The Constitution (122nd Amendment) Bill, 2014, paving the way for Goods and Services Tax, was finally passed in the Rajya Sabha on August 3 (with amendments) and is being touted as the biggest economic reform after liberalisation in 1991. The Lok Sabha had already passed the bill earlier. The NDA claims that it will bring a sea change in the country’s economy and help the poor.
However, the Bill will need to be ratified by at least half of the 29 states before it comes to the president, who will then form the GST Council that will ultimately decide the tax rate. The NDA government wants to implement the Act by April 2017.
- GST is expected to remove a plethora of indirect taxes at the state and central government levels. There will be a single comprehensive tax structure.
- It will help business through one tax structure across the nation
- This will also simplify business across states. Transportation of goods will be easier.
- Multiple taxation leads to corruption which will now be reduced.
- All transactions involving GST will be computerized, thereby instilling and ensuring transparency.
However, there are still many sticking points that may dampen the positive effects of GST. For example:
- Implementing GST itself is a humungous task. BBC calls it the “most complex tax structure” in the world.
- Only bigger manufacturers are likely to get advantage out of GST. Whether they will pass on the benefits to the consumers is a big question.
- GST could have a negative effect on the unorganized sector. This will hit employment in this crucial sector.
- The GST Council comprising the center and state governments is tilted heavily in favour of the
central government with 33 percent representation. Thus, the centre will have the power of veto on any tax suggestion and the states will be at the mercy of the centre for increasing tax rates.
- It is expected that the taxes will go down at the state level. Which means that revenues of the states will also fall. How will then the states survive? Where will they have the money to invest in welfare schemes, on education, on health, etc? They will perforce increase taxes in areas not covered by GST. This will lead to regular inflation.
- Prices of essential commodities could go up although the government claims it will come down once the GST settles in.
- The EU and the US have rejected GST as it adversely affects financial federalism.
Lead picture: Happier times for FM Arun Jaitley. But the road ahead on GST could be tricky. Photo: UNI