Vol 3 | Issue 3 | July 2016

GST: WHEN AND WHY?
Dr. Mandeep Mahendru*
Goods and services tax (GST) is India’s most ambitious indirect
tax reform plan so far, aiming at making it comprehensive as nearly all
goods and services will be taxable, with minimum exemptions. GST may
prove out to be a game changer by creating seamless uniform market,
dismantling fiscal barriers between states, which in turn will help reduce
the cascading effect of tax on goods and services.
GST which got through Lok Sabha on 6th May, 2015, is a tax levy on
manufacture, sale and consumption of goods and services at a national level. GST is a value-added tax
levied on goods and services (except the list of exempted goods and services) that is paid by the final
consumer while the retailer takes credit of the tax he has paid when buying the goods for retailing. In
this way, all the services of retailer or the chain behind him are taxed apart from the actual value of
production of the commodity. It is proposed to be implemented as a dual GST. At central level, it will
be called CGST and at the State level, it will be known as SGST. The rate levy will be decided mutually.
A lot of debate is going on the need for GST. As another level of tax reform, GST is going to screw
up the tax system in the country. Tax policy of any country plays vital role in bringing efficiency and
effectiveness in the economy. In the past, India has relied too much on the indirect taxation system
because of agrarian economy, low level of income and lack of reliable system to track personal income.
From time to time, Government comes out with various policies to bring tax reform to simplify and
strengthen the tax structure. One such step towards the simplification and rationalization of Indirect
tax structure was taken by introducing VAT. Citizens of India welcomed this step and VAT has become
a very popular tax. Very soon, people identified shortcomings in the structure while levying VAT at
both centre and state level. CENVAT also has a limitation of non inclusion of several taxes such as VAT,
Surcharge and the like.
To address such issues, GST as a part of comprehensive tax reform to ignite the harmonized
consumption system, has been proposed to which the lower house has given its nod, but is still waiting
in upper house. GST has been well accepted around the world with more than 140 countries in
agreement where GST rate ranges between 15 to 20%. Going to be a single tax levied on goods
and services being sold, GST will eliminate multiple taxes like CENVAT, Central sales tax, State sales
tax, Octroi etc which will help in reducing tax evasion and lead country towards economic growth.
The single taxation is going to put rest to the debate about republic and federation of the states
where goods can freely move within the country broadening the thinking of the corporate to pan
India level. The single tax system will lead towards increased transparency, less paper work and less
accounting complications, leading to more competition among the manufacturing sector proving
beneficial for the consumer. The efficiency will increase as a result of uniform taxation system since
state specific advantages will go. The simpler the tax, more will be the compliance. By removing the
cascading effect, layers of taxes and simplifying structures, GST will bring simplicity, more compliance
and will help in widening the tax base. With GST, the cost of the production in domestic economy will
fall leading to global competitiveness of manufacturers. According to expert bodies, GST will boost
India’s economic growth by nearly 1 to 1.7%..
In terms of growth, the macroeconomic impact of introduction of GST will really be significant.
A shift from income to consumption-based taxation will surely increase the revenue of the country
which in turn will increase the investment. In turbulent times when the fiscal deficit management is
critical, a complete failure to implement GST will surge the fiscal deficit to around 4% during FY16-17.
The need of the hour is to take care of certain issues including taxation on interstate services, stock
transfers, and integration of central and state taxes before moving further.
*Dr. Mandeep Mahendru is a Faculty Member in the area of Economics at IBS Gurgaon
4 SAMVAAD | Vol. 3 | Issue 3 | JULY 2016