GST620

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 HeadTax RevenueUnder GSTNot Under GST
Direct Taxes7,48,6437,48,643
Customs2,01,8191,47,41358,1061
Union Excise Duties2,06,3561,28,35690,0002
Service Tax2,15,9732,15,973
State Excise Duty1,00,5771,00,577
Stamp Duty and Registration Fees98,17598,175
General Sales Tax (VAT)5,61,5974,26,6001,35,0003
Taxes on Vehicles43,46943,469
Entertainment Tax2,2942,294
Taxes on goods and Passengers21,27621,276
Electricity duty24,94724,947
Taxes on purchase of Sugarcane186186
Others12,37312,373
Total22,37,6859,20,82213,32,566

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 TaxesState Taxes
Central Excise DutyVAT/Sales Tax
Additional Excise DutyCentral Sales Tax (levied by the Centre and collected by the States)
Excise Duty levied under the Medicinal and Toiletries Preparation ActEntertainment Tax, Luxury Tax
Service TaxOctroi 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.

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.

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."

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, 2014-15
Revenue HeadMaharashtraUttar Pradesh
Tax RevenueSubsumed Under GSTNot subsumed Under GSTTax RevenueSubsumed Under GSTNot Subsumed Under GST
State's Own Tax Revenue
Taxes on Income2,13802,13848048
Taxes on Property and Capital Transactions21,293021,29313,592013,592
Sales Tax69,09051,52617,564147,50034,76412,7361
State Excise11,500011,50014,500014,500
Taxes on Vehicles5,25005,2503,95003,950
Taxes on Goods and Passengers1,09801,098000
Taxes and Duties on Electricity6,50106,5018500850
Entertainment Tax57857805405400
Other Taxes and Duties1,14101,14120020
Share in Central Taxes
Corporation Tax6,73606,73625,493025,493
Income Tax4,79804,79818,160018,160
Taxes on Wealth1601659059
Customs3,1162,336780211,7938,8442,9502
Union Excise Duties2,0122,01207,6157,6150
Service Tax3,5353,535013,38013,3800
Other Taxes and Duties on Commodities and Services51510000
TOTAL TAX REVENUE

1,38,85460,03978,8151,57,50265,14492,358

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.

We welcome feedback. Please write to respond@indiaspend.org. We reserve the right to edit responses for language and grammar.

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