India’s transformational GST has some hits, few misses

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There were certain basic objectives of introduction of GST. One was to substantially reduce, if not eliminate, the cascading of taxes by providing seamless flow of input tax credit in the entire supply chain. The second aim was to cut down the compliance costs by clubbing together seventeen indirect taxes of Center and States like Central Excise, Service Tax, and State VAT etc. These two targets have been achieved substantially, except that five Petroleum products and Alcohol for human consumption could not be brought within GST. The third aim was to reduce the logistics and transportation costs. 

In the pre-GST era, worst thing was the Central Sales Tax (CST) for inter-state trade because CST could not be taken as credit and hence was a cost that was added to the value of goods. Therefore, often there was a business compulsion for tax-avoidance or tax-planning by having warehouses at different states to facilitate ‘stock transfer’, since stock transfer was not a sale and hence did not attract CST. In the GST regime, there was no such need since the Integrated GST (IGST) for inter-state trade provided credit facility. This started the process of consolidation of warehouses and consequent savings on cost. The other disruption was stoppage of trucks, examination of goods and collection of Entry Tax or Octroi at the inter-state check posts.

This led to delays and malpractices, thus adding to costs. Abolition of Entry Tax and imposition of same rate of State GST (SGST) for a particular commodity across the states made these routine checks unnecessary and hence the check posts were abolished. Consequently, transportation time came down sharply leading to savings. The fourth aim was to make India a Common Economic Market. In the pre-GST era, India was not a common market; State VAT rates were different in different states. In the GST regime, for one particular commodity, the rate of GST is same across the country. Besides, Entry tax and inter-state check posts were ideas contrary to Common Economic Market. Therefore, one can now look at India as a ‘Common Economic Market’.

The fifth aim that stemmed from the collateral benefit of the structure of GST was to have equitable growth of industry across the country While some states like Karnataka Gujarat equitable growth of industry across the country. While some states like Karnataka, Gujarat, Maharshtra etc. were highly industrialised, there were the populous states of Bihar, U.P., Odisha, West Bengal, Kerala etc. that lagged far behind. GST being a destination based consumption tax, in a case of interstate trade the state’s share of GST accrues to the destination state.

 Therefore, the destination consumption states like U.P., Bihar etc. will have extra revenue from IGST, besides their own SGST for intra-state trade. Since these states would get richer in revenue, it is expected that this extra revenue would be spent in development of infrastructure and power generation, the two fundamental requirements for industrial growth. Thus, in course of time, all these populous states would also become industrialised, and that would make the program ‘Make in India’ successful. Green shoots are expected in two or three years more.

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