GD Topic: Should Indian Government Implement GST (Goods & Services Tax) ?

Background of GST (Goods and Services Tax)

GST has been proposed in the Indian Parliament few months back and economists are deep diving to study its implications and feasibility of implementation throughout the country. Implementation of GST has been passed by one house of the Indian parliament but awaits approval from the other house.The Idea of GST was introduced long back but due to lot of issues in implementation the government is trying hard to amend the constitution and take it though.

What is GST?

GST stands for Good and Services tax. At present, India has two broad categories of taxes:

1. Direct Taxes (eg. Income tax, Wealth tax) – The liability of these taxes cannot be shifted.

2. Indirect Taxes – Liability can be shifted.

• Central VAT

• State VAT

• Service Tax

The bottom line of GST is to curb the payment of ‘tax on tax’ i.e. double taxation.

If GST is implemented, consumers shall pay taxes only on the ‘new’ value added just like the VAT.

Under the current tax structure, state government only levy taxes on goods while central government levies taxes on both goods and services. In new emerging industries, such as ecommerce, it is difficult to distinguish between products and services. Thereby, GST will help unifying taxation throughout the country.

Indian GST will have following distribution:

1. Central GST

2. State GST

3. Integrated GST (This is a special tax that one has to pay for interstate transaction which is 1% which is to be decided by GST council after 5 years if they wish to continue or abandon it)

Why should government implement GST – Benefits of GST

1. GST will bring tax consistency throughout the country.

2. It will allow free movement of goods from one state to another.

3. The cost of product from across states will almost be the same thereby providing equal opportunities of business owners in all states.

4. The cost of the product for the manufacturers will come down as double taxation will be minimised.

5. A reduction in these cascading taxes increases the incentive for more consumption, leading to higher revenues which compensate for the reduction in tax rates.

6. With consumers having more money in their pockets, the GDP is set to increase.

Why should government NOT implement GST – Disadvantages of GST

1. From a consumer standpoint, there is no worthy disadvantage of implementing GST. However, few businesses may suffer.

2. Businesses where cost advantages lies within states will suffer and lose their core competency. e.g. VAT in Bangalore, Chennai and Hyderabad are lowest at 5% and it helps firms to provide products all across India at price which other states cannot meet due to higher VAT rates in other states. This is the reason why all eCommerce firms have their biggest fulfillment centers in these three cities.

States will suffer huge loss with implementation of GST as they will lose price advantage for common commodities available nationwide. Government has reached to conclusion they would still be paying any  revenue loss hereafter to each state for a period of 5 years from the date of implementation of GST.

3. The biggest contradiction comes with the fact that, on one hand, the government is pushing Digital India movement and boosting eCommerce, whereas on the other with GST its making tough for businesses to operate at a nationwide scale.

Recently eCommerce companies have requested government to keep aggregators out of GST.