The goods and services tax (GST) is aimed at creating a single, unified market that will benefit both corporates and the economy. Finance Minister P Chidambaram did not spell out a roadmap for implementing GST in his Budget speech, but he expects a draft Bill on the Constitutional amendment and a draft Bill on GST in the next few months.
Here are 10 top takeaways on GST
- What is GST? It is an indirect tax that will lead to the abolition of all other taxes such as octroi, central sales tax, state-level sales tax, excise duty, service tax, and value-added tax (VAT). Both the state and the central governments will impose GST on almost all goods and services produced in India or imported into the country.
- What categories are exempt from GST? Exports will not be subject to GST. Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected.
- How will GST benefit the economy? It will simplify India's tax structure, broaden the tax base, and create a common market across states. This will lead to increased compliance and increase India's tax-to-gross domestic product ratio. According to a report by the National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per cent. Exports are expected to increase by between 3.2 per cent and 6.3 per cent, while imports will likely rise 2.4-4.7 per cent, the study found.
- How will GST benefit corporates? It will be beneficial for India Inc. as the average tax burden on companies will fall. Reducing production costs will make exporters more competitive. "The most important reform for India, whether it is for our group, for India generally, or for most businesses, will be the goods and services tax. It will add about two percentage points ... to India's GDP growth," Rahul Bajaj, chairman of the Bajaj Group, told Reuters in November 2012.
- Will goods and services become costly? The highest rate of taxation under GST will be around 15 per cent in the first year, and eventually come down to 12 per cent in the second year. By comparison, the current rate of the various indirect taxes levied in India amounts to roughly 20 per cent. Goods deemed necessary or of basic importance will be taxed at a lower rate.
- Will state governments lose out? Some states fear that a uniform tax rate, if lower than their existing rates, will dent collections. However, the central government has said it will compensate states for the potential revenue loss. Mr Chidambaram has set aside Rs 9,000 crore towards the first installment of the balance of central sales tax (CST) compensation. Also, instead of an earlier proposal for a uniform GST rates across the country, the Union Government has agreed to have a floor rate of taxation with a narrow band.
- Can states decide to opt out of GST? In a deviation from its earlier stand, the government has agreed for a phased roll-out of GST. States will also have the flexibility to opt out of GST.
- What's the latest on GST? Three sub-committees have been formed to resolve all outstanding differences and submit their reports in three months. i) One will look at the issue of integrated GST for inter-state movement of goods and VAT on imports. ii) The second will decide on a revenue neutral rate on GST - one that is not too high for the traders and not too low for states. iii) The third will look for a mechanism so that traders have to coordinate only with one agency - centre or state. This committee will also decide on a common exemption list and threshold for levying GST.
- What's the roadmap for GST? In his Budget speech of 2007-08, Finance Minister P Chidambaram had announced the implementation of GST from April 1, 2010. The second deadline for GST was April 2012. Now, there are hopes that the GST regime will come into effect by 1 April 2014.
- How will it become a reality? The GST can be implemented only through a Constitutional Amendment Bill, which means it needs to be approved by not less than two-thirds of the members present and voting in each House of Parliament. The GST must also be ratified by the legislatures of at least one-half of the states.
(With inputs from agencies)