The Monsoon session of the Parliament began on Monday and will go on till August 12. Once again, hopes are high that the Goods and Services Tax Bill will get passed in the Rajya Sabha, paving the way for this reform to become legislation and eventually get implemented next year. The bill has already been cleared in the Lok Sabha.
The GST will function as a single tax to replace the numerous indirect taxes prevalent in India would make life simpler for many of us. But, as with any major reform in India, the road towards its implementation is a long one. Let’s take a look at GST’s journey so far and what we can expect next.
One tax in place of many
There are a plethora of indirect taxes at the Central and state levy on the consumption of goods and services within India. In comparison, direct taxes are levied on a person’s income – for instance, the Income Tax.
Excise and duty tax are two biggest indirect taxes at the Central level that will be replaced by the GST. At the state level, some of the biggest indirect taxes that will be replaced by the GST include sales tax as well as entry tax and octroi – both of which are levied on certain goods entering a city – to name a few. However, taxes on petroleum, tobacco, and some other categories of products will be kept out of the GST.
Replacing this bevy of taxes by the GST will simplify the overall taxation regime.
However, it could also result in a loss of revenue to the Centre and many states. Therefore, the panel headed by Chief Economic Adviser, Dr Arvind Subramanian, tasked with deciding rates of taxation under GST, had recommended a revenue neutral rate of 15-15.5%. As its name suggests, this is the rate which preserves revenue at current levels. However, the final decision on the rate (or a range of rates) will be taken by a body called the GST Council, which will have representatives from the Centre and states.
The history of the GST in India goes back more than 10 years. In the 2006 Union Budget during the Congress-led United Progressive Alliance rule, then Finance Minister P Chidambaram had proposed the introduction of this tax from April 1, 2010.
The journey from then to the GST Bill in the Lok Sabha last year has indeed been long. There have been disagreements on contentious issues such as whether or not to include items such as petroleum and tobacco that are large revenue-earners for states and how to compensate for losses incurred by states by bringing so many taxes under one umbrella.
These issues have taken a long time to sort out and finally, in May 2015, the Lok Sabha passed the GST Bill. It is now pending in the Rajya Sabha and, given that the BJP is making a renewed effort to reach out to opposition parties to bring about a consensus on contentious issues, the Bill is expected to be passed soon. Even Prime Minister Narendra Modi recently said: “I do not think any political party will try to commit suicide by opposing GST.”
What lies ahead
But there are still some hurdles that the GST Bill will have to clear. First, it will need to be passed by the Rajya Sabha with a two-thirds majority. Adjournments and disruptions of Parliament sessions will only delay this. Second, assuming the Bill makes it through the Rajya Sabha, it will to have to be ratified by the legislative assemblies of at least 15 states (that is, more than half of the 29 states in India). The President will then approve the GST Bill for enactment. Fourth, 60 days after the Bill is enacted, the GST Council (consisting of representatives from the Centre and States) will be formed. Finally, the GST Council will recommend the rules and structure for implementation. This step could take some time considering the many categories of goods under indirect taxes that will have to be migrated to a new rate of tax under the GST.
A big move forward
This means that there is at least a year to go before the GST is implemented. But when that does happen, it has the potential to bring meaningful changes to the taxation regime in India.
While the introduction of the Service Tax in 1994 bought a vast number of untaxed services within the tax administration, it is now time for India to move to a unified regime of indirect taxes. In doing away with the myriad and complicated indirect taxes between state and Centre, the GST is likely to simplify the overall taxation regime. Consumers will benefit from a more transparent system of taxation, while manufacturers will benefit from easier payment and administration of their taxes.
Obviously, none of this will happen overnight, and maybe not even in a year. But then, structural reforms take time and their benefits will also be seen only over the longer term.
Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.