GST & its effects

GST & its effects

Question: GST has been viewed as a deterrent for cooperative federalism. Discuss the various facets of this GST debate.

About GST

• GST is a tax reform which is the same as VAT with a wide base

• While VAT is imposed on goods only, GST will be VAT for both goods and services

• In the present tax regime, sales of goods but not services are taxed by the states

• GST will usher in uniform tax rate by subsuming an array of indirect taxes under a single rubric

• It will also facilitate tax administration, improve compliance and eliminate economic gaps in production, consumption and trade

• GST will also avoid cascading of taxes thereby cutting production costs and making exports more competitive

• GST will add 2% to national GDP according to some estimates

• GST however, will adversely impact fiscal and political autonomy of states
How the States Will Suffer?

• Centre will administer the CGST while states will administer the SGST

• Some curtailment of the freedom of states is a foregone conclusion; states will not be able to move a commodity from lower to higher rate or place it in the exempt category

• Rates for CGST and SGST will be fixed by the GST Council causing states to lose their right to tax commodities at rates they want

• Tax and tax rates will fall outside the state’s control; this is a serious issue considering that sales taxes account for close to 80% of the state’s revenue

• Political economy of the state will be threatened as a result of this

• Imposition of uniform tax regime could harm welfarist states with social service agenda

• GST will widen the tax base and make it identical for centre and states and it is tax on consumption seeking to institute a uniform rate on all forms of consumption; this works best when exemptions are zero or minimal; once implemented GST regimes tend to move towards higher rates and fewer exemptions

GST: Arguments in Favour

GST has been supported on account of the following reasons:

• It simplifies tax administration
• It ensures compliance is easier
• It prevents a cascading effect and could add to GDP

GST: Arguments Against

• The GST reduces fiscal and political autonomy of states
• States cannot exempt some goods and services
• It also lowers the state’s source ability to raise money for welfare
• Moreover, indirect taxes such as GST burden the lower income groups more

Facts and Stats

• In the year 2010, the 13th Financial Commission recommended GST of 12%
• This is a revenue loss for states as VAT is 13 to 14 percent
• In 2014, state governments mooted revenue neutral rate of 27%
• This is a massive tax burden for wage earners