Dear Readers,

The Goods and Services Tax (GST) law-considered to be a landmark taxation law in India post- independence-has been in news for the past few months. In October 2015, the Centre and states finalised the draft of a model GST law as well as an integrated-GST law.

Given the importance of this topic from competitive examinations’ point of view, in this article we will understand what is GST, the reasons it has been proposed and the changes it will lead to in the taxation system in India.

History

In the 2006-07 Union Budget (during the United Progressive Alliance (UPA) regime), it was announced that a GST law would be introduced by 2010 and a roadmap for the same would be finalised. Recently, Narendra Modi-led NDA government tabled the much-awaited GST bill in Rajya Sabha. In August this year, Finance Minister Arun Jaitley put forth the Constitution (One Hundred and Twenty-second Amendment) Bill, 2014, which is the first and crucial step in implementing this law.

What is GST?

• It is a unified taxation system, which aims to cut down a multiplicity of central and state indirect taxes in order to streamline the taxation system.

• Given the federal structure of Indian polity, GST will be levied at the central and state level. In other words, central GST or CGST will incorporate taxes such as the central excise duty, additional custom duties, sales tax. The state GST or SGST will subsume electricity duty, sales tax, value added tax (VAT), entertainment tax, luxury tax, lottery tax. Further, the octroi (entry tax) will be discontinued altogether.

• The levy of GST on imports and the inter-state trade and commerce will be decided solely by the Union government. The tax collected would be distributed between the Central and state governments in a manner to be provided by the Parliament, based on the GST Council’s recommendations.

• Certain goods will be kept outside the purview of GST until there is a clarity between the states and the Centre on their taxation. These include petroleum crude, high speed diesel, petrol, natural gas, aviation turbine fuel, and alcohol for human consumption.

How will the taxation system benefit from GST law?

• Indirect taxes imposed by the Centre or state(s) on businesses tend to overlap especially when the Centre and state(s) tax the same economic activity. The GST is expected to be a one-tax-solution that will replace dozens of indirect taxes.

• Doing away with a bevy of taxes reduces administrative costs for businesses and would prevent unnecessary litigation that springs up as a result of non-compliance to procedures or dual taxation.

• GST will equally empower the Centre and states, thereby nearly removing any discrepancy between their taxing powers. Further, it will not violate the constitutional requirement of fiscal federalism i.e. demarcation of taxing responsibilities between the Centre and states.

Challenges that obstruct implementation of GST law

• Despite the provisions of the law, states fear that its implementation will do away with fiscal federalism and that they will lose their independent powers to impose and collect taxes.

• State governments assert that the revenue loss suffered as a result of removal of certain state taxes should be compensated by the Centre. To alleviate these concerns, the 122nd Constitutional Amendment Bill, 2014, proposes to levy an additional 1% tax on the inter-state supply of goods for the initial years. As compensation, the proceeds will be paid to states from where the goods originate.

• It is also feared that thousands of tax officers may lose their job after the GST law is passed. However, officials assert that this is unlikely as the government will gainfully employ them to ensure ease of transition and compliance, widen tax base, among other roles.

• The biggest challenge is to decide the revenue-neutral rate (RNR) for levying tax and a minimum threshold value. The RNR is the tax rate that allows the government to receive the same amount of money even after implementation of GST.

Dear PaGaLGuY readers, current affairs forms an important component of several competitive exams such as the UPSC Civil Services Examination, SSC-CGL, Bank PO & PSU entrance tests, etc. New initiatives and socio-economic policies or what are known as flagship programmes announced by the Union government and State governments are often asked in competitive examinations. Therefore, understanding new initiatives, terms/concepts that make news is critical for aspirants.

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