GST: Most important tax reform since 1947?

The Bill has been described as a reform measure of unparalleled importance in independent India. But several challenges remain. Shruti Srivastava explains.

Written by Shruti Srivastava | Updated: May 12, 2015 4:10 am
Goods and Services Tax, GST, Tax reform, indirect tax, indian tax reform, tax reform GST, GST tax, BJP government, Business news, indian express explained, explained Indian Express, india news GST is an indirect tax that will be levied on manufacture, sale and consumption of goods and services. (Source: Reuters photo)

The Bill has been described as a reform measure of unparalleled importance in independent India. But several challenges remain — to begin with, clearing the Rajya Sabha. Shruti Srivastava explains.  

What is the Goods and Services Tax (GST)? Why is it needed?
A destination-based, indirect tax that will be levied on manufacture, sale and consumption of goods and services.

GST will lead to economic integration of India: Arun Jaitley

Will subsume all central and state indirect taxes and levies, including excise duty, additional excise duties, service tax, additional customs duty (countervailing duty, special additional duty of customs), surcharges and cesses, value added tax, sales tax, entertainment tax (other than the tax levied by local bodies), central sales tax (levied by the centre and collected by states), octroi, entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling.

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Currently, tax rates differ from state to state. GST will bring uniformity, reduce the cascading effect of these taxes by giving input tax credit. Will have a comprehensive tax base with minimum exemptions — will help industry, which will be able to reap benefits of common procedures and claim credit for taxes paid. This is expected to reduce the cost for consumers. Finance Minister Arun Jaitley estimates GST will help increase India’s GDP by around 2 per cent.

Also Read: Centre, states agree on free flow of GST credit on inter-state trade

What is the constitutional status of GST?
Currently, states don’t have the power to levy service tax, while the Centre does not have the power to levy tax beyond the factory gate, i.e. VAT, sales tax, etc. To facilitate this, a constitutional amendment is required. The UPA government brought a Bill in Lok Sabha in 2011, but failed to get it passed. The NDA government introduced a “slightly modified” version of the Bill in Lok Sabha last December. It was cleared on May 6, but for GST to become a reality, the Bill must be cleared by two-thirds majority by both Houses, and ratified by 50% of states. It is now pending in Rajya Sabha.


So, why is the Bill stuck?
The government does not have a majority in Rajya Sabha, and the opposition wants the Bill to be referred to a Select Committee, which the government is not keen on. Also, many states do not want to give up their fiscal autonomy. In Budget 2007-08, then finance minister P Chidambaram announced GST’s implementation from April 1, 2010. The empowered committee of state finance ministers led the discussions. Punjab and Haryana were reluctant to give up purchase tax, Maharashtra was unwilling to give up octroi, and all states wanted to keep petroleum and alcohol out of the ambit of GST. BJP-ruled states like Madhya Pradesh and Gujarat took hard positions.

Despite the passage of the Bill in Lok Sabha, most of the original concerns of states remain. Gujarat and Maharashtra want the additional one per cent levy extended beyond the proposed two years, and raised to two per cent. Punjab wants purchase tax outside GST.

If it is finally passed and ratified, then?
The Centre and states have to frame and pass GST laws — Central GST and State GST —  which will provide the framework for the new tax. The IT infrastructure has to be ready before April 1, 2016, the scheduled date for implementation of the new tax. A GST Council will be formed, which will decide on issues including tax rates, exemption list and threshold limit. Sub-groups formed earlier to prepare blueprints for business, payment and refund processes, revenue-neutral rate, threshold limit, dual control and GST laws, have submitted reports. While the National Institute of Public Finance and Policy and sub-group have suggested a rate of 27% for both states and the Centre, the Finance Minister has made it clear this is too high.

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  1. Manish Garg
    May 3, 2016 at 5:16 pm
    27 is too high
    1. K.V. Amla
      May 12, 2015 at 8:36 am
      The bjp is very defensive against congress. Congress should not be allowed to dictate terms in RS.kayvee,bhopal
      1. N
        Narendra M
        May 12, 2015 at 7:55 am
        (1) If it is recognized that Goods & Service Tax (GST) introduction is an essential measure for better fiscal discipline and for increasing revenues of both the Central and State governments, question is what are the objections of State governments to a minimum number of exemptions and exclusions? (2) Readers wish to know why earlier BJP as an opposition party did not provide support for introduction of GST regime. (3) Mr. Arun Jaitley, our Union Finance Minister, knows very well why was the GST introduction earlier resisted by the State governments, including some BJP governments (even Gujarat, when PM Mr. Modi was chief minister)? The opposition continues. What are his suggestions in this situation? (4) My query is this: when would our political parties learn to take economic decisions purely on considerations of merit and without bringing politics in implementation of such economic decisions?
        1. R
          Richard Nicholas
          May 12, 2015 at 6:02 am
          The congress should let this bill p,as they were the ones who initiated and started the GST bill.
          1. A
            Jun 2, 2015 at 5:22 pm
            Impressive article. I recently wrote an article on Service tax implications. It's worth reading:
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