So how will life change for us when GST kicks in?

a) No cascading effect of taxes

The term ‘cascading effect of taxes’ refers to a tax on tax. As if paying tax is not bad enough, under
the present regime you pay tax on tax.
Suppose I produce a product at a net sale price of Rs 100/. Say, it is currently subject to 12 per cent
excise duty. So the total cost is now Rs 112. Now, I am a good man. I want to sell the product at Rs
112/- and make no profits. But if I do that, I will incur a loss because when I sell, I have to pay sales
tax. Let’s say the sales tax rate is 4 per cent. To not lose I will have to price the product at 112 + 4 per
cent of Rs 112, namely Rs 116.48. So, instead of it being Rs 100 + Rs 12 + Rs 4 = Rs 116, it is Rs
116.48. The extra Rs 0.48 is the 4 per cent tax on the tax of Rs 12/-. This is referred to the cascading
effect of a tax.
Tax on tax is at best an irritation and at worst is a pain. With GST, as there will be only one tax, the tax
on tax is eliminated.

b) GDP growth
GST will not just increase indirect tax collection. It will also affect direct taxes by widening the tax
base.
As the sale is logged to GSTN, it leaves cyber footprints that are impossible to delete. The buyer will
have to report his purchase and corresponding sale. Earlier he might have got away with it; now he
can’t. To that extent, unreported income now gets reported. Money from parallel economy finds its
way to the real economy and GDP goes up. So GDP will go up in the short run not because production

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in the country will go up but because production will get reportedly more correctly. Over the long haul,
as inflation tumbles, prices fall, and more purchasing power stays in the hands of the customer GDP
will go up.

c) Black money
Since, GST will have a paper trail, which can be accessed by the income tax department, it will
discourage the generation of black money. PAN and Aadhar will be required to file GST returns. This
will help the income tax department to track transactions, which it is unable to do today. Moreover,
both the tax boards, Central Board of Direct Taxes and the Central Board of Excise and Customs have
already started sharing the data with each other to better tracking of black money.
The dual monitoring structure proposed within GST, involving the Centre and the states will also curb
income tax evasions. So, even if one set of tax authorities or fails to detect fraud, the other overseeing
body may not.

d) Consumers
GST will not make commodities cheaper immediately. The uniform rate of GST will increase the prices
in the short term. However, in the long run, GST will reduce the prices of goods and services due to no
tax on tax and account of improvement in productivity. But while some commodities will become
cheaper, others could turn dearer. From the consumer point of view, the biggest advantage would be
a reduction in the overall tax burden on goods, free movement of goods from one state to another
without stopped at state borders for hours for payment of entry tax and reduction in paperwork to a
large extent.

e) Industry
Currently, the industry faces multiple taxes. Under the new regime, there will be only one tax, albeit by
two agencies, the Centre and the State. If the compliances are kept simple, it would be a game
changer. Simplified compliance obligations, uniform tax rates, better administration of taxes, are
some of the pluses. The removal of barriers of state boundaries for inter-state trade would go a long
way in the creation of a buoyant economy.

f) Government
GST will increase tax buoyancy. As we saw, the GDP will go up, which would mean more incomes are
reported, and hence more taxes are collected.

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SHOULD WE HAVE A SINGLE RATE?
Should India not have had one rate for goods and one rate for services? If you ask me, I would say ‘Yes.’
Some suggest we could have had two rates for products, and one for service.
But the government in its wisdom has announced, to start with five rates for goods and 5 for services and
later added a few more. This is certain to open up the floodgates of litigation because questions of
classifications will begin to happen. In the United Kingdom, for instance, this has led to endless disputes
regarding the classification of, for example, food products such as potato crisps (regular rate) or biscuits
(reduced rate), depending on the amount of potatoes in the products.
Global experience on this has been mixed. Countries like Australia, Canada, Korea, New Zealand, Singapore
and South Africa predominantly collect at a single standard rate.
New Zealand introduced VAT with a low single standard rate. South Africa, when it implemented, had zero
rates for essential food items. Singapore also has a single rate. Australia has a number of zero rates for
food, healthcare, and educational supplies.
Of the 30 African countries that adopted a VAT between 1990 and 2010, 23 have a single-rate system. The
EU favors an only one standard rate. OECD reports since the 1980s have supported a single-rate VAT.
In many countries, multiple rates are justified by the assumption that the poor spend a high proportion of
their income on essentials. But this ignores the fact that the wealthy also benefits from these reduced
rates. Remember, they consume more of the necessities than the poor.

WAY FORWARD
While we can eternally keep debating on issues, we need to get started somewhere. We have waited for
close to two decades for this to happen. It’s time we got things cracking. Along the way, we can, with
experience make the needed changes. For sure, the government has every intention to make it a success.
All that it needs is to hear voices of reason and caution to ensure that this big-ticket reform turns out to be
a success in say five years.

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APPLICABILITY AND TAX POINTS

Ÿ The Act applies to the whole of India except to the state of Jammu and Kashmir.

Ÿ It applies to all goods generally with the exclusion of petrol and alcohol.

Ÿ The GST Act will merge these indirect central and state taxes into a five-Slab schedule of 0,
5, 12, 18 and 28 per cent.

Ÿ Exports are exempt from VAT.

Ÿ Imports are usually subject to VAT. Since the corresponding input tax on exports is
deductible, VAT does not affect the competitiveness of domestic firms to export. In India,
imports will not come under GST.

Ÿ The GST on every transaction within a state is to be split equally into a Central GST and a
State GST. When goods are shipped from one state to another, the Centre will collect an
integrated GST from the seller.

Ÿ States have the right to raise the tax on a product or service to 20 per cent. Centre has the
right to raise the tax to another 20 per cent, which means that at some point the rate on a
product or service can touch a high of 40 per cent.

Ÿ All the current taxpayers registered under VAT, Service Tax and Excise Duty, are required to
migrate to GST.

Ÿ They will furnish the details at GST Common portal for the purpose of migrating themselves
into GST regime. Once migrated there will be no need for them to further register themselves.

Ÿ The enrolment process for other existing taxpayers not registered with VAT will be started at
a later date

Ÿ Basically, every supplier whose taxable supply is leviable to tax under GST and his aggregate
turnover in a financial year exceeds the threshold limit of 20 lakh shall be liable to register
himself in the state where he makes the taxable supply.

Ÿ If a person operates different states with the same PAN, he has to register separately in each
of those states.

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