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Weekly Digest (Economics, Finance and Banking) 2 August - 8 August 2016 GST SPECIAL

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Capital tends to liberate itself from dependence on the human contribution. That’s why essentially all technology is substitutive (imitative). The fraction of the global population capable of making any contribution of non-near-zero value today is no greater than 20% (Damned lies statistics!!). Politics fills the gap with bureaucratic bloat and other make-work, welfare, a variety of protectionisms, macroeconomic junky-stimulus … and the gulf it needs to fill yawns open further every year. Sunny-side up (old-style) liberalism promotes 'The Process' (which is great). If it seriously expects to maintain the narrative that there is a continuous historical trend in which (dysgenically deteriorating) human populations will always find a useful place, it is deeply in denial. Massive swathes of the core industrial infrastructure are already close to laborless. The proletariat was a phase. Socialists have nothing correct and interesting to say on this (like most) issues; they have completely missed the point and jumped to the opposite of the correct conclusion. Following them down their basic income/social credit/whatever-it’s-called-this-century rabbit hole is not fruitful intellectually or otherwise......

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Some 4 days back, Subir Ghosh in an interaction on FB suggested that this edition be dedicated to GST, which until then, I had no intention of doing. Couple of reasons raised their heads, viz. my BPL understanding on taxation being one, and a challenge to pick this up later to come out with a booklet on GST for disseminating the intricacies. Though, the second is very much wanting to see the light of the day, the first one was a hindrance in that convincing the self of this status of poverty was a lot easier than struggling to come out of it.  Also, thanks Seela for reminding me of the importance of GST through the digest. Hopefully, the booklet would have me inching away from the present status of BPL in Taxation. But, this is merely a slug in and out of it. Here's the GST special for the Digest.



Public Finance Public Accountability Collective (PFPAC) Weekly Digest (2 August - 8 August 2016)​ 

GST Special 

So, GST is a reality now. The tax patchwork dates back to 1991, when the government embraced free-market policies and devolved power to the states, including authority over taxes. For more than a decade, as it became increasingly clear that the overlapping tax codes hampered growth, Indian leaders have pushed for a radical simplification, only to be halted by political opposition. That hurdle now seems to have been cleared. Though a long series of legislative steps must be taken before the new tax system goes into effect, Wednesday’s approval of a constitutional amendment by the upper house of Parliament was seen as the most daunting obstacle. The move, described as “India’s reverse Brexit moment,” is a significant victory for Prime Minister Modi. Elected in 2014 with a promise of bold economic transformation, he had been unable to marshal parliamentary support to pursue several of his central initiatives, such as overhauling land and labor laws. It is likely to lead to an inflationary bump. And the government’s chief economic adviser, Arvind Subramanian, warned that the single tax will be “fiendishly, mind-bogglingly complex to administer.” The drawbacks of state-dictated tax policies have long been recognized, but lawmakers were stymied. Simplifying the system required the political muscle to persuade states, especially large, wealthy ones like Mr. Modi’s home state of Gujarat, to surrender control over tax revenues. A Goods and Services Tax bill was first introduced by the Indian National Congress party in 2011, but has since been blocked by whichever of the two main parties was not in control of Parliament. Before 2014, it was Modi’s BJP, that disapproved of the measure. The Congress Party has opposed it since then. Technically, the parliamentary vote on Wednesday approved only a constitutional amendment on the new tax system, the first of many steps needed to enact the tax measure, usually referred to by its initials, GST The constitutional amendment must also be approved by a majority of India’s state legislatures and by the president. Once it is approved, which is expected, Parliament must enact legislation to create the new tax system, and individual states must pass their own laws. Still to be settled is the thorny issue of tax rates. States will want high rates, to maximize revenue, and the central government will push for lower rates to avoid sparking inflation. Surjit Bhalla, a macroeconomic adviser on India to the Observatory Group, a consultancy in New York, compared the new tax regime to the industrial deregulation of 1991 and said it should put to rest any doubts about Mr. Modi’s credentials as an economic modernizer. “It’s a mega-reform, and it comes under his leadership, which is why he and the BJP were very keen to get it passed,” he said.

Timeline of GST

FIRST MENTION : In 2000, the Vajpayee government mooted the idea of GST, setting up an empowered committee headed by Asim Dasgupta.  

KELKAR TASKFORCE ON FISCAL CONSOLIDATION : This mooted the idea while suggesting the FRBM (fiscal responsibility and budget management) framework in 2003.  

