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GST: Paradigm shift in indirect taxation regime

EFFICIENT:The GST Bill underwent a long gestation period, having been first initiated in 2000 by the Vajpayee government.

GST:  Paradigm shift in  indirect taxation regime


Vikas Khemani

The GST Bill underwent a long gestation period, having been first initiated in 2000 by the Vajpayee government. In 2006, the then Finance Minister P. Chidambram announced in his Budget speech that the target date for implementation of the GST Bill would be April 1, 2010, and formed an empowered committee of State Finance Ministers to design the roadmap. However, it was not until May 2015 that the Bill was passed by the Lok Sabha. The Bill was eventually passed by the Rajya Sabha on August 3, 2016, after ratification by the states, received assent from President Pranab Mukherjee on September 8, 2016.

Finally on July 1, 2017 the GST Bill formally came into effect.

Eliminates tax redundancies

The major highlight of the Bill is that it eliminates tax redundancies; a manufacturer pays tax only to the extent of his value addition, not on the whole cost of the good sold, as the raw material supplier would have already paid tax on his goods. Similar tax incidence is applicable on all stages of the supply chain, each paying tax on the extent of value added by them.

In effect, GST eliminates unaccounted for goods in all stages of the value chain. Now this begs a question, why is there so much of hue and cry surrounding the GST and its implementation?

A big positive

Largely the fears are around the uncertainty surrounding how things will work with new procedures and compliances and the impact it would have on sales. All these apprehensions are short-term in nature, over the longer term it is structurally a big positive.

Teething issues

To my mind the fears that consumption will get adversely impacted are inaccurate. Having said that, yes there will be some short-term teething issues as we align to the new framework, and there would be specific impact to certain sectors. Some segments will get impacted for a shorter period of time and probably some industries would change from the longer term viewpoint, but that is the idea behind this reform.

Balanced tax slabs

The other fear that people have is that the new tax regime might end up becoming inflationary. In this regard, I feel the government has been cognisant of this while framing the multiple tax slabs, which have evolved after numerous iterations and criticisms; and are very balanced.  However, there will be things which will be cheaper and those which will get dearer; but on an aggregate basis I don’t expect a widespread inflationary impact, especially in lieu of the fact that the government has signalled its seriousness in enforcing the anti-profiteering clause, if the need arises.

Efficient, better market place

I would like to take you down memory lane when we migrated from the outcry system to online trading and when we moved from physical settlement to dematerialisation settlement. There were a lot of worries around job losses, cost increase, volumes going down. In hindsight, the results are evident. These shifts have created a much larger, efficient and better market place. Certainly, there were impediments at first, and things were uneasy till we got used to it, and eventually it led to structurally smoother, safer and more efficient systems.

Transparency

From the customer point of view, GST ushers in a lot of transparency, and also brings down the aggregate price of goods and services. This is primarily because of the cascading impact of taxes and tax redundancies, whereby the end consumer bears the burden of the incremental taxes.  Secondly, in the earlier scenario, the states had varying taxes and tax rates, under the One Nation, One Tax regime, the tax uniformity gives companies the freedom for setting warehouses and optimising transport costs, the ultimate beneficiary of which is the common man. Lastly, the GST is estimated to increase the GSP by 100-150 bps in the longer run, higher growth, implies more job opportunities and the common man shall stand to benefit from the same.

Remarkable achievement

As India gets into the process of implementing its largest taxation reform since Independence, of subsuming hundreds of different tax rates of thousands of goods and services across all its states and Union Territories into just five tax rates, one must acknowledge this remarkable achievement, against the backdrop of such a vast socio-economic and political disparity across a federal polity such as India. It is said change is inevitable, but progress is optional and GST implementation is a confluence of both.

The writer is President and CEO, Edelweiss Securities. The views expressed in this article are his own

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