Praise Be To The Tax Gods

Ask anyone in India about the taxes that we pay and you see their eyes well up in tears, followed by a sense of exasperation and a rant about the tax structure that rivals Shoaib Akhtar’s tirade against Misbah ul-Haq on TV.  Heck, you can’t blame us.  The amount of time we spend calculating taxes and seeing it cross the actual price many times over make us feel terrible (see airline ticket prices). The Goods and Services Tax, could thus be the messiah that the poor taxpayer has been waiting for to deliver him from sin, sin of a kind that isn’t really the taxpayer’s fault considering the current system is complicated that being able to follow it to the tee is more complex than unravelling the wires of three pairs of earphones that have been lying in your pocket for weeks.

The GST is a kind of Value Added Tax, the mechanism of which we shall discuss later.  There are a number of changes however that have been brought about as per the 122nd Constitutional Amendment Bill. A few salient features are:

  1. An introduction of a dual GST model so as to ensure federal autonomy between the centre and the states.
  2. Both Centre and State will have concurrent powers as per Article 246A which is to be included in the Constitution
  3. An exception to the concurrent tax set-up is the IGST or the Integrated Goods and Services Tax which allows only the centre to levy taxes on interstate trade. The centre can charge an additional cess not exceeding 1%.
  4. The GST has in fact been defined as a tax on all goods and services excluding alcohol for human consumption
  5. Establishment of a GST Council under Article 279A. The council will be formed by the President within 60 days of the Act coming into force and will consist of the Union Finance Minister (as Chairman), the Union Minister of State in charge of Revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each state government.
  6. The functions of the GST Council include making model laws, making recommendations regarding taxation on certain goods and services. The GST Council is to decide when GST would be levied on petroleum crude, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel.

The Goods and Services tax aims to cover all indirect taxes.  Here, the tax burden falls on the end consumer, even though it is charged at all stages of production.  The GST works on a system of ‘input tax credit’.  In such a system, a manufacturer would in theory have to pay a tax at a percentage fixed, say x% on two goods costing Rs A and Rs. B.  Thus the tax payable would be x(A+B).  At the next stage, the next seller would add say y% and thus his final tax would be yx(A+B).  However, having already paid the tax of x(A+B), he would already have a credit to his name.  The final burden falls on the consumer, who will pay the entire amount to the seller at the previous stage, who will in turn pay upwards.  Thus, the tax burden moves in a manner opposite to whom it is levied on.

Considering the fact that the GST will make payment of taxes much easier, something that is needed (you only need to open the Income Tax Act to see that, or meet a CA), it could be the most fundamental piece in making India a business friendly destination.  The Bill has already been passed in the Lok Sabha and requires passage by half the states in the Rajya Sabha as well as the consent of 2/3rd of the States present and voting.  The government seems confident and if all goes well, then the current tax set up should be modified by April 2016.

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