FEBRUARY 28, 2006 : Then finance minister P Chidambaram formally introduced the concept of GST in his budget speechApril 1, 2010 was set as the deadline for rollout.  



FEBRUARY 28, 2007 : Chidambaram reiterated the commitment, said the empowered committee of state finance ministers had agreed to work with the central government to prepare a road map.  

MAY 10, 2007 : Empowered committee of state finance ministers decide to set up a joint working group.  

APRIL 30, 2008 : Panel submits "A Model and Roadmap for GST in India" to the government led by Manmohan Singh.  

NOVEMBER 10, 2009 : Empowered committee submits detailed paper on goods and services tax.  

DECEMBER 29, 2009 : Kelkar-headed 13th Finance Commission makes some suggestions on GST.  

FEBRUARY 26, 2010 : Then FM Pranab Mukherjee postpones rollout to April 2011.  

MARCH 22, 2011 : Constitution (115th Amendment) Bill, 2011, introduced in Lok Sabha to enable levy of GST.  

MARCH 29, 2011 : Bill referred to standing committee on finance headed by Yashwant Sinha.  

AUGUST 7, 2013 : Committee submits report in Parliament. However, Bill lapses with dissolution of 15th Lok Sabha.  

DECEMBER 18, 2014 : Cabinet approves Constitution (122nd Amendment) Bill, 2014.  

DECEMBER 19, 2014 : Bill introduced in Lok Sabha.  

MAY 6, 2015 : Bill passe
d by Lok Sabha.  

MAY 12, 2015 : Bill taken up in Rajya Sabha.  

MAY 14, 2015 : Bill sent to joint committee of Rajya Sabha & Lok Sabha.  

JULY 22, 2015 : Select committee submits report.  

AUGUST 1, 2016 : Finance Minister Arun Jaitley moves amendments to Bill based on political consensus.  

AUGUST 3, 2016
 : Rajya Sabha takes up and approves Bill.
 (VideoVideo: PCVideo: AJ)

PRESS CONFERENCE ON THE PASSAGE OF GST AMENDMENT BILL IN RAJYA SABHA (Video). 

What is GST? 
Understanding GST

The most prominent hurdle in introducing this new tax structure has been the ongoing struggle between the states and the centre on the loss of revenue. It’s taken years to resolve, but even now it is an issue that isn’t anywhere close to being completely fixed. Nonetheless, the introduction of the Constitution Amendment Bill in the parliament seems like the first key step towards bringing in the belated GST reform. The GST is being introduced not only to get rid of the current patchwork of indirect taxes that are partial and suffer from infirmities, mainly exemptions and multiple rates, but also to improve tax compliances. With the increase of international trade in services, the GST has become a preferred global standard. All OECD countries, except the US, follow this taxation structure.

Get, which will convert the country into unified common market, replacing most indirect taxes with one tax is an indirect tax (versus direct taxes) levied when a consumer buys a good or a service. India's current tax scenario is plagued by various indirect taxes, which the GST aims to subsume with a single pan-India comprehensive tax, by bringing all such taxes under a single umbrella. GST would have a dual structure: a state component administered by the states; and a central component administered, levied and collected by the Centre. The Bill aims to evade the cascading effects caused by taxes on production and distribution prices of goods and services. These cascading effects are caused due to levy of different charges by the states and the Centre distinctively, thus raising the tax burden on Indian products, affecting their prices, and as a result, sales in the international markets. GST, if successfully implemented as planned would help boost exports. 

The salient features of the proposed model are as follows:

  • Consistent with the federal structure of the country, the GST will have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.
  • The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.
  • The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.
  • Since the Central GST and State GST are to be treated separately, in general, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST.
  • Cross utilisation of Input Tax Credit (ITC) between the Central GST and the State GST would, in general, not be allowed.
  • To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.
  • The administration of the Central GST would be with the Centre and for State GST with the States.
  • The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities.
  • Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department.
  • Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.

In the changed scenario, the following taxes under Centre and States will be subsumed in GST
Central Taxes subsumed by GST
State Taxes subsumed by GST
 Central Excise Duty
Central Sales Tax
Service Tax
State VAT
Duties of Excise (medicinal and toilet preparations)
Purchase Tax
Duties of Excise (medicinal and toilet preparations)
State Cesses and surcharges
Additional Duties of Customs (commonly known as CVD)
Entry Tax (all forms)
Additional Duties of Excise (textiles and textile products)
Entertainment Tax (not levied by local bodies), Luxury Tax
Special Additional Duty of Customs (SAD)
 Taxes on advertisements
Cesses and surcharges in so far as they relate to supply of goods or services
Taxes on lotteries, betting and gambling

So, how would the GST actually mitigate the cascading effects of indirect taxes under the present taxation regime in the country? 

