India prepares to implement GST by 2016, with caveats

Compensation for States for loss of revenue due to GST for five years; narrow tax band allowed over GST for both States and the central government for fiscal autonomy The Dollar Business Bureau

The World Bank estimates that the delay in movement of goods in India could be cut by around 25% with the implementation of GST

In a much needed boost to reforms, India’s Finance Minister Arun Jaitley introduced the Amendment Bill on Goods and Service Tax (GST) in the Parliament’s Lok Sabha yesterday. If everything goes well, GST will replace several taxes in the transit of goods within India from April 2016. Jaitley introduced the Bill after it received the Cabinet’s approval last week following unrest among industry leaders that nothing much was being done to boost the sagging economy and exports. Earlier this year, the World Bank had said that GST could help cut down about 7-9% of logistics costs in India, and reduce truck transit delays by as much as one quarter. With GST, Indian goods are expected to become more competitive in the international market due to reduction in costs expected at up to 10%. It also encourages exporters to use the shortest and fastest routes to move their goods. Imported goods and raw materials will also become cheaper. However, the proposed GST has several caveats that could be troublesome for both the industry and the government. Among the key proposed amendments are: powers to states to make laws for levying GST; a dispute resolution mechanism; and compensation for States for loss of revenue due to GST up to five years. The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year, said the Finance Minister. Jaitley also said that GST will simplify and harmonise the indirect tax regime in the country. “It is thus, expected that introduction of GST will foster a common and seamless Indian market and contribute significantly to the growth of the economy,” he said. However, indications show that this may not be the case. According to the proposals, GST will absorb central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD). At the State level, it will absorb taxes like VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax. However, there would be two GST taxes: one that the centre levies called the Central Goods and Services Tax (CGST) on inter-state movement, and the other will be by States called the State Goods and Services Tax (SGST) on transactions within a State. The government has assured that there would be a seamless flow of input tax credit from one State to another and the proceeds of IGST will be given to the States as well. All SGST will accrue to the consuming State, which means that the compensation required by such States are unlikely to taper in five years. Another caveat that is worrying is the provision for additional taxes and a narrow tax band over and above the floor rates of CGST and SGST. This aims to give some fiscal autonomy to the States and Centre, said Jaitley, but it robs GST of its purpose. The government has also exempted liquor from GST and has kept petroleum and petroleum products out of the GST purview until a consensus is arrived between the States and the central government. Despite the government’s ability to enact the Bill, GST has some way to go, and expect more caveats to emerge, just like our never-ending octroi gates.

This article was published on December 20, 2014.

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The Dollar Business Bureau - Dec 20, 2014 12:59 IST

India prepares to implement GST by 2016, with caveats

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