It’s almost six months since the rollout of the India’s most ambitious tax reform – the Goods and Services Tax (GST). An indirect form of tax, in theory it is meant to simplify things and bring down prices of goods and services by doing away with the existing plethora of taxes. It is also expected to facilitate seamless interstate trade by eliminating taxes on goods every time they cross state borders.
The main reason for ushering it in is to make it easier for organisations to do business in India, improve compliance and spur sales, all of which will eventually fuel the economy.
But our version of GST is a far cry from an ideal one typically having a single, low rate for all goods and services. Instead revenue and inflation concerns, coupled with wide income disparity, has led to four different slabs of 5, 12, 18 and 28 percent. And the highest slab of 28 percent is also the steepest in the world.
Apart from that, there have been initial hiccups too post rollout that have added anxiety over expectations. So much so, the GST, along with demonetisation and a few other things, have been blamed for slowing the economic growth in the nation in the first quarter of the current fiscal year.
Jumping at the opportunity, opposition Congress leader Rahul Gandhi labelled it as Gabbar Singh Tax (Gabbar Singh was the notorious celluloid bandit Gabbar Singh, featuring in cult movie Sholay). Prime Minister Narendra Modi, on the other hand, defended it calling it Good and Simple Tax.
Good or not, successful or not, perhaps, it’s too early to judge.
Meanwhile, the economic growth which took quite a hit on account of the disruption caused by GST seems to be inching back to normal now (the GDP which hit a three-year low of 5.7 percent in the first quarter of fiscal year 2017-18 has increased to 6.3 percent in the second and latest). And in any case most other countries that implemented it, did not witness a smooth transition either.
While we reserve a discussion on whether the ground breaking tax did the economy any good for latter, when it would be more appropriate, here’s a quick look at some of the key developments post its rollout.
Considerable reduction in the number of items fitted in the highest tax slab
Previously more than 200 items attracted the highest GST of 28 percent. Currently the number stands at just 50. This is a result of the government’s efforts to rationalise the structure of the brand new indirect tax. Realising many items of common use, ranging from chewing gums to detergents, placed in the highest bracket could make them expensive for the general public and thereby hurt demand, it fitted those in the next slab of 18 percent. Ultimately, the highest GST tax bracket will be kept exclusively for luxury goods and so-called sin goods, namely cigarettes, pan masala, aerated drinks, etc.
The government has also removed from the list items made by small and medium enterprises (SMEs) in order not to place a high tax burden on them. Most of them do not have economies of scale and are labour intensive. Besides, they account for a meagre 5 percent of the total indirect tax revenue. Hence the move may not bring down revenue collection.
Another objective of the government going forward is to reduce the number of tax slabs to three from the current four. To that end it plans to merge the two tax rates of 12 and 18 percent.
Formation of National Anti-profiteering Authority (NAA)
To ensure all such rate cuts and overall reduced taxes, resulting from elimination of the cascading effect of taxes and also from removal of limitations on claiming input tax credits, are passed on to public in the form of reduced prices, the government has approved of a board called National Anti-profiteering Authority (NAA). The task of the NAA is to ensure such lowered taxes also result in lower market prices.
In fact, the formation of the body came close on the heels of a dramatic slashing of GST rates for restaurants from 18 percent (AC restaurants) and 12 percent (non-AC restaurants) to a flat 5 percent. This move was necessitated by reports that restaurants were not forwarding the benefits of the input tax credit (ITC) received to its consumers.
For the uninitiated, an input tax credit allows manufacturers and service providers to lessen their tax burden, by enabling them to claim taxes they have already paid on purchase of various inputs. In this way GST is able to bring down the tax on tax effect.