If a Baker procures raw material or inputs such as Wheat or flour, sugar, yeast etc for Rs.100, a sum that includes a tax of Rs 10. With these raw materials, he makes bread. In the process of creating the bread, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130. At a tax rate of 10%, the tax on output (this Bread) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 - 10). The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 or a total of Rs 150. A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 - 13). In the final stage, a retailer buys the Bread from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15). Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or  Rs. 16. 

In a present non-GST regime, there is a cascading effect of “tax on tax”, as there are no provision to set-offs for taxes paid on procured products or inputs or on previous purchases. From the above example of Bread manufacturing, the bread manufacturer buys raw materials at Rs 100 including tax of Rs 10. The gross value of the bread (good) he manufacturers would be Rs 130, on which he pays a tax of Rs 13. But since there is no set-off against the Rs 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130 + 13). With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then, Rs 163. On this, the tax of Rs 16.30 (at 10%) takes the sale value of the good to Rs 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer. The retailer, thus, buys the good at Rs 179.30, and sells it at a gross value of Rs 208.23, which includes his value addition of Rs 10 and a tax of Rs 18.93 (at 10% of Rs 179.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase. The total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, work out to Rs 10 + 13 + 16.30 + 18.93 = Rs 58.23. For the final consumer, the price of the good would then be Rs 150 + 58.23 = Rs 208.23. Compare this Rs 208.23 with a tax of Rs 58.23 to the final price of Rs 166, which includes a total tax of Rs 16, under GST.

Positives of GST

First, it addresses a serious impediment to our competitiveness. Without the GST, there are multiple points of taxation, and multiple jurisdictions. We also have an imperfect system of offsetting credits on taxes paid on inputs, leading to higher costs. Also there is cascading effect, which hampered the interstate commerce. By bringing the GST. It will enhance the ease of doing business, and make our producers more competitive against imports.

Second, implementation of the GST is an iconic example of “cooperative federalism”. The States agreed to give up their right to impose sales tax on goods (VAT), and the Centre gave up its right to impose excise and services tax. In exchange they will each get a share of the unified GST collected nationally.

Third, once the GST is in place, it means a unified, un-fragmented national market for goods and services, accessible to the smallest entrepreneur. Companies need not maintain stock depots to avoid paying interstate taxes. This will free up some capital. All this will add to demand, and also efficiency.

Fourth, because the structure of claiming input tax credit is linked to having proof of taxes paid at an earlier stage in the value chain; this creates interlocking incentives for compliance between vendor and customer. No more questions from a vendor: “Would you like that with receipt or without receipt?” Because of this inherent incentive, the total taxes paid, and hence collected, may go up significantly. This provides buoyancy to the GST. In fact, a significant part of the black economy will enter the tax-paid economy.

The rate for GST is as yet undecided, but it would be in a range that would make exports competitive. A sub-committee of the Empowered Committee of state finance ministers had proposed revenue-neutral rates (RNR) for the Central and state components at 12.77 per cent and 13.91 per cent, respectively, taking the effective GST rate to 26.88 per cent. This is much stiffer than the 14-16 per cent in most countries as well as the recommendation of a taskforce of the Thirteenth Finance Commission of 12 per cent (7 per cent for state GST and 5 per cent for central GST). However it is expected that GST rate won’t be more than 18%. Under the GST Constitutional Amendment Bill, the President shall constitute the GST Council. GST Council shall constitute of the Union Finance Minister (Chairman) and MoS in charge of Revenue; Minister in charge of Finance or Taxation, or any other Minister, nominated by each state. Decision will be made by three-fourths majority of votes cast. Centre shall have a one third of votes cast; states shall together have two-thirds. Mechanism for resolving disputes arising out of its recommendations may be decided by the Council itself. The Council is invested with making decisions on: 

• Taxes to be subsumed
• Exemptions
• Model GST laws, Principles of Levy, etc.
• Threshold for exemption
• Rates, including floor and bands
• Special rate/rates for specified period
• Date from which GST to be levied on crude, high speed diesel, natural gas, aviation   turbine fuel and petrol
• Special provisions for the Northeast, J&K, etc.

