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In a pre-Goods and Services Tax (GST) scenario, manufacture of a vast number of goods attracted excise duty at the Central level and the sale of the same item was subjected to tax on sale by the states. This resulted in a cascading effect of duty and taxes. Cascading effect takes place when tax is levied on tax resulting in an overall increase in prices. The story, however, does not end there. On account of sale, when the product moved from one state to another, the receiving state levied entry tax and municipalities levied octroi.
The year 1994 saw the birth of a new kind of tax termed as 'service tax' by the Centre. Initially, it was imposed only on three services but it currently covers all services barring a few such as education and health care.
Many business transactions were visited with double taxation over a period of time. For example, software was considered as goods and subjected to VAT which is a tax on sale by the state. However, the same software was subjected to service tax by the Centre. Restaurants were subjected to VAT as there was supply of food and beverages. However, air-conditioned restaurants were treated as services and also subjected to service tax.
In addition to these, there are product-specific levies such as cess on coffee, rubber, tea, automobile, etc., apart from new levies such as clean energy cess, Swach Bharath cess, Krishi Kalyan cess, etc.
Further, because of the complex tax system, procurements were driven based on availability of tax credit as against business realities. Unwarranted business structures such as branches and godowns were created to operate within a particular state to get the tax credits and thereby common market was never achieved.
A layman or a common man has no clue as to what these taxes are, the method of calculation, rates, etc. Some reports suggest that the incidence of indirect tax levies on goods is as high as 30 per cent for some products.
Need for reform
Indian businesses have been seeking a reform of the indirect tax structure for a long time. The government has been discussing this reform for a number of years. Finally, after multiple debates and discussions, the Indian Parliament amended the Constitution to pave the way for the introduction of GST in India.
GST in India has the following objectives: Eliminate tax as a cost in business; eliminate cascading effect of taxes; facilitate a simple law which will provide clarity to the industry, administration and the public at large; create a common market; provide a mechanism for tax credits so that only the value addition in the supply chain gets taxed; widen the tax base, increase compliance and ensure that businesses fall within the organised format; arrest tax evasion and improve revenues of the Centre and the states; and attract investments since GST is known in many countries.
Impact on the Indian economy
Even though some studies have indicated a quantum percentage jump in gross domestic product (GDP) on account of GST implementation, it will be too early to make an assessment of the impact. However, when an organised buyer in the supply chain prefers only to deal with the registered organised supplier on account of the importance of tax credit, compliance is being ushered in by the market. Vendors will have no choice but to register and comply with GST if they want to do business.
When a vast set of businesses and service providers who are currently not in the mainstream and who do not report their turnover or pay proper taxes, walk into the GST regime and report their activities, turnover and contribute to the nation's revenue, the parameters of GDP calculation will change.
The GST also has an interesting provision whereby if a supplier is unregistered but the recipient is registered, then the registered person will have to pay the GST on a reverse charge basis and tax credit will be available. This means that the government gets the revenue even on transactions in the unorganised sector so long as the recipient is registered and over a period of time, a database is built on such transactions for future remedial action.
Impact on direct tax revenues
India currently has a corporate tax rate of 33 per cent without taking into account dividend distribution tax and minimum alternate tax. The fact of the matter is that there are businesses which do not pay taxes on account of transactions not reflected in the books and effected through cash. While demonetisation introduced certain shocks which resulted in a change in mindset in reporting business transactions, there is still more scope for change. When the GST increases compliance and brings in a vast community of new assessees, they will have to necessarily report income and pay direct taxes. Over a period of time, compliance should prompt the government to also reduce the rates of taxes.
GST is new and there is huge demand for knowledge professionals, training, consultants and advisory services. Since the entire GST system is technology-based and system-driven, there is a huge market for software solutions, middleware, systems management and ERP solutions. Further, all existing IT platforms and systems will have to change and there is opportunity in that segment.
The biggest challenge that India is likely to face is that while GST as a tax regime is reform-oriented and seeks to change the indirect tax landscape, the past has not been forgotten and a number of legacy problems such as multiple rates, classification issues and multiple compliance points continue to plague the new tax system.
The business community, specifically the small and medium segment, are worried as they will have to quickly figure out the rates for instant tea and instant coffee; lens and spectacles; butter and bread; soaps and shampoos; construction and consultancy; renting and real estate. There is very little time since July 1, 2017, is the indicated date for implementation.
The writer is an advocate and tax consultant based in Chennai. Views expressed are his own and do not reflect the newspaper's policy.
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