With the Centre and States in India finally reaching a consensus on the details of the Goods and Services Tax (GST), India is set to roll out one of its largest indirect tax reforms. When introduced in April 2016, The Goods and Service Tax (GST) Bill will be a value added tax (VAT). The proposed GST will be a comprehensive indirect tax levied on manufacturing, the sale and consumption of goods, as well as services at the national level. It will replace all other indirect taxes currently in place now imposed on goods and services by the Indian Central and State governments.
Background
The GST will convert the country into a unified market, replacing most indirect taxes into one tax. It will have a dual structure — a Central component, levied and collected by the Centre, and a State component to be administered by the States.
At the Central level, it will include Central excise duty, service tax and additional customs duties while at the State level it will include value-added tax, entertainment tax, luxury tax, lottery taxes and electricity duty. The current Central sales tax (CST) will be completely phased out. Entry tax, or octroi, will be incorporated from the start, but state taxes on petroleum products will continue for a few years after the GST is introduced as per the agreement between the Centre and States. State taxes on alcohol and tobacco will remain.
As with VAT, the tax will be charged on each stage of value added. At each stage, a supplier can offset the levy through a tax credit mechanism. This means the consumer, being the last in the supply chain, will pay the GST.
The rate for GST has yet to be decided, but it’s expected to be in a range to keep exports competitive. A sub-committee of the Empowered Committee of state finance ministers have proposed revenue-neutral rates (RNR) for the Central and State components at 12.77% and 13.91%, respectively, taking the effective GST rate to 26.88%. However, this rate has yet to be confirmed.
Why does India need the GST?
The objective of the GST is to remove the current piecemeal of indirect taxes, which contain mainly exemptions and multiple rates, in order to improve India’s tax compliances. The introduction of the GST in different countries has been one of the most important developments in taxation over the last six decades. With the ability to raise revenue in a transparent and neutral manner, it is not surprising more than 150 countries have adopted the GST.
With the increase of international trade in services, the GST has become a preferred global standard. All Organization for Economic Co-operation and Development (OECD) countries, except the U.S., have chosen to follow this taxation structure.