Benefits accruing out of GST
First, as the Prime Minister outlined in an interview, the GST will increase the resources available for poverty alleviation and development (Caution: Youtube Video - Arnab and Modi). This will happen indirectly as the tax base becomes more buoyant and as the overall resources of the Central and State governments increase. But it will also happen directly because the resources of the poorest States - for example, Uttar Pradesh, Bihar, and Madhya Pradesh - who happen to be large consumers will increase substantially. 
Second, the GST will facilitate ‘Make in India’ by making one India. The current tax structure unmakes India, by fragmenting Indian markets along State lines. These distortions are caused by three features of the current system: the Central Sales Tax (CST) on inter-State sales of goods; numerous intra-State taxes; and the extensive nature of countervailing duty exemptions that favours imports over domestic production. In one fell swoop, the GST would rectify all these distortions: the CST would be eliminated; most of the other taxes would be subsumed into the GST; and because the GST would be applied on imports, the negative protection favouring imports and disfavouring domestic manufacturing would be eliminated.
Third, the GST would improve - even substantially - tax governance in two ways. The first relates to the self-policing incentive inherent to a valued-added tax (VAT). To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the value-added/tax chain. Provided the chain is not broken through wide-ranging exemptions, especially on intermediate goods, this self-policing feature can work very powerfully in the GST. The second relates to the dual monitoring structure of the GST - one by the States and one by the Centre. Critics and taxpayers have viewed the dual structure with some anxiety, fearing two sources of interface with the tax department and hence two potential sources of harassment. But dual monitoring should also be viewed as creating desirable tax competition and cooperation between State and Central authorities. Even if one set of tax authorities overlooks and/or fails to detect evasion, there is the possibility that the other overseeing authority may not. 
What are the main concerns of GST?

The main issue with GST in India comes from states. States have been vehemently opposing the “One Nation, One Tax” system as they claim it would reduce their revenue. For instance, states earn nearly 50 per cent of revenues from levies on petroleum products. Concerns have mounted over potential losses due to subsuming of state levies into GST. States have raised concerns of revenue loss due to the phase out of the Central Sales Tax (CST), which they have pegged at Rs 34,000 crore. On a theoretical level, RNR for GST would ensure that there are no losses to either the state or the Centre. Indirect tax collections are in fact expected to go up on the back of better tax compliance under the regime. But as a sweetener, the Centre has agreed to include a provision on compensation for a period of three years on losses arising out of GST to states in the Constitution amendment Bill. The FM has also promised Rs 11,000 crore to states as CST compensation in this fiscal. Further, to give fiscal autonomy to states, the Centre will collect taxes from traders having a turnover of over Rs 1.5 crore while the states will tax those having a turnover between Rs 25 lakh and Rs 1.5 crore. Another challenge associated with GST is a conflict between producer state and consumer state. As GST is destination based tax system, therefore consuming state will receive more revenue, and producing states or developed states will get less revenues. It will also discourage the producing state to produce more goods. 

Legally speaking, we still have to wait for  the Lok Sabha to pass the GST Bill (which is not the same as Constitution Amendment Bill) and the states have to pass their own GST bills. If we are looking at 1st April 2017 to roll out the GST, all these technical glitches have to solved by or before March 2017. If we look into the details of GST and its implementation on deadline, it seems there are still miles to go.  

Full fledged rolling out of GST requires following steps to be completed before 1st April 2017: 

1. Changes made to Bill in Rajya Sabha will have to be again approved by Lok Sabha. 
2. The Bill needs to be ratified by a majority of the states(15/29). Following this it will be sent to President for Assent (Under Article 111)
3. After Presidential assent, a GST Council comprising the representative from state and Centre will be setup.
4. The council will help codify Central GST and State GST law which would be passed by Parliament and state assemblies.
5. GST network, the IT backbone of GST, to felicitate online registration, tax payment and return filling would be introduced.
6. GST network would create an online portal. The portal will begin migrating date of existing taxpayer under the current VAT/Excise, Service Tax regime.
7. All businesses will be given a GST identification number a 15 digit code comprising their state code and 10 character PAN.
8. The GST network has already validated the PAN of 58 Lakh businesses from the tax department.
9. Government is already enabling “Master Trainers” who would train accountants, Lawyers and tax officials on the new system. 

