3/4/2017 What is GST and how it will affect you

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What is GST and how it will affect you

August 3, 2016, 3:43 PM IST Sanjiv Shankaran in Cash Flow | India | TOI

The Rajya Sabha has cleared a constitutional amendment to bring about a system of Goods and Services Tax (GST) in India. It
is perhaps the most important economic reform item on the Narendra Modi governments agenda. This is one reform which
affects all of us.

It also happens to be a complicated reform as most taxation matters usually are. This blog attempts to present an overview
on GST and explain why it is expected to make a difference to all of us.

How is Indias tax system structured today?

The constitution divides taxation powers between centre and states. Both levels of government have some exclusive areas
where they can levy tax. Income tax, which includes tax on company prots, is the exclusive domain of central government.
These taxes are referred to as direct taxes.

Indirect taxes are taxes levied on manufacture of goods, provision of services and consumption. In India, generally speaking,
indirect taxes levied on manufacture of goods or provision of services are the exclusive domain of central government. Taxes
on consumption are the exclusive domain of state governments.

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What is the problem with this arrangement?

There are two important problems with the current arrangement.

First, keep in mind that some good such as a shirt has to rst be manufactured before it is consumed. The central government,
therefore, levies its indirect tax called central excise at the factory gate. Subsequently, a shirt reaches a retail outlet and is
bought by a consumer. The state government, at this stage, levies a tax on consumption dubbed value added tax (VAT). So, we
have a tax at the factory gate which adds to the cost of the shirt and another tax on the nal price.

Since states have their exclusive domain on consumption tax within their borders, they treat goods coming from other states
as imports. For example, if a shirt maker in Uttar Pradesh buys dye in Bihar, he would have paid central excise and Bihars
state taxes on the product. On this cost, Uttar Pradesh government would levy its tax if the shirt is sold in the state. If the
shirt is sent across Uttar Pradeshs border and sold in Delhi, an export tax called central sales tax is collected by UP.

As the example suggests, India is politically one country, but economically it is fragmented. There are multiple taxes when
there is commerce across state borders. Consequently, it increases costs for everyone and makes economic activity within
India for Indians complicated.

How will GST help?

Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax barriers between states and create a single
market. For that to happen the constitution rst needs to be amended to remove different layers of governments exclusive
powers to levy taxes. Once this step is taken, the tax barriers between states, and centre and states will disappear.

How will it help consumers?

Today consumers have no idea about the extent of taxes they pay on goods. If you get a bill after buying merchandise which
gives the extent of VAT you have paid, it is an understatement of the actual tax you have paid. Remember, well before
merchandise reached the retail outlet, the central government has collected excise duty. The extent of excise duty is not
mentioned in the bill.

Therefore, today it is reasonable to assume we pay well over 20% tax for most merchandise we buy.

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In GST, consumers should benet in two ways.

First, all taxes will be collected at the point of consumption. It means that if a shirt is taxed at 18%, it will include both central
governments taxes and state governments taxes. Transparency in taxation should deter governments from indiscriminately
increasing taxes as there is bound to be public backlash.

Second, once barriers between states are removed, we as consumers will not end up paying tax on tax which is what
happens when goods move across state borders.

If this is the case why will GST not kick in the moment both houses of parliament clear the constitution amendment bill?

The constitution amendment bill only changes the overarching principle of indirect taxation in India in order to create a
common market. Details of GST have yet to be worked out. It is only after details have been worked out can the nal GST rates
be xed. Therefore, after the constitution is amended, the centre and states have to pass a separate legislation which eshes
out the details of GST. Eventually, this will be followed by subordinate legislation which details procedures.

In short, the constitution amendment is just the beginning of the legislative journey.

DISCLAIMER : Views expressed above are the author's own.

Author

Sanjiv Shankaran
Sanjiv is a journalist working for the Edit Page of The Times of India.

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Co-governance without accountability

July 22, 2016, 2:42 PM IST Sanjiv Shankaran in Cash Flow | India | TOI

Upendra Baxi, a law professor who has written on the role of judiciary in governance, believes that courts co-govern the
country along with elected representatives.

Well, we must today accept it is a fact that the Supreme Court co-governs the country, said Baxi in an interview.

It is not just Supreme Court which co-governs the country. The National Green Tribunal has tried hard to reach that exalted
status.

The tribunals order on ban of old diesel cars has triggered a lot of comment. And also of concern.

A ban at short notice is bound to be disruptive. Among other things, there are livelihoods at stake. And invariably there is, at
best, a loose link between the phenomenon the ban seeks to address and the activity which has been banned.

In the case of diesel cars, there are legitimate questions on the extent to which a ban will remedy poor air quality. Moreover,
in the case of Delhi, there is a problem about disposal of old diesel cars as India does not yet have an effective policy to scrap
old vehicles.

When the legislature passes impractical or counterproductive laws, there is a possibility of rectifying them through public
pressure on elected representatives. After all the elected representatives are forced to justify their actions to the people. The
level of accountability may be inadequate, but it still does exist.

When the judiciary chooses to co-govern, they do so without subjecting themselves to the same level of accountability that
elected representatives do. And the cost extracted from these sudden and far-reaching changes brought about by judicial
orders is borne by citizens. No wonder India is a frustrating place to live in.

DISCLAIMER : Views expressed above are the author's own.

Author

Sanjiv Shankaran
Sanjiv is a journalist working for the Edit Page of The Times of India.

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