The GST Bill May Get Passed, But Acceptance Will Take Time
Political concessions made by the government may mean that the full benefits of a single GST may not be realised.
It is said to be the biggest tax reform since Independence. The government says it will usher in a pan-Indian marketplace, do away with multiple taxation and reduce corruption. GST or a single tax on goods and services will also add 2% to India’s GDP, according to Finance Minister Arun Jaitley.
The Modi government is leaving no stone unturned to ensure the passage of the GST Bill, being discussed in the Lok Sabha this week. But the political concessions it has had to make mean that India may not derive the much-promised full commercial benefits of a single GST.
Here are some spoilers industry is worried about:
GST Rate: Recently, a GST sub-panel suggested that the GST rate should be pegged at 27%. This basically puts it at par with the existing rate, (Excise 12.5% plus VAT 12.5% - 15%) which means there will be no savings for businesses across the country. The Finance Commission had suggested a rate of 12% across all products and services, but the states do not appear to have accepted this since the exclusion of big-grossers alcohol and petroleum products from GST would require a much higher ‘revenue neutral’ GST rate. The global average for GST is 16.4%.
Alcohol, Petroleum products etc: States, like human beings dislike uncertainty. Most states want to retain control over revenue from lucrative sectors like alcohol, real estate and petroleum products because they are unsure of how much money they will lose by moving to GST. Moreover to pacify them (and ensure the Bill gets passed) while these categories have been included under GST based on industry considerations, they have been agreed to be excluded from GST laws in the initial years of implementation.
Extra Levy: The concept of a revenue neutral rate sits at the heart of GST. It says that neither states nor the Centre should lose any revenues on moving to GST. As GST is a consumption based tax, manufacturing states like Maharashtra and Gujarat are apprehensive of losing tax revenues. A 1% levy has thus been introduced which will be retained by the state (much like sales tax) with the GST going to the Centre. While it may make some states happy, it will push the GST rate up a further 1%.
Services: While there is no confirmation yet on how services will be taxed, there is a fear that services may be taxed at a higher rate. Given that the rate is currently 12% (to be revised soon to 14%) this would mean a significant jump.
But while far from perfect, tax experts say in the long run the benefits of GST will be substantial. “While introduction of GST in India is a welcome step, it would be a process and not a one-time occurrence. Over the years more sectors and products such as real estate, petroleum and alcohol and several other taxes such as the stamp duty and electricity duty may ultimately fold into the GST regime. The GST regime in it’s true form may take 5 years or more to stabilize and evolve into the desired comprehensive indirect tax regime in the country,” said Rajeev Dimri, Partner, BMR & Associates.
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