GST and the Economy: Impacts

The Finance Commission had commissioned a study by NCAER to assess the impact of GST on GDP growth and exports, according to which, implementation of a comprehensive GST across goods and services is expected, ceteris paribus, to provide gains to India’s GDP somewhere within a range of 0.9 to 1.7 per cent. This will be possible due to the following reasons:

1. Exports: The differential multiple tax regime across sectors of production leads to distortions in allocation of resources thus introducing inefficiencies in the sectors of domestic production. With regard to India’s exports, this leads to lack of international competitiveness of the sectors which would have been relatively efficient under distortion-free indirect tax regime. Add to this, the lack of full offsets of taxes loaded on to the fob export prices. The export competitiveness gets negatively impacted even further. While indirect taxes paid by the producing firms get offsets under state VAT and CENVAT, the producers do not receive full offsets particularly at the state level. The multiplicity of taxes further adds the difficulty in getting full offsets. Thus, providing full tax offsets, by way of GST is expected to result in gains for GDP.

2. Allocation of factors of production: GST would lead to efficient allocation of factors of production. The overall price level would go down. It is expected that the real returns to the factors of production would go up. This would translate into enhanced economic welfare and returns to the factors of production, viz. land, labour and capital. The GST will bring about a qualitative change in the tax system by redistributing the burden of taxation equitably between manufacturing and services.

3. GST will reduce tax evasion: There is a very logical reason as to how GST will help in reducing tax evasion - All traders will insist on taking bills for all their purchases. Let us understand this with an example. Suppose you are a mobile phone distributor. You are buying mobile phones from the manufacturer and selling to wholesaler. This is the net position after introduction of GST. 

As we can see, all the distributors will prefer to purchase with invoice, because it gives them a better profit margin.
This is because the distributor will get credit of all the taxes paid at the previous stage. In the present scenario, the distributor has to bear the burden of excise duty. Therefore, for him it makes more sense to simply avoid paying taxes. However, after the introduction of GST, it will be more beneficial to purchase goods on invoice. Now, if the customer himself insists on taking the bill, we can assume that tax evasion will fall. This is the biggest advantage of GST. 
Note
One may think that there are chances of price increase for final consumers. This doubt arises because of my example in the first part. However, we cannot say this with certainty because of three reasons - (1) It depends on the rate of GST, which is likely to be revenue neutral rate; (2) There are a lot of other taxes, apart from VAT and Excise, therefore my example is not entirely correct and it is used only to show that incentive to raise invoice will increase; (3) The major reduction in tax evasion will be observed in the middle stages, not so much as the final stage.
4. More money to backward states: Take a look at the tax collections of various states in India. 

You can see that there is a big difference between states; and that tax collections are highest in manufacturing states.
GST will ensure that tax collections in other states also rise, because GST is a consumption based tax. 

