6/13/2014 [FC-XIII] Goods and Services Tax (GST) | Dreamer

http://sagarsumit.wordpress.com/2013/08/11/fc-xiii-goods-and-services-tax-gst/ 1/4
Dreamer
Of the Motherland, by the Motherland, for the Motherland
[FC-XIII] Goods and Services Tax (GST)

August 11, 2013

Economy / Finance economy, goods and services tax, tax
Background to GST
The first phase of reform of indirect taxation occurred when the Modified Value Added Tax (MODVAT)
was introduced for selected commodities at the central level in 1986, and then gradually extended to all
commodities through Central Value Added Tax (CENVAT). The introduction and integration of service tax
into CENVAT deepened this effort. Reform at the state level occurred through introduction of Value
Added Tax (VAT) by all the states in the country in a phased manner between April 2003 and January
2008. Buoyed by the success of VAT, and mindful of the need for further improvement, the GoI indicated
in Feb 2007 that a roadmap for introduction of destination-based GST to replace origin-based Central
Sales Tax (CST) in the country.
What is GST?
GST is a destination-based tax framework with both central and state GST components levied on the
same tax base. The central GST portion would subsume the following taxes:
i) Central excise duty and additional excise duties
ii) Service Tax
iii) Additional Customs Duty (Countervailing Duty )
iv) All surcharges and cesses
The state GST would subsume the following taxes:
i) Value Added Tax
ii) Central Sales Tax
iii) Entry Tax, whether in lieu of octroi or otherwise
iv) Luxury Tax
v) Taxes on lottery, betting and gambling
vi) Entertainment Tax
vii) Purchase Tax
viii)State Excise Duties
ix) Stamp Duty
x) Taxes on vehicles
xi) Tax on goods and passengers
xii) Taxes and duties on electricity
xiii)All state cesses and surcharges

6/13/2014 [FC-XIII] Goods and Services Tax (GST) | Dreamer

http://sagarsumit.wordpress.com/2013/08/11/fc-xiii-goods-and-services-tax-gst/ 2/4
But why GST?
It would make India a common market and also result in generation of positive externalities.
It will reorient supply chains and remove the present bias towards backward integration due to
uniform nature.
As a result, it will also inhibit tax induced migration of investment. Our manufacturers will
become more competitive.
It will support growth of lagging but resource-rich regions.
It would lead to efficient allocation of the factors of production, with a fall in overall price level,
thus leading to gain in exim market and improve the trade balance.
It will reduce compliance costs, enhance transparency and improve collection efficiency (as there
will be one tax instead of differential multiple tax regimes). Try to recall what taxation by
different states did to trade in European nations during industrial revo era.
It also offers the possibility of strengthening the revenue base of local bodies given that the tax
base overall would increase.
Not to forget, the value of GST-reform induced gains in GDP in the light of above points.
Hmm..but its not possible that everything is all good and there are no major concerns!
Yes, youre right. Some of the major concerns are:
Determination of the tax base: How revenue neutral its gonna be? Some states apprehend that
single tax rate would be regressive, with the tax levied on items of common consumption
increasing, while providing needless relief to higher taxed luxury goods.
Vertical imbalance and state autonomy: States worry that it may favour Centre through
proportionally large central GST rate and may hurt state autonomy as it requires a stable rate
structure. Please note that tax rate is the only lever of macro-economic policy available to the
states.
Small enterprises are presently exempt from excise. GST will bring them into tax net.
Low income states argue that their consumption base was low, and they had increased their tax
effort significantly under VAT, there was little scope for them to increase their revenues (high tax
= less consumption). States are looking for an objective compensation mechanism to support
such losses.
Selective rollout vs. implementation by all the states at the same time.
Summary and Recommendations:
Let us revisit the salient features of GST and keeping the above concerns in mind, let us see what the
Commission recommended.
The Commission has recommended the adoption of the GST and formulated a model ST. The main
features of the model GST are:
The central portion of the GST would include (a) central excise duties, (b) service tax, (c) additional
customs duties, (d) all surcharges and cesses.
The state GST would include (a) VAT, (b) central sales tax, (c) cesses and surcharges, and others such
as luxury tax, lottery tax, stamp duties, etc.
There would be special provisions for certain goods such as petroleum, and exemptions would be
6/13/2014 [FC-XIII] Goods and Services Tax (GST) | Dreamer
http://sagarsumit.wordpress.com/2013/08/11/fc-xiii-goods-and-services-tax-gst/ 3/4
allowed only on the basis of a common list applicable to all states and the centre.
GST should be implemented by all states and the centre at the same time to reap max benefit.
To provide incentives to states to agree to the model GST, the Commission has recommended the
implementation of a Grand Bargain which comprises of the design of GST, its operational modalities, a
binding agreement between Centre and the states with contingencies for change in rates and
procedures, disincentives for non-compliance, the implementation schedule and the procedure to claim
compensation. The Grand Bargain envisages a grant of a total of Rs. 50,000 crore to be provided to all
states. This amount would be distributed among states subject to the model GST framework being
adopted by all states. This grant would be used to compensate states for revenue losses on account of
implementing GST. This amount should not be distributed if states cannot reach a consensus on
implementing GST.
The Empowered Committee of State Finance Ministers (EC) should be given statutory status. The
compensation should be disbursed in quarterly instalments on the basis of recommendations by a three-
member Compensation Committee. The Compensation Committee should comprise of the Secretary,
Department of Revenue of the central government, Secretary to the EC, and an eminent person with
experience in public finance.
Share this:
Twitter Facebook Google
About these ads

Loading...
Related
[FC-XIII] Union and State
Finances (Revenue,
[FC-XIII] Fiscal
Consolidation and New
[FC-XIII] Introduction and
Issues
6/13/2014 [FC-XIII] Goods and Services Tax (GST) | Dreamer
http://sagarsumit.wordpress.com/2013/08/11/fc-xiii-goods-and-services-tax-gst/ 4/4
Expenditure and Sharing):
Issues
Architecture for Federal
Finance
In "Economy / Finance" In "Economy / Finance"
In "Economy / Finance"
Follow
Follow Dreamer
Get every new post
delivered to your Inbox.
Enter your email address
Sign me up
Powered by WordPress.com