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GST: India journey, and how other countries have implemented it

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The Goods and Services Tax (GST), the biggest reform in India’s indirect tax structure, at last looks to become reality. The Constitution (122nd) Amendment Bill comes up in Rajya Sabha today, and if all goes well, the Bill is likely to be introduced in India from April 2017.

GST :India's journey so far and how other countries have implemented it
In India, GST is proposed to have a dual structure— a Central GST levied and collected by the Centre and a state GST administered by States. The rationale behind the bill is that it simplifies the indirect tax regime with a single tax.

The Bill’s draft does away with additional tax on the movement of goods across state boundaries. States will be compensated for revenue losses in the first five years of implementation of and a mechanism has been put in place to decide on conflicts between states, if any.

This one-stop tax move will cover taxes like central excise duty, state-level taxes like, VAT or sales tax, entertainment tax, entry tax, purchase tax, luxury tax and octroi.

The move will create uniformity in taxes across states, increasing efficiency and compliance and also boost Modi government’s big push towards ease of doing business.

Once implemented, the Bill will convert the country into a unified market, replacing most indirect taxes and subsuing all those into a single tax regime. With the implementation of the GST, the entire indirect tax system in India (excise, state-level VAT, service tax) is expected to evolve.

GST, An Explainer

Tax in India is payable at the final point of consumption. At each stage of sale or purchase in the supply chain, this tax is collected on value-added goods and services, through a tax credit mechanism, whereby it seeks to address challenges with the current indirect tax regime by broadening the tax base, eliminating cascading of taxes, increasing compliance, and reducing economic distortions caused by inter-state variations in taxes.

Read: The earlier GST bill is passed, the better for states: Arun Jaitley

Impact on Sectors

In India, GST is proposed to have a dual structure— a Central GST levied and collected by the Centre and a state GST administered by States.

The implementation of GST will essentially benefit those consumer durable companies which have not availed tax exemptions in the past, reducing price margin between organized and unorganized sector.

According to a report in The Economic Times: The warehouse/logistics costs across the operational and non-operational segments will be curtailed. This will improve the operational profitability by almost 300-400 bps.

The impact may remain neutral or negative for FMCG companies, specifically for those firms which either enjoy tax exemptions or fall under the concessional tax bracket.

The Economic Times reporurther says: The logistics sector is largely fragmented and comprises many unorganized players. Several players in the unorganised sector avoid tax which generates a cost gap between them and the organized players.

With the GST coming into picture, we expect an overall positive impact, with a reduction in the cost competitiveness as all the players will be brought under a uniform tax base, thereby improving growth opportunities for the organized players.

The GST Journey So Far

However all said and done, GST has remained one of the biggest stalled projects to the debit of our ruling Government. With the passage of the Constitution amendment Bill now looks near certain, here’s the journey so far in India and what it looks like in other countries.

2000: The Vajpayee Government started discussion on GST by setting up an Empowered Committee. The committee was headed by Asim Dasgupta(Finance Minister, Government of West Bengal)

2002-2004: The Kelkar Task Force on the implementation of Fiscal Responsibility and Budget Management(FRBM) Act, 2003 and suggested a comprehensive Goods and Services Tax(GST)

Budget 2006-07: In the Budget speech of this financial year, a proposal to introduce GST by April 1, 2010 was first mooted.

2007:

  • May: Empowered Committee(EC) of State Finance Ministers started to work on GST roadmap.
  • November: The Joint Working Group, submitted its report to the Empowered committee on November 19, 2007

Read: Modi Government turns 2: Five Hits and Misses in Retail

2008, April: EC finalized views over GST and submitted report titled ” A model and roadmap for Goods and Services Tax” in India.

2009 November: EC releases its First Discussion Paper

2011, March 22: The Constitution (115th Amendment) Bill introduced in Lok Sabha for levy of GST on all goods or services except for the specified goods.

2013:

  • Aug: Standing Committee Submitted its report on GST
  • November: EC rejected Govt’s proposal to include petroleum products.

2014, December 18: Constitution (122nd Amendment) Bill placed in Lok Sabha by Union Finance Minister

2015, May 6: Constitution Amendment Bill passed by Lok Sabha

2015, May 12: Bill referred to a 21-member Select Committee of Rajya Sabha headed by Bhupender Yadav

2015, July 22: Select Committee submits its report

Monsoon and Winter Sessions 2015, Budget Session 2016: Bill not tabled on the back of opposition led by the Congress and persistence of sticking points

2016, August 3: Bill tabled in Rajya Sabha

How other countries have implemented GST:

(Source: Draft model law on GST by CAIT (Confederation of All India Traders)

More than 160 countries have introduced GST in some or other form. It has been a part of European tax landscape for over 50 years. It is also widely accepted and preferred form of indirect tax in the Asia Pacific region. It is interesting to note that there are over 40 models of GST currently in force, each with its own distinct peculiarities.

Countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. While in China, GST applies only to goods and the provision of repairs, replacement and processing services. It is only recoverable on goods used in the production process and GST on fixed assets is not recoverable.

In Australia GST is a federal tax, collected by the Centre and distributed to the States.

Canadian Model: The GST in Canada is dual between the Centre and the states and has three varieties:

1. Federal GST and provincial retail sales taxes (PST) administered separately – followed by the largest Majority.
2. Joint federal and provincial VATs administered federally (Harmonious Sales Tax – HST).
3. Separate federal and provincial VAT administered provincially (QST) – only for Quebec as it is like a quasi independent province.

Similarly Brazil too follows dual GST model, which divides revenue collected between the centre and states.

World over, GST rates are typically between 16 per cent and 20 per cent. In India, it is likely to be the same. The tax-rate(s) under the proposed GST would come down, but the number of assesses would be likely increased by 5-6 times. Although rates would come down, tax collection would go up due to increased buoyancy and enhanced taxpayer base.