This is because, being a consumption based tax, tax collection will go to the states in which the goods are consumed, and not where they are manufactured. Now, where are the goods consumed? Typically speaking, more consumption will take place in states where the population is higher. As a result of this, the per capita tax collection in the economy, across various states will even out. This will be another advantage to the economy of the country, because more taxes will accrue to states that have need of money; which, in turn, will get developed.
5. No location/geographical bias, support to small businesses: Another big advantage in GST is that it will even out the tax structures of various states. This removes a location bias. Therefore, I can set up my factory in any state of the country, without having to worry about tax differences. In any ideal scenario, taxes should not be a hindrance to my investment decision. In India, this will go away once GST in introduced. This means that even undeveloped locations can see more businesses coming up. A small retailer in Madhya Pradesh can transfer its goods to Uttar Pradesh and purchase its goods from Rajasthan. It can also take input services from a contractor located in Bihar and pay advertising charges to an agency in Karnataka - all this, without any significant worry about taxation. Why? Because tax structure in all these states will be the same!
The auto industry is likely to gain from the implementation of the GST since it is expected to reduce logistics costs by removing trade hurdles, paving way for more competitive manufacturing. “I think the automotive sector will be one of the most positively impacted sectors. At present, we have multiple rates of excise duty. With the GST coming in, we are hoping we do not see more than two rates. So that will be also a very positive development as far as our industry is concerned, which we believe is very, very highly taxed. While we haven't seen the GST rate yet, whatever comes will certainly be lesser than cumulatively what it is today.” according to Vishnu Mathur, director general, Society of Indian Automobile Manufacturers (SIAM). Be ready for an expensive air travel. The goods and service tax (GST) once implemented will increase the cost of air tickets and other services such as cargo transportation and aircraft maintenance. The Indian aviation industry believes that the exclusion of petroleum and aviation fuel from its ambit will continue to impact the aviation sector. The central government will continue to impose excise duty on five petroleum products - crude oil, diesel, petrol, natural gas and aviation turbine fuel (ATF), while the state governments will continue to impose value-added tax on these petroleum products.
With the implementation of GST, which is likely to be done by April 2017, three sectors will benefit the most: retail, FMCG and consumer companies and logistics businessLogistics sector, which accounts for nearly 14 per cent of the GDP, could see savings to the tune of USD 200 billion annually on implementation of GST, which will ensure faster movement of goods and less idle hours, say experts. "For a USD 2-3 trillion dollar economy, this could mean a potential of USD 200 billion wasteful inventory spent being available to deploy in productive value creation and further propelling the economy's growth," said Deepak Garg, founder of logistics firm RivigoIn the retail sector, the implementation means a seamless integration of goods and service transaction across the states. It will have benefit at different stages of the value chain. 
When it comes to the Gems and Jewellery industry, the general consensus is that a uniform GST will be very beneficial across the board for the whole industry as it will give a uniform and standardized measure of determining the Market Rate Price for the jewellery items in particular and for the related raw materials in general.
On the realty sector, these is an euphoric mood, as the GST is purported to have positive impact by reducing tax burdens. "The enactment of this law will single-handedly solve many of the challenges faced by the real estate sector and help in pulling the sluggish sector out of its long slumber. Heavy taxes that are being paid currently by the developers will automatically go down by a considerable percentage," realtors' body NAREDCO President Parveen Jain said. A significant reduction in indirect tax on the cement industry is anticipated to aid the cement companies to save on their logistic costs, due to rationalization of warehouses and lower transportation costs (comprising up to 20-25% of total revenue).
Post GST, Pharmaceutical industry's traditional cost and distribution model will get replaced by supply chain efficiencies. The central tax subsumed under GST and interstate transactions between two dealers will become tax neutral. This will lead to decrease in cost which can be added to margins. Also here + here on healthcare industry.  
Moving on to the entertainment industry, in the current scheme of affairs, consumers pay a service tax ranging between 14.5-15% for all broadcast services like Television (Cable + DTH), films as well as digital content. Apart from this an entertainment tax ranging between 8-12% is further levied increasing the average tax to as much as 25%. Once GST comes into play, consumers will have to pay a single tax the likely rate for which will be anywhere between 18-20%. Hence the overall rate of tax on consumers will reduce significantly.
Positives for Restaurants, in that the consumers might end up paying more. The reform is all set to boost hospitality and luxury industry
As an aside, for GST impact across sectors, take a look at winners and losers. One too can look at this almost very optimistic 'almost everybody gaining from GST'. A large section of India Inc wants to keep the standard GST rate below 20 per cent, and services like telecom, banking, healthcare and railways to be included in the ‘merit’ list to keep inflation in check. “No tax reform can succeed unless adequate revenue generation is assured to both the Centre and states. Likewise, in the case of GST, the Revenue Neutral Rate (RNR) should be worked out, taking into account the tax buoyancy and all out efforts must be made in this direction,” Assocham Secretary General D S Rawat said. The road ahead for Industry, and the reactions from the industry

The negative impacts of GST on economy

1. GST is being referred as a single taxation system but in reality it is a dual tax in which state and centre both collects separate tax on a single transaction of sale and service.

2. At present the main Indirect tax system of central Government is central excise. All the goods and commodities are not covered by the central excise and further there is an exemption limit of Rs. 1.50 Crores in the central excise and further traders are not liable to pay central excise. The central excise is payable up to the stage of Manufacturing but now GST is payable up to the stage of sale.

3. Majority of dealers are not covered with the central excise but are only paying VAT in the state. Now all the Vat dealers will be required to pay “Central Goods and service tax”.

4. Many economists anticipate minimal impact on consumer price inflation if the standard GST rate is at 18%. A Nomura report estimates it to impact headline CPI (Consumer Price Index) inflation by 20-70 basis points (bps) and core CPI by 10-40 bps in the first year of implementation. That would be on account of higher prices of electricity, clothing and footwear, health/medicine, and education after accounting for input taxes, it says. If the rate is around 22%, then ministry officials project inflation to accelerate 30-70 bps. 


















