GST: Issues between Centre and states

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GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the Producer’s point and Service provider’s point up to the retailer level. …

GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the Producer’s point and Service provider’s point up to the retailer level.

The Goods and Services Tax is being billed as the significant next step in indirect tax reform since VAT was successfully introduced all over India.

However, in introducing GST, there are some objections from some State governments.

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  • 1. SUBMITTED BY: Group IVAditya BansalSakshi MehraJuhi NegiGandharav MendirattaHarshit Arya
  • 2.  GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the Producer’s point and Service provider’s point up to the retailer level. The Goods and Services Tax is being billed as the significant next step in indirect tax reform since VAT was successfully introduced all over India. However, in introducing GST, there are some objections from some State governments. So, before moving further to the issues between center and states regarding GST, lets understand what exactly is VAT and GST.
  • 3.  VAT is paid by the customer, it is a tax paid on the purchasing price. The amount of value-added tax that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed. VAT is paid on the amount of value added to the product at every stage of production. It was introduced because they create stronger incentives to collect than a sales tax does.
  • 4. BENEFITS OF VAT Reduces tax evasion. Encourages competitiveness of exports. Tax structure becomes easier and more visible. Enhances tax compliance and results in higher revenue growth. Multiple taxes such as turnover tax, surcharge on sales tax, additional surcharge etc. have been put an end to.
  • 5.  GST is basically a comprehensive VAT on most goods and services, where all taxpayers, except the final consumer, get credit on the taxes paid on inputs. Currently we have a dual VAT system — a Central VAT and a State VAT. Since VAT has improved tax collection and compliance, presumably the same will happen when GST at both the Central and State levels subsumes the many remaining indirect taxes (such as entry tax, purchase tax, luxury tax, etc.) at varying rates, that have kept the indirect tax regime highly complicated and unstable.
  • 6.  In this system, the consumer pays the final tax but an efficient input tax credit system ensures that there is no cascading of taxes — tax on tax paid on inputs that go into manufacture of goods. Put simply, GST is levied only on the value-added at every stage of production. The price of any input going into production will have a cost and a tax component. The system ensure that when the final tax is calculated, the tax paid on input is taken out and the tax is levied only on the cost of the good produced.
  • 7.  The principal issues are > The fiscal autonomy of States > The compensation mechanism for possible revenue loss in future If the same GST rate is applied to all States and the States cannot impose any other taxes, some States may feel they would lose the power to raise revenues, especially if they require the funds to come good on electoral promises of distributing freebies.
  • 8.  The Centre is promising to compensate the States for any revenue loss for the first three years after GST is introduced. But, a uniform rate may not compensate the revenue loss for all the States because: - Some states are more industrialised - Some are more agricultural - Some are resource-rich Therefore, some States feel they should have the power to impose supplementary taxes, and at appropriate rates as necessary, even if a State-level GST is introduced.
  • 9.  But the Centre is not in favour of allowing States this freedom as that would undermine the objective of a single market with a uniform stable tax regime. Further, as expenditure on services as a percentage of income typically goes up with a rise in income, the inclusion of services in the GST net will provide more automatic revenue gain, which the States will now share with the Centre.
  • 10.  Well, the GST model would be able to bring a balance in between fiscal autonomy and harmonisation, which is of course better than the present complex system. This would lead to:  Lesser exemptions  Smaller number of rates  Lesser corruption  Greater compliance  Lesser disputes  Lower collection cost and  Higher tax collection
  • 11.  It would also avoid ‘cascading (or tax-on-tax effect) — thereby reducing prices and improving the international cost competitiveness of Indian goods and services. So as to build a consensus and put a good system in place, its better to be slow in bringing up this system instead of pushing it through a mess and haphazard compromise hurriedly.