Primer on India’s Goods and Services Tax

If there is one area of economics which I would want to improve, it is taxes. I just don’t understand them at all. I just understand (that taxes are critical in every macroeco/fin eco equation/identity) the basics and the famous dictum – Nothing is certain but death and taxes. But with all those regulations and rules, it just gets too much for me. I understand VAT but that is just it. I don’t know the details at all which is very important as VAT is justa  theoretical concept. The practical aspect lies in details.

So, when the Goods and Services Tax was initiated by Indian Fin Min in 2006 Budget speech, I just gave it a big miss. He said:

It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate.

Now as talks abiout GST picked up, I was like what is this? Thankfully Google helped.

I found this excellent primer by Sudhir Halakhandi, a Chartered Accountant. Basically it is a VAT system which would cover entire spectrum of goods and services. So no separate Services Tax, Excise Duty, Tax on Interstate sales and current VAT. Halakandi points that as states tax goods and centre services, states will find it tough to forgo their powers. His small note also gives a detailed analysis of how the input-output system will work. So now I atleast know the basics.

Dr Vijay Kelkar has also given an excellent speech (his speeches) detailing design issues and the need for business associations to help develop this important reform. The benefits are quite large:

Much can and has been said on the merits of the GST. It will bring about a phase change on the tax firmament by redistributing the burden of taxation equitably between manufacturing and services. It will lower the tax rate by broadening the tax base and minimizing exemptions. It will reduce distortions by completely switching to the destination principle. It will foster a common market across the country and reduce compliance costs. It can provide a fiscal base for local bodies to enable them to fulfill their obligations. It will facilitate investment decisions being made on purely economic concerns, independent of tax considerations. It will promote exports. A recent study on the impact of GST on foreign trade indicates that the rate of growth of exports will be significantly higher than that for imports. CST will also promote employment. Perhaps, most importantly, it will spur growth. As I have mentioned elsewhere, it has been estimated at the GST implementation increased Canadian GDP by 1.4 percent. In India, we can expect a similar kind of positive impact. This means gains of about 15 billion dollars annually. Discounting these lows at a modest 3 percent per annum, the present value of the GST works out to about half a trillion dollars. This is indeed a staggering sum and suggests the need for energetic action to usher the GST regime at an early date. I will attempt to address important questions relating to effective implementation of the GST regime.

Good stuff.

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5 Responses to “Primer on India’s Goods and Services Tax”

  1. Primer on India’s Goods and Services Tax | www.business-on.info Says:

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  2. Primer on India’s Goods and Services Tax « acc3ss.info Says:

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  3. CA SUDHIR HALAKHAND Says:

    Good wirte up and further thnaks for making reference of my article “Goods and service Tax-An Introductor Study published in ICAI CA Journal in 2007- CA SUDHIR HALAKHANDI

  4. Taxation services india Says:

    Good Article, I liked your article and your description is also good. I would love to read your further posts.

  5. Tax Guru Says:

    I’ve been active in taxations for lengthier then I care to admit, both on the personal side (all my employed life story!!) and from a legal stand since passing the bar and pursuing tax law. I’ve supplied a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes impeccable sense. Please uphold the good work – the more individuals know the better they’ll be armed to handle with the tax man, and that’s what it’s all about.

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