The Goods and Services Tax, which was passed by the Rajya Sabha on Wednesday, has been portrayed as the biggest tax reform in independent Indian history. But what will it actually mean for India's citizens?
The GST, which subsumes all indirect taxes like excise, octroi and service tax into one overarching tax that applies across the country, is being projected as a panacea for all of India’s tax woes. The passage of a Constitutional Amendment in the Rajya Sabha on Wednesday will begin the process of implementing the GST across India. But there's still one big piece of the puzzle missing: the tax rate.
The new tax will replace the myriad of indirect taxes we currently have to deal with, including service tax, Value Added Tax and those annoying cesses you see on your bills. Yet the legislation that has been passed doesn't specify what the actual rate will be, it simply commits to the idea that this should go down over time. Until the rate is decided on, we will not know just how much the taxation reform is going to have a direct impact on ordinary people.
As the video above illustrates, the GST is an all-encompassing indirect tax levied only on consumers – meaning only when you buy things, not when you sell them. Businesses will no longer have to deal with a confusing patch work of Central and state taxes and instead deal with one state GST and one Central GST. Effectively, you will pay a flat rate for a product or a service.
For all the politicking that has already taken place on the subject though, the government has yet to settle on what that rate will be. Instead, the Constitutional Amendment will set up a GST Council, comprising of the finance minister, Union minister of state for revenue and each of the state's finance ministers, which will then recommend a GST rate.
On this council, the Centre will have a third of the votes cast and the states will have two-thirds, with decisions being made by a three-fourths majority. This means the Centre has an effective veto on the Council's recommendations. Either way, the rate will be set by the Council.
Although the GST Council will not begin its deliberations for some time now, we have some indication of what rate it might eventually settle on. A committee set up by the government to advise on a revenue-neutral GST rate – revenue neutral because it would be a rate that would ensure that the Centre and state continue to receive the same amount of indirect taxes that they did before GST – recommended earlier this year that the revenue-neutral rate could be as low 15%. This would effectively work out to a standard rate of 17% or 18%, with some items being taxed at a lower rate and a much higher 'sin' tax for certain goods.
In its report, the committee said that the average tax rate in high-income countries like United Kingdom and Germany is about 16.8% while it is 14.1% on average in emerging economies like Brazil, Mexico and China. The committee recommended 16.9% as its preferred rate for India and 18% as an alternative.
Meanwhile, the report also had inputs from an earlier document by the National Institute of Public Finance and Policy, which had recommended a standard rate that went as high as 27% last year. This recommendation was based on adding up excise duty and the current burden of various service taxes, but doesn't entirely take into account the broader tax base the GST is supposed to achieve.
The states had supported a rate that high, somewhere in between 18% and 27%, believe that will ensure they continue to get a large amount of revenues despite the changes in the way taxes are collected. But since GST is a regressive tax – the flat rate means it hurts the poor more than the rich – the Centre and the Opposition have pushed for a lower rate.
For a while, the Congress even asked for an 18% cap to be included in the Constitutional Amendment itself. Although it has dropped that demand, Chidambaram said on Wednesday that that Congress will continue to campaign that the standard rate be no higher than 18%. He claimed anything above that level will actually harm the economy by increasing inflation and making goods unaffordable.
Finance Minister Arun Jaitley confirmed earlier in the year that he was looking to set a rate under 18%. But there is no consensus on this yet. The states will argue for a higher rate, the Congress will campaign for it to remain at 18% and even various sections of the ruling alliance will have different opinions on the subject.
Only when that rate is set will we get a clear image of what the GST actually means for ordinary people.