A truck driver next to his parked truck while waiting to get his loads cleared to cross a checkpoint at the Commercial Taxes Department check post at Walayar in Palakkad district in southern Indian state of Kerala, India. At the Walayar checkpoint, lines of idle trucks stretch as far as the eye can see in both directions along the tree-lined interstate highway, waiting for clearance from tax inspectors that can take days to complete.
About 42% of the Rs 22 lakh crore ($328 billion) revenue of the central government and 35 states and union territories will now be subsumed under the goods and services tax (GST), passed by Parliament's upper house on August 3, 2016 and being touted by some as one of independent India's "boldest reforms".
Around Rs 9.20 lakh crore ($137 billion) of central and state revenue from 15 taxes--from central excise to levies on gambling--in 2014-15 ($1 = Rs 67) will be brought under the GST, scheduled to be levied from April 1, 2017, although the government might be hard-pressed to make this deadline.
| Revenue Receipts Of Centre And States, 2014-15 (Rs. crore) | |||
|---|---|---|---|
| Revenue Head | Tax Revenue | Under GST | Not Under GST |
| Direct Taxes | 7,48,643 | 7,48,643 | |
| Customs | 2,01,819 | 1,47,413 | 58,1061 |
| Union Excise Duties | 2,06,356 | 1,28,356 | 90,0002 |
| Service Tax | 2,15,973 | 2,15,973 | |
| State Excise Duty | 1,00,577 | 1,00,577 | |
| Stamp Duty and Registration Fees | 98,175 | 98,175 | |
| General Sales Tax (VAT) | 5,61,597 | 4,26,600 | 1,35,0003 |
| Taxes on Vehicles | 43,469 | 43,469 | |
| Entertainment Tax | 2,294 | 2,294 | |
| Taxes on goods and Passengers | 21,276 | 21,276 | |
| Electricity duty | 24,947 | 24,947 | |
| Taxes on purchase of Sugarcane | 186 | 186 | |
| Others | 12,373 | 12,373 | |
| Total | 22,37,685 | 9,20,822 | 13,32,566 |
Source: Indian Public Finance Statistics 2014-15, Ministry of Finance, Petroleum and Natural Gas Statistics, 2014-15, Revenue Receipts, Budget 2014-15, Report No. 17 of 2013, CAG of India
[1] Basic Customs Duty, [2] Excise Revenue from Petroleum and cigarettes (2013 data for cigarettes), [3] VAT through petroleum products
(Other taxes have been considered under sources not subsumed, although some might have been included in the GST.)
Industries and commercial enterprises currently pay various taxes at various stages of a product or service, such as manufacture, transport, wholesale, logistics and retail. The administration of these taxes is often tangled in paperwork, contradictory, results in slow inter-state movement of products and increases costs for consumers.
Most of these taxes will be subsumed by the GST, barring a few, such as those on vehicles, roads, property and electricity, as the chart below explains.
| Taxes Subsumed Under GST | |
|---|---|
| Central Taxes | State Taxes |
| Central Excise Duty | VAT/Sales Tax |
| Additional Excise Duty | Central Sales Tax (levied by the Centre and collected by the States) |
| Excise Duty levied under the Medicinal and Toiletries Preparation Act | Entertainment Tax, Luxury Tax |
| Service Tax | Octroi and Entry Tax (all forms) |
| Additional Customs Duty, commonly known as Countervailing Duty (CVD) | Purchase Tax |
| Special Additional Duty of Customs-4% (SAD) | Taxes on lottery, betting and gambling |
| Cesses and surcharges in so far as they relate to supply of goods and services. | State cesses and surcharges in so far as they relate to supply of goods and services. |
| Taxes Not Subsumed Under GST | |
| Petroleum, Tobacco, Alcohol, Vehicles, Road and Tolls, Stamp Duty and Registration, Land Revenue | |
Source: Concept note on GST, Department of Revenue, Government of India
The law enabling the GST must now go back to the lower house, the Lok Sabha, which must clear new amendments brought in by the government to get political consensus, after which it must be ratified by half of all state legislatures.