The Goods and Services Tax as proposed is certainly not a silver bullet. The original concept of the GST was to have a single tax which would subsume all central and state indirect taxes and eliminate cascading of taxes.  The proposed tax does subsume the major indirect taxes, including, central excise dutyservice tax, state VAT, countervailing duty/Special Additional Duty of Customsoctroi and entry taxpurchase taxluxury taxtaxes on lottery, betting and gambling, etc.  However, four critical state level taxes have been excluded from GST: tax on petroleum products, electricity duties, excise duty on alcohol, and stamp duty on immoveable property.  Moreover, the “additional tax (not exceeding 1 percent) on supply of goods in the course of inter-state trade” simply Far From Silver Bullet, GST Will Likely Have Negative Impact on Growth appears to be a replacement of the Central Sales Tax since it is non-VAT-able. Don't listen to politicians, for here's why the GST might actually end up harming India. Some provisions of the constitutional amendment bill on the goods and services tax (GST) could undermine the competitiveness of India’s information technology (IT) industry and have the potential to spark disputes and litigation, the software and services sector lobby group has warned. Complex billing and invoicing requirements due to the supply and valuation provisions of the GST bill could complicate taxation for IT companies and make life difficult for the services sector in general, and IT industry in particular, National Association of Software and Services Companies (Nasscom) president R. Chandrashekhar said in Hyderabad.

Meanwhile, a report ‘Implications of GST for Indian Textiles Sector’ by Ministry of Textiles, Government of India, says that since the CGST (Centre Goods and Services Tax) and SGST (State Goods and Services Tax) rates are likely to be higher than the corresponding textile sector revenue neutral rates (RNRs), the textile prices would go up. This will adversely affect demand for textile products. It also says that exports will be zero-rated and all input taxes paid will be rebated by the tax authorities making duty drawback kind of schemes redundant (export zero-rating effect). How would it impact textile industry?


GST and the Political: Impacts

The 2014 Bill amends the Constitution to give concurrent powers to Parliament and state legislatures to levy a Goods and Services tax (GST). This implies that the Centre will levy a central GST (CGST), while states will be permitted to levy a state GST (SGST). For goods and services that pass through several states, or imports, the Centre will levy another tax, the Integrated GST (IGST). Once the constitutional framework is in place, the Centre will have to pass simple laws to levy CGST and IGST. Similarly, all states will have to pass a simple law on SGST. These laws will specify the rates of the GST to be levied, the goods and services that will be included, the threshold of the turnover of businesses to be included, etc. 


However, the GST Constitutional Amendment Bill will only facilitate the advent of the GST Bill and the contentious issues like GST rate, what will happen to branded garments etc, will be dealt with later when the GST Bill is expected to be tabled in the Winter Session. To discuss the nitty-gritty of the Constitutional Amendment Bill CNBC-TV18’s Shereen Bhan spoke to Haseeb Drabu, Finance Minister of Jammu And Kashmir, and Satya Poddar, Partner, EY. According to Drabu, two concerns still remain with regards to the amendments – language on compensation clause, the word ‘full compensation’ has not been incorporated, which is still a concern. "Second relates to the amendment on Article 270 clause 1A and 1B which refers to the inter-state GST (IGST) unclaimed credits not being a part of the divisible pool," he said. While Poddar said there needs to be clarity on mechanism for dispute resolution for states that deviate from GST council recommendations.

The Prime Minister said that the GST will also be the best example of “cooperative federalism”. “Together we will take India to new heights of progress,” he said. Quite rightly, AIADMK has continued to abstain from seconding any such thoughts. The AIADMK’s fundamental problem is with the GST council. 

