From Idea to Action: The Long and Winding Road to GST in India

The Goods and Services Tax (GST), a landmark tax reform in India, wasn't born overnight. It was the culmination of a decades-long journey, fraught with political hurdles, complex negotiations, and economic considerations. This blog delves into the history of GST in India, tracing its path from a distant dream to a reality that transformed the nation's economic landscape.

Among the many initiatives taken by P Chidambaram, the proposed adoption of a nation-wide Goods and Services Tax (GST) will go down in history as the most fundamental change in our fiscal system. In February 2006, the then finance minister had announced that the country would migrate by 2010 to a Goods and Services Tax regime from the current regime of myriad central and state taxes.

As commonly understood, the concept of GST entails a merger of the aforementioned taxes except for customs duties. As per the emerging consensus among the centre and states, the most practicable structure for India is a dual GST wherein state and central taxes fuse into a single state tax and a single central tax respectively.However there are significant issues relating to both levy and collection of taxes. We also need to appreciate that there may be considerations other than revenue .

As per Article 246 of the constitution of India, Parliament and state legislatures have the exclusive power to make laws with respect to items in the union list and state list respectively, while both can make laws on items in the concurrent list. The tax laws mentioned in the table create a charge of tax on the occurrence of a taxable event as inferred from the entries in the lists.Hence combining the taxes and redefining legislative powers will need constitutional amendments in the seventh schedule. Now, as per proviso to Article 368(2) of the constitution, amendment to any list in the Seventh Schedule requires a majority of total membership of the house and two thirds of those present and voting.

v Seeds of Reform: A Nation Divided by Taxes-

Prior to GST, India's indirect tax system was a labyrinthine maze. A multitude of central and state levies, like excise duty, sales tax, octroi (a local tax on goods entering a town), and value-added tax (VAT), plagued businesses and consumers alike. This cascading effect of taxes – a tax on tax – inflated product prices, hindering competitiveness and hindering economic growth.

The idea of a unified indirect tax system emerged in the 1950s. The A.M. Mudaliar Committee report in 1960 emphasized the need for a national sales tax, but political and administrative challenges stalled progress. In the 1990s, with India's liberalization and globalization efforts, the need for a simpler and more transparent tax system became even more pressing.

v GST IMPACT ON INDIAN ECONOMY

The overarching objectives of the GST are to ensure the availability of input credit across the value chain, simplify tax administration, harmonise tax laws across the country, increase the tax base and raise compliance. By significantly reducing the cost of tax compliance it is expected to reduce evasion and help generate higher tax revenue.

Importantly, GST will transform India a new common market that has more states than the European Union has members, and twice the population of North America, as observed by Bloomberg.

1. A stable, transparent and predictable tax regime will also encourage local and foreign investment in India, helping create significant job opportunities and add 1%-2% to India’s GDP growth, according to estimates by the National Council of Applied Economic Research (NCAER).

2. The tendency of successive governments in India to continuously increase indirect tax rates has led to a distorted tax regime wherein our country has one of the lowest direct tax-to-GDP ratios in the world. India’s indirect-to-direct tax ratio stands at 65:35 compared to the average 35:65 ratio of most other countries. By limiting the powers of governments to levy inordinately high indirect taxes, the GST can help correct this skew.

3. The common man stands to gain as manufacturers are likely to pass on the benefits of economies of scale in production and efficiency in supply chain that will accrue from the levy of GST. Consumers today pay about 25%-26% more than the cost of production for manufactured consumer goods under the current tax regime. If the revenue neutral rate of GST is set around 17-18%, manufactured goods will become cheaper. On the other hand, services are likely to become expensive as the effective service tax at present is 15%. The two are likely to offset each other so that the net impact on inflation will be benign in the longer term.

The studies show that standard GST rate in most countries ranges between 15% and 20%. In India a GST rate between 18%-20% which is likely to be will probably minimise the inflationary impact. While many state governments are lobbying to set the GST rate higher, it should be noted that the NDA government has made an important concession in agreeing to a full five-year compensation to the states for possible loss of revenues.

v THE CHALLENGE OF IMPLEMENTING GST

A strong IT backbone will be crucial in ensuring the successful rollout of GST. A non-profit entity, the Goods and Services Tax Network (GSTN), was incorporated in 2013 with the objective of creating the IT infrastructure needed to implement the GST. GSTN will connect the databases of 29 states and 7 Union Territories with the Centre to enable registration, return filing and payment services to tax payers across India. However, the challenge lies in integrating and streamlining the many tax administrations as technology capabilities vary across states - some big states have sophisticated systems but smaller states have very rudimentary ones. The GST portal also has to provide a simple front-end for trade and industry to file tax returns and pay taxes.