Simultaneously, the information-technology backbone that the GST will require is getting ready, with software testing set for October 2016, the Economic Times reported on August 3, 2016.
1/4 Passing of GST bill: This is only end of a beginning. The real hard work starts now.
— Dr Hasmukh Adhia (@adhia03) August 3, 2016
2/4 I compliment team of officers of Centre and States who worked hard for last 10 years to see this day today.
— Dr Hasmukh Adhia (@adhia03) August 3, 2016
3/4 We will make all attempts to implement GST asap.
— Dr Hasmukh Adhia (@adhia03) August 3, 2016
4/4 We are ready with state of art IT design for GST implementation. Hardware and software will all be ready for testing by jan 17.
— Dr Hasmukh Adhia (@adhia03) August 3, 2016
Hard to implement, but basic design is ready
It isn't yet clear what the GST taxation rate will be, but 17%-18% is likely. Implementing the GST will not be easy because many taxes and their administration must be disentangled and brought online into a single, nationwide system. However, the basic architecture of such a system has been created.
Our 2010 design of IT strategy for GST which led to GSTN formation. Another leapfrog! @arvindsubraman @thesuniljain https://t.co/JVXXTldVNX
— Nandan Nilekani (@NandanNilekani) August 4, 2016
As that nationwide system is constructed and brought online, tax administrators will also have to be retrained.
"For effective implementation of GST, tax administration staff--both at central and state levels--would require to be trained properly in terms of concept, legislation and procedure," Karthik S and Satish Dedhia, tax experts at PriceWaterhouseCoopers, a consultancy, wrote in Forbes India in February 2016. "The tax administration staff would also need to change their mindset, approach and attitude towards the tax payers. And for this, they would have to ‘learn, unlearn, and relearn’ the GST not only in letter but in spirit too."
I would like to add that GST will also be the best example of cooperative federalism. Together we will take India to new heights of progress
— Narendra Modi (@narendramodi) August 3, 2016
Passing 122 Const. amend. Bill 2014 #GST in RS today is a historic event. It would herald one market-one nation, a way to #TransformingIndia
— Arun Jaitley (@arunjaitley) August 3, 2016
#GST Bill. Quality of debate illustrated Indian parliamentary functioning at its best. 2/2
— arvind subramanian (@arvindsubraman) August 4, 2016
Structural reforms thru GST, Bankruptcy law,Jam trinity, Company law tribunal will make India an easy & simple place 2 do business in. Gr8!
— Amitabh Kant (@amitabhk87) August 4, 2016
FT on #GST: One of the most significant reforms since liberalization began 25 years ago. https://t.co/YJq5N8KXId pic.twitter.com/9Hm32MJgg8
— Sadanand Dhume (@dhume) August 4, 2016
GST has to go a long way, especially clear a dope test without fear of sabotage #GSTBill
— Madhavan Narayanan (@madversity) August 4, 2016
A GST council will control the new tax regime across Centre and states; it will fix tax rates, exemptions and other issues. The Centre’s representatives control a third of the vote in the council.
Two central representatives (Finance Minister and Minister of State for Finance) account for 33.3% of the vote, while 29 finance ministers account for the remaining 66.7% vote, according to the 122nd Constitutional Amendment Bill passed in the Lok Sabha (lower house of Parliament).
Balancing act ahead, but calculations for UP, Maharashtra show it can work
The key challenge for the central government is to ensure both Centre and states benefit from the GST; in other words, get as much as or more money than they currently do.
The Centre is likely to compensate states for lost revenue on ‘goods’ by increasing their share of taxes on services, according to this analysis by the Institution of Chartered Accountants of India (ICAI).
Indian states cannot afford to lose revenue because they are already in debt, as IndiaSpend reported.