"The newly formed council will resolve disputes, decide what is in the purview of the GST and fix tax rates. In effect, it decides what the GST in India will be. The dissent note rightly captures how arbitrary and poorly thought out this is: GST Council as a constitutional body impinges on the legislative sovereignty of both Parliament and the State Legislatures. It also completely jeopardizes the autonomy of the States in fiscal matters. In spite of our repeated objections, the present Bill also envisages the formation of the GST Council. We strongly object to the provision for the GST Council. Ideally it should not exist. The existing mechanism of the Empowered Committee of State Ministers which dealt with VAT issues is adequate. No statutory GST Council is required. Furthermore, the decision making rule and voting weightage in the proposed Council are completely unacceptable. They give the Government of India an effective veto in the GST Council and no distinction is sought to be made amongst the States in weightage."
The central government having an effective veto makes a mockery of the council. It is also absurd that all states have exactly one vote. The express purpose of the GST Bill is to concentrate on manufacturing and achieve excellence so that the same product is not manufactured locally with sub-optimal efficiency in every state for tax reasons. That being the case, it is natural there are going to be only a few manufacturing states while the rest will be consuming states. To have a council where the manufacturing state has one vote whereas all other states, likely consumers, also have a vote each is unfair. Of course consumers will vote in their own interests. Even if we assumed the central government did not have a veto, the council’s voting and decision-making structure is deeply problematic. Ain't this usurping the powers of the states? On the envisaged structure of the GST Council and dispute resolution mechanism (DRM)Satya Poddar, partner, EY, who has been one of the staunchest and most incisive critics of any attempt to distort the Goods and Services Tax (GST) structure by deviating from the best global practices says, "The disputes will primarily relate to (politically driven) deviations from the harmonised structure of GST. The DRM won’t have any penal powers, and so, its influence on the stakeholders would only be moral. Solutions will have to be found in the spirit of cooperative federalism."

GST is obviously an adventure in Constitution, with the institutionalisation of GST having more than a touch of romance. The claim that the GST cuts down the states’ autonomy is considerably overstated if looked at in a dynamic perspective. First, it is true that the states will not be able to use goods and services taxes to finance local practices. But for a while, they have considerable leeway on petroleum taxes that form a bulk of their revenue. Second, we are possibly underestimating the potential of non-goods and services-related revenue the states can deploy. In fact, one of the weaknesses of the current system was that the revenue efforts of most states were pretty meagre; they often took the easy way out. The degree to which states (and local governments) can deploy other kinds of taxes like property taxes is very much an open one. I would not underestimate the states’ creative capacities to find new sources of revenue if a distortionary mechanism is closed off. And in future, there could even be a debate on allowing some degree of state income taxes. Third, if the aggregate revenues go up because of the GST, that arguably creates a new kind of spending autonomy. Bhanu Pratap Mehta analyses

In a chat with ET Now, Rajiv Lall, MD & CEO, IDFC Bank, says for the first time through consensus building, we have built nationwide federal understanding on a unified market. 

ET Now: Would you call this a landmark milestone or is the euphoria a bit misplaced? 
Rajiv Lall:  This is a totally momentous occasion, a milestone and it is not just because for the fiscal aspects of it, this is a milestone in the development and evolution of the Indian federation. This is the first time that through consensus building, that we will have built nationwide federal understanding on a unified market. So it is politically very significant. I think even more so than just for its fiscal and economic implications.  
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What about the common man? A common man incurs various expenses on day to day which are charged to indirect taxes. Purchase of goods have a standard excise duty of 12.5% embedded in it and standard VAT of 14% appearing on the face of the invoice. The effective tax rate on goods is around 28% due to 'tax on tax' and no input tax credit available to dealer of the excise duty charged by the manufacturer. Service tax is levied at 15% on the services consumed. So optically it seems that goods will become cheaper and services expensive should the rate of GST be a range of 17% to 19%. Accordingly, services consumed by a common man such as telecom, rail transportation, banking, air travel etc may become expensive. Whereas small cars, FMCG products etc may become cheaper. Or, as P. Chidambaram says, if the government believes that GST will be a more efficient tax that will enhance revenues and reduce tax evasion, it must be prepared to take some risks. All risks cannot be balanced by socking the people with high rates of GST which is an indirect, and therefore regressive, tax. The idea of GST has been promoted as pro-growth and pro-people. A high standard rate will be dubbed - and will be seen - as anti-people.

Thus, a flawless GST and the New Direct Taxes Code will put India’s fiscal system on the cutting edge of the world market economies. Even a 2% reduction in costs increases profits by over 20%. This will attract investments. As tax cascading disappears, the industry will move to the lagging regions because of lower costs and thus bring these into the growth dynamics. The current GST is an improvement over the current scenario but it is not perfect. We still won’t see a 100% free flow of credits due to the Dual-GST structure. Further, all goods need to be brought under GST, to reap full benefits, and one expects that after GST rolls out and stabilises, states will agree to bring in goods like Alcohol and Petrol. In the end, we must realise that although GST is a huge reform, the current version is an incremental reform, which shows us the path to the ultimate destination of having a perfect GST. It is hard to say whether Indian can achieve a perfect GST, given the inherent complexities of our structure, but going forward we must hope that we move closer and closer to the target. Here's hoping that the GST Bill is not an example of a half-baked and a vague reform

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