Goods & Service Tax (GST) now closer to reality

One of the biggest taxation reforms in India -- the Goods and Service Tax (GST) -- is all set to integrate State economies and boost overall growth.

GST will create a single, unified Indian market to make the economy stronger.

Finance Minister Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010.

The implementation of GST will lead to the abolition of other taxes such as octroi, Central Sales Tax, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, etc., thus avoiding multiple layers of taxation that currently exist in India.

But just what is GST all about and how will it impact you?

What is GST?

Goods and Services Tax -- GST -- is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level.

Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.

The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain.

Experts say that GST is likely to improve tax collections and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate.

What are the benefits of GST?

Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.

It is expected to help build a transparent and corruption-free tax administration. GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).

Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold.

How will it benefit the Centre and the States?

It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.

What are the benefits of GST for individuals and companies?

In the GST system, both Central and State taxes will be collected at the point of sale. Both components (the Central and State GST) will be charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies.

The contentious issue of Central Sales Tax compensation has been resolved with state governments agreeing for a lower payment of Rs. 34,000 crore for phasing out the CST, a precondition for rollout of the Goods and Services Tax (GST). CST is a tax imposed on the inter-state movement of goods.

"The amount of compensation for three years - 2010-11, 2011-12 and 2012-13 - was about Rs. 34,000 crore. The Centre has agreed to pay this compensation amount to states," Bihar's finance minister Sushil Kumar Modi said.

According to the resolution, the Centre would bear 100 per cent of the loss accrued to states in 2010-11 fiscal on account of lowering of CST. However, for 2011-12 and 2012-13 fiscal, the Centre would give 75 per cent and 50 per cent of the losses to the states.

CST was reduced from 4 per cent to 3 per cent in 2007-08 and further to 2 per cent in 2008-09 after the introduction of Value-Added Tax (VAT).

The Centre had then promised the states that it would bear losses due to reduction of CST.

"However, the promises were not kept," Mr Modi said adding the Empowered Committee accepted a central proposal to reduce the rate of compensation for early payment.

The committee set up by Finance Minister P Chidambaram to resolve the CST issue had suggested that the payment of Rs. 34,000 crore be made to the states towards losses on account of phasing out of CST.

The CST was to be phased out totally after the introduction of GST, which was originally scheduled to be launched from April 2010.