Maharashtra, India’s most industrialised state, and Uttar Pradesh (UP), the most populous, expect to get at least Rs 60,000 crore and Rs 65,000 crore, respectively, per year, as IndiaSpend's calculations revealed in December 2015. We found that these figures, based on data from the Reserve Bank of India’s Study of State Finances, are almost equal to the revenue Maharashtra and UP currently receive through a host of taxes, which the GST will replace.
| Expected Revenue Through GST, Based On Tax Revenue For Maharashtra, 2014-15 | |||
|---|---|---|---|
| Revenue Head | Tax Revenue | Subsumed Under GST | Not subsumed Under GST |
| Share in Central Taxes | |||
| Taxes on Income | 2,138 | 0 | 2,138 |
| Taxes on Property and Capital Transactions | 21,293 | 0 | 21,293 |
| Sales Tax | 69,090 | 51,526 | 17,5641 |
| State Excise | 11,500 | 0 | 11,500 |
| Taxes on Vehicles | 5,250 | 0 | 5,250 |
| Taxes on Goods and Passengers | 1,098 | 0 | 1,098 |
| Taxes and Duties on Electricity | 6,501 | 0 | 6,501 |
| Entertainment Tax | 578 | 578 | 0 |
| Other Taxes and Duties | 1,141 | 0 | 1,141 |
| Share in Central Taxes | |||
| Corporation Tax | 6,736 | 0 | 6,736 |
| Income Tax | 4,798 | 0 | 4,798 |
| Taxes on Wealth | 16 | 0 | 16 |
| Customs | 3,116 | 2,336 | 7802 |
| Union Excise Duties | 2,012 | 2,012 | 0 |
| Service Tax | 3,535 | 3,535 | 0 |
| Other Taxes and Duties on Commodities and Services | 51 | 51 | 0 |
| TOTAL TAX REVENUE | 1,38,854 | 60,039 | 78,815 |
| Expected Revenue Through GST, Based On Tax Revenue For Uttar Pradesh, 2014-15 | |||
|---|---|---|---|
| Revenue Head | Tax Revenue | Subsumed Under GST | Not subsumed Under GST |
| State's Own Tax Revenue | |||
| Taxes on Income | 48 | 0 | 48 |
| Taxes on Property and Capital Transactions | 13,592 | 0 | 13,592 |
| Sales Tax | 47,500 | 34,764 | 12,7361 |
| State Excise | 14,500 | 0 | 14,500 |
| Taxes on Vehicles | 3,950 | 0 | 3,950 |
| Taxes on Goods and Passengers | 0 | 0 | 0 |
| Taxes and Duties on Electricity | 850 | 0 | 850 |
| Entertainment Tax | 540 | 540 | 0 |
| Other Taxes and Duties | 20 | 0 | 20 |
| Share in Central Taxes | |||
| Corporation Tax | 25,493 | 0 | 25,493 |
| Income Tax | 18,160 | 0 | 18,160 |
| Taxes on Wealth | 59 | 0 | 59 |
| Customs | 11,793 | 8,844 | 2,9502 |
| Union Excise Duties | 7,615 | 7,615 | 0 |
| Service Tax | 13,380 | 13,380 | 0 |
| Other Taxes and Duties on Commodities and Services | 0 | 0 | 0 |
| TOTAL TAX REVENUE | 1,57,502 | 65,144 | 92,358 |
Source: RBI, Study of State Finances; figures in Rs crore
[1] Sales tax on petroleum products, [2] Proportion of basic customs duty has been assumed as 25% of total customs duty, as per national revenue statistics
(Note: State Revenue Receipts through Alcohol, Tobacco and allied products have been considered subsumed under GST on account of Data unavailability.)
We chose Maharashtra for the analysis because it the state with highest revenue from its own taxes, as a share of total revenue, at 66%; and UP because it has the highest total revenue but no more than 36% from its own taxes.
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