More crucially, proper training will have to be imparted to GST administration staff both at central and state levels in terms of the concept, legislation and procedure as this new tax differs significantly from the existing indirect taxation system in the country.

v Political Will and Legislative Hurdles

The period between 2011 and 2016 witnessed intense political negotiations. Concerns of states regarding revenue loss, the design of the GST rate structure, and compensation mechanisms were addressed. Finally, in 2016, after years of tireless efforts, the historic 122nd Constitutional Amendment Bill was passed, paving the way for a unified GST.

v GST in Action: A Transformation with Challenges

On July 1st, 2017, India embarked on a new era with the rollout of GST. This monumental shift aimed to streamline tax administration, eliminate cascading taxes, and create a common national market. While the initial implementation faced teething troubles, including technical glitches and complex compliance procedures, GST has demonstrably benefited the Indian economy.

v Benefits of GST: A Unified Market Takes Shape

1) Enhanced Transparency: GST replaced a multitude of indirect taxes with a single, transparent levy. This reduces tax evasion and simplifies compliance for businesses.

2) Reduced Cascading Effect: Previously, taxes were levied on taxes, inflating prices. GST eliminates this cascading effect, leading to a potential reduction in final consumer prices.

3) Boost to Exports: GST reduces the cost of exports by making input tax credits readily available, enhancing India's competitiveness in the global market.

4) Improved Compliance:The online GST portal facilitates compliance and reduces manual interventions, leading to a more efficient tax administration system.

5) Unified Market: GST creates a single national market, allowing for the free flow of goods and services across state borders.

v Challenges Remain: A Work in Progress

Despite its undeniable benefits, GST in India is still evolving. Harmonizing tax rates across various product categories, simplifying compliance procedures for small and medium businesses, and addressing concerns of specific sectors are ongoing challenges.

v Looking Ahead: A Continuous Journey

The journey of GST in India is far from over. Constant refinement, addressing emerging concerns, and leveraging technology to simplify compliance will be crucial for its continued success. GST has the potential to be a game-changer for the Indian economy, fostering growth, creating a level playing field for businesses, and ultimately, benefiting the Indian consumer.

The Goods and Services Tax (GST) revolutionized India's economic landscape. This seemingly simple reform, however, was the culmination of decades of discussions, negotiations, and political will. This blog traces the fascinating journey of GST in India, from its conception as a distant dream to its implementation as a transformative force.

v THE LONG WINDING ROAD

A) Frequent changes* GST Council has met 35 times since inception* Many changes in two years* Multiple revisions in rulesB) Cumbersome compliance* Return filing remains challenging* Vendor reconciliation is another headache* Multiple registration for service providers* Jurisdiction divided between states and Centre

v THE ROAD AHEAD

We expect the GST to benefit the pharmaceutical industry through the rationalization of the tax structure and optimizing distribution. Any reduction in production or distribution cost will significantly enable the industry to pass on the benefits to the patients.

It has been a tortuous decade-long journey for the GST as bitter political wrangling had stymied previous attempts to make this much-needed reform a reality.

I sincerely hope that the passage of the Constitutional Amendment Bill in the Rajya Sabha will hasten up the legal process to implement GST in India and the state governments will act swiftly to ratify the legislation.

The multiple stakeholders including the political class should align to look at this as an evolutionary reform and must not hold up the implementation worrying about the nitty-gritty of the GST to be perfected. Issues can be ironed out and the GST can be fine-tuned over time. The focus should now squarely be on the implementation of GST at the earliest.

Conclusion :-

The story of GST in India is a testament to the power of collaboration. Through tireless efforts, political consensus, and a commitment to economic reform, a complex idea transformed into reality. As GST continues to evolve, its success will depend on ongoing refinement, addressing industry concerns, and leveraging technology. Ultimately, a well-functioning GST has the potential to propel India's economy forward, creating a more vibrant and competitive marketplace for all. The conclusion likely discusses the impact of GST on the Indian economy. Did it achieve its goals of simplifying the tax system, boosting economic growth, and increasing tax revenue?
It could also address the challenges of implementing such a major reform, such as opposition from vested interests, compliance issues, and the need for continuous improvement.
The conclusion might also look ahead to the future of GST in India and discuss any potential reforms that could be made to further improve the system.

From Idea to Action: The Long and Winding Road to GST in India

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