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7 things to know about GST Bill
The Cabinet on Wednesday cleared the Constitutional Amendment Bill on a nationwide Goods and Services Tax (GST). The implementation of GST is touted as the biggest taxation reform. A single tax nationwide is expected to replace a complex web of central and state-level taxes, ease movement of goods across states and expand India's economic growth.
Here are some key things to know about GST:
What is GST:
The Goods and Service Tax (GST) is a new form of indirect tax which will replace others like service tax, sales tax, octroi, central and state sales tax imposed under the current multi-tax system. It was expected to be a single tax levied by the central government on the production of goods and services. Currently, each state imposes a different tax. So, each state was counted as a different market by businesses. It is a huge task to move goods from one state to another due to differential taxes. GST will remove such demarcation and create a unified market. This is expected to help ease movement of goods across states and reduce costs for businesses.
The proposed GST is expected to be a dual-tax. It will be levied by both the central as well as the state government. This is a departure from the original plan for the GST to be a single tax. As per the initial report by GST committee, central GST and state GST were proposed at 10% each, a report by Kotak Securities said. "However, most experts believe GST rates could settle at anywhere between 20% and 24%. Service tax rate is likely to go up from 12.36% to 16%," the report added. A Financial Express report also suggests that 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.
State revenue compensation:
Currently, the state government has a separate tax structure from the central government. State tax rates are often higher than the central government's rates. The GST - levied by the centre - was to replace the state taxes too. This means state governments would lose out on key revenue. This is why they have been at loggerheads with the central government for compensation. Finally, the central government has decided to compensate the states for all the losses incurred in the first three years. Further, it will pay 75% and 50% of the losses in the fourth and fifth year respectively.
Exceptions to GST:
The state governments wanted to exclude taxes on petroleum and alcohol products from the purview of GST. This is because, these items account for significant portion of the state's revenues. This was a key issue of discussions between the centre and the states. It has now been decided that alcohol will be exempt from GST. Petroleum products too will be excluded from GST initially. It would be slowly included in the purview of GST later.
Implementation of GST:
The new tax aims to replace the current indirect tax structure. This requires an amendment to the Constitution. The Bill to make such an amendment needs to be approved in Parliament and then cleared by at least half the state legislatures. Only then, it can be implemented.
Challenges to GST:
The Goods and Service Tax will bring new businesses into the tax net. This means that the current administration and tax bureaucracy would have to deal with a higher number of tax assesses. This could be a key challenge, especially because the tax departments of all the state and central governments would have to co-ordinate and work in harmony.
Companies to benefit:
The implementation of GST is expected to reduce cost of logistics. This includes costs of transportation as Octroi tax will not be levied separately. A complicated tax structure increases the overall costs for companies. "Logistic costs form 14% of value of goods in India versus 7-8% in developed countries," the Kotak Securities report said. The implementation of the GST is expected to simplify the tax structure and make the supply chain more efficient. This would narrow the cost differentials between organized and unorganized sector. The organized sector would be in a better position to compete with the unorganized sector on prices. This could shift demand to companies in the organised sector from unorganised players. Hence companies like Finolex Cables, Havells etc that compete with uroorganised sector in products like cables, wires could stand to gain.
Rs 34,000 crore
It is expected that state governments may lose revenue worth Rs 34,000 crore, according to a report byFinancial Express. This is because state governments earn nearly half of their total revenues through tax collection on petroleum products. The centre will compensate state governments for this loss of revenue for three years.