The Goods and Services Tax (GST) is being discussed fervently today because the Rajya Sabha passed something. Typically what the Rajya Sabha has been doing in the last few months is to scream and shut down because of some protest or the other, which means the fact that it got anything done is, by itself, a cause for celebration. But this is different.
What the GST will do, we will come to later. But it’s important to understand this:
- What has been done is to allow the government to create a tax called the GST. This requires a constitutional amendment, since the constitution doesn’t say anything about a common GST.
- The amendment, which allows a concept called the GST to happen, and is not actually specifying the actual GST (which comes later as a separate bill) has been passed by the Rajya Sabha.
- It now comes back to the Lok Sabha which shouldn’t take too long to say okay since everyone else is on board
- Then it goes to the president who will ask the states to participate.
- Now all states – okay, 50% of them – have to say okay to this amendment. Because in India you can’t just change the constitution – any changes have to be ratified by half the states out there. And ratified means 2/3rd majority
- Then it goes back to the president for a final okay.
- This means the constitution has been amended. That’s all.
- Now comes the REAL GST BILL. Till now we were only talking of allowing such a bill to happen.
- The real GST bill will go through a parliamentary committee who’ll probably suggest changes, throw all sorts of objections and so on. This will have to be introduced in the houses in the winter session.
- If there’s some agreement, the bill will be voted on in the Lok Sabha and Rajya Sabha.
- After that, there some more okays by states and back to the president for assent and so on. States have to pass their own GST bills alongside with the GST, which is important otherwise the GST can’t function properly.
If things go right then we might see this bill implemented as an act by 2018. They’re trying for 2017 but the implementation will have glitches as all the taxation agencies have to bring their software together in a very short time.
What Does The GST Do?
You have all these taxes. Central Excise, which manufacturers pay. Then VAT which is paid by wholesalers, retailers alike. Then there’s service tax which non product manufacturers pay. When you buy from any of them, you pay the tax, and they offset the amount they’ve already paid when procuring the materials and only pay the rest.
But there are glitches. What you pay as VAT inputs cannot be offset against excise duty. These are different systems. Service tax payers cannot offset VAT. and so much more.
The GST replaces all these taxes with a single tax. You can offset input taxes with your output collections of tax, so you have a smaller hassle. With a single GST, your interstate transport becomes easier if you dont have to pay entry/exit taxes to each state. And eventually in some cases you pay less – like in buying FMCG goods, you are implicitly paying about 25% of MRP as Excise + VAT. A lower rate (probably 18%) will cut down the tax substantially.
Who’s benefited, who’s not?
It’s too early to say. Let the actual bill come. Let’s see the rates. There’s talk of an 18% rate. That will be high enough to cause inflation because too much will go up (services, telephone bills, bank fees etc) and too little will fall (FMCG and some durables). There’s talk of a much higher tax for luxury vehicles, flat screen TVs and what not, at 40%. That’s also going to be inflationary.
If states push for a 20% rate, then things will look really bad.
If parties don’t easily agree on the GST bill itself, the government might have to do stuff that is even more harmful, like allowing states to add taxes to stuff that currently comes in GST’s ambit and so on.
So let’s leave that for later.
Why the Hullaboo About GST Then?
Honestly, we don’t know. This is just the start. We have the whole journey that needs to be covered. So we won’t rejoice just yet.
Except there’s one thing that’s delightful. The Rajya Sabha actually passed something. Now that’s something worth writing about.