GST-Will the common man benefit?

Oct 2016 , by , in Latest News

GST- Will the common man benefit?

Since its announcement, the roll out of GST had faced innumerable hurdles. Finally after 10 years the bill cleared Lok Sabha in May 2015 and on Aug 03, 2016 it was passed by the Rajya Sabha. Will GST be the real game changer or is the so-called biggest tax reform over-hyped?

If all goes well, The Goods and Services Tax (GST) is likely to be implemented from April 2017. It promises to eliminate the cascading burden of existing taxes on the businesses, minimizing the compliance costs through uniformity of tax rates and procedures across the country.

The idea of GST (to be levied across goods and services at the point of consumption) is to subsume most indirect taxes under a single taxation regime. This is expected to help broaden the tax base, increase tax compliance and reduce economic distortions caused by inter-state variations in taxes.

How the world does it

More than 160 countries have introduced GST. In EU, known as Value Added Tax (VAT), it has been a part of the tax system for past 50 years. In the Asia-Pacific region, it is a preferred form of indirect tax.There are different models of GST used by every country, Singapore virtually taxes everything at a single rate; some countries have more than one rate (a zero rate, certain exemptions and higher and lower rates) like Indonesia that has five positive rates, a zero rate and over 30 categories of exemptions.In some countries, it is recoverable only on goods used in the production process and specified services. Such as China where GST applies only to goods and the provision of repairs, replacement and processing services. It is only recoverable on goods used in the production process and GST on fixed assets is not recoverable.The three models widely implemented are:

  • Centre collects the tax – This is the system prevalent in developed countries like Australia, where the centre collects the tax on behalf of both the states and centre and distributes as per the consumption survey of different states.Given the fiscal autonomy of the states as per the Constitution,India cannot have this kind of GST.
  • States collect the tax – The model only prevalent in Canada’s Quebec region, entails the state to collect tax and give it to the Centre. In India, the Centre has control over defence, external affairs and finance and therefore, outsourcing the revenue collection to the states is not possible.
  • Both Centre & States collect – The Empowered Committee of State Finance Ministers found this model to be apt in the Indian context. Brazil too follows dual GST model which divides revenue collection between the centre and states.

“No country of comparable size and complexity has attempted a tax reform of this scale,” Harishankar Subramanian, Ernst and Young.

The Indian GST

According to the experts GST will boost the country’s GDP by 2% points. The uniformity of taxes will help businesses grow and take advantage of economies of scale. Also, the provision of tax credits will encourage more businesses to file taxes enlarging tax paying base.

The Indian GST system includes two taxes — Central GST collected by the Centre, State GST collected by the states. The complication arises as the consuming state collects the tax and not the manufacturing state. As per the amendment, the centre will compensate the states for initial five years but the long term implications are still to be seen.Differences can easily flare up between the centre and the states over the tax-sharing arrangements.

Moreover, lucrative items like alcohol, tobacco aviation turbine fuel and petrol goods as well as electricity and real estate have been left out of the GST and will have separate taxes resulting in some cascading effect.

GST is an electronic transaction tax and the preparedness of the IT infrastructure at the grassroots level will be a challenge. Government has roped in Indian software giant Infosys to help build the electronic infrastructure but, in terms of IT ability not all states are at the same level.  Businesses especially the small businesses and individual tax payers too would have to gear up accordingly.

The standard GST rates in most of the countries ranges between 15- 20% and is 22 -25% in Scandinavian countries where social security coverage is higher. In India, the panel headed by chief economic adviser Arvind Subramanian has proposed GST 17-19% but, several states have suggested the GST rate over 20% to minimise revenue losses. The government favours an 18% GST rate and rightly so, as a steep tax could stoke inflation.

Where the real estate stands

The real estate industry contributes about 7.8% to India’s GDP and is closely linked to allied sectors  such as cement, steel, IT, BFSI (banking, financial services and insurance) etc. so, any impact on these industries would bound to have ramifications on the real estate business which is yet to be seen.

For the developer, GST will reduce the complexities and help increase tax-related compliances. Also, completed projects are less likely to be affected by the bill as the buyers have already paid the taxes but the prices of under-construction projects may see an increase if the GST rate is higher than the existing cumulative taxes.However, the biggest dampener for the real estate buyers is the non-incorporation of the stamp duty in the GST.

The verdict is still out

A less-than-perfect GST is any day preferable than the current inefficient and fragmented tax structure. There is a possibility of improving the same as we go along, but the current demand of some states for GST standard rate 22-24%would prove to be inflationary and a burden on people.

Executing the technologically complex new tax system could be fraught with glitches and the implementation timeline of start of next financial year seems doubtful. But, once functional, GST will convert the country into a unified market, lead to tax buoyancy and can be a big push towards ease of doing business.

The concerns of the common citizen are about the services getting costlier and the fear of additional taxes in future.  While, the unified market which will benefit large-scale producers, the future of unorganized sector that employs almost 90% of the workforce is left hanging in the balance.


Sapna Srivastava

Editor, Realty Plus

About Shubham Singh