GST Principles- Single GST, Dual GST
- Simple and transparent tax: Dual GST is the best solution for countries like India because it will reduce the number of taxes at central and state level. This will also be easy to implement and create accountability for.
- Decreasing tax rate: Dual GST will also result in reduction in the effective tax rates for many goods.
- Removal of cascading effect of taxes: The implementation of GST will reduce the cascading effects of the present taxation system
- Simplified tax compliance: By reducing the transaction costs of taxpayers, dual GST will bring about simplified tax compliance.
- Increase in the amount of tax collection: Better compliance and a wider tax base will lead to increased tax collections
- India is a federal country with disparate states: Dual GST is ideally suited for a country like India to ensure unity through diversity. Single point GST is neither desirable economically nor practical administratively, because it means central excise duty, sales tax and service tax will be merged to be collected as a single tax.
- Questions about the Constitution: The Constitution of India does not permit the Centre to be in charge of sales tax and states similarly are not permitted to levy central excise duty and service tax. If the Constitution is amended to combine all taxes in 1 list ( whether Union/State/Concurrent), present federal structure will change fundamentally. This is because the Centre will levy everything if it goes to the Union List and the States would not agree to this. If this goes to the State List, Centre will protest against loss of fiscal power. Concurrent list would be even bigger problem with no one being able to control the power of states to increase taxation rates.
- Upset fiscal federalism: If dual GST is not adopted and a unified GST system is preferred, this will upset the notion of fiscal federalism which is the fundamental cornerstone of India polity. Moreover, the fundamental structure of the Constitution cannot be changed through an amendment. Unified GST would therefore go against the spirit of the Constitution
- Unified GST does not exist in most federal States: With the exception of Australia, unified GST system does not exist in any nation with a federal structure. Countries that have combined GST are unitary states mostly. Though Canada has a single federal GST, it also has states sales taxes and Brazil does not follow a pure single GST system either.
- Who will collect the GST?: This becomes an issue if single point GST is implemented. States will not allow Centre to be sole tax authority. System will malfunction further if tax collection services at Union and State level are merged.
- Dual GST most practical for federal India: As Centre already levies CENVAT and tax services, CGST will work well with some harmonisation as will SGST with symmetry in a dual GST system.
- Easily attainable: The dual GST system is easy to attain in the current structure, given that India is following an indirect taxation system. Certain amendments may be required, but on the whole, the transition will be easier.
- Good balance: The dual GST will strike a good balance between need for harmonisation and fiscal autonomy of Centre and States. Both levels of Government will be able to apply taxes to goods and services at various points in the supply chain.
- Least changes, most benefits: Dual GST will provide a competitive atmosphere for companies to work on an international scale. Moreover, single taxation system will also reduce costs to customers
- Single point GST will impair Centre revenues: Dual GST will prevent a dent in the Centre revenue. Reduction in fiscal transfers will offset losses and Centre will also have access to revenue resources for future needs. Any other option may not be revenue neutral for state
- Better for business: Single GST will mean that businesses will have to comply with different task laws for different states and this will affect business stability
- Undermines States powers, is not workable: Unhealthy competition can result among states using tax structures to attract industries if single GST is implemented. Dual GST is more workable and a complete withdrawal of Centre from States taxation could impair the ability of the latter to collect revenue in a symmetrical manner.
- Dual GST not an ideal model: It can only be a transitional model as tax would be levied at two levels and compliance costs may not lessen significantly.
- Comprehensive model of Single GST better: This GST format is a comprehensive model for taxation of inter and intra state transactions of services and goods.
- Taxation of services at state level a challenge in dual GST: This is more so for services that are provided nationwide such as telecommunications and transportation.
- Prevent economic distortions: A single/unified GST would be levied at a single rate thereby doing away with classification disputes and economic distortions.
- Freeing up of resources: Reduction in compliance costs would open up resources for more productive pursuits besides making India a one tax nation and common markets a reality. There would also be free distribution of goods and services with lack of checkpoint or internal tax frontiers and other barriers to trade.
- One rate, one base: One set of rules will form the essence of a unified GST. It will also promote harmonisation of tax rates, bases and administration.
- Inter state variations to lessen: Indian experience with inter-state variation has been less than positive For example there is substantial diversion of gold and silver sales in areas where VAT is lower compared to other states. Such variations would be problematic in terms of taxation of service elements of a unified GST would also be ideal from a business perspective as stability in decision making will result
- Minus the cascading effects: Cascading effects would be contained as there would be no tax at two levels.
- Increase customer awareness: Customer will know how much is the indirect tax burden in goods and services consumed by him.
The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the supply of goods or services. France was the first country to introduce this value added tax system in 1954 devised by a public servant. In India, due to non-consensus between central and state government, the proposal is to introduce a Dual GST regime i.e. Central and State GST.
Dual GST: Many countries in the world have a single unified GST system i.e. a single tax applicable throughout the country. However, in federal countries like Brazil and Canada, a dual GST system is prevalent whereby GST is levied by both the federal and state or provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.
Impact on Prices of Goods and Services: The GST is expected to foster increased efficiencies in the economic system thereby lowering the cost of supply of goods and services. Further, in the Indian context, there is an expectation that the aggregate incidence of the dual GST will be lower than the present incidence of the multiple indirect taxes in force. Consequently, the implementation of the GST is expected to bring about, if not in the near term but in the medium to long term, a reduction in the prices of goods and services. The expectation is that the dealers would start passing on the benefit of the reduced tax incidence to the customers by way of reduced prices. As regards services, it could be that their short term prices would go up given the expectation of an increase in the tax rate from the present 10% to approximately 14% to 16%.
Benefits of Dual GST: The Dual GST is expected to be a simple and transparent tax with one or two CGST and SGST rates. The dual GST is expected to result in:-
- reduction in the number of taxes at the Central and State level
- decrease in effective tax rate for many goods
- removal of the current cascading effect of taxes
- reduction of transaction costs of the taxpayers through simplified tax compliance
- increased tax collections due to wider tax base and better compliance
Certainty of implementation: The Finance Minister has made a categorical statement in Parliament that GST will be implemented on April 1, 2013. In his subsequent media interactions, he has further indicated that he is keen to implement the GST even if some of the States are not ready or willing to implement GST by this date. Accordingly, based on the present indications, as also on the basis of our subsequent interactions with senior Government Officials, we believe that the April 1, 2013 timeline for introduction of the dual GST will be met.
Who would be impacted: All businesses, whether engaged in sales / supply of goods or supply of services, would be impacted by GST. The impact would be on supply chains, ERP, product pricing, dealer margins etc.
Applicability to service providers: Unlike the transition from the sales tax regime to the VAT, where only businesses dealing in goods were affected, in the case of GST, as the name suggests, both goods and service providers will be impacted. Thus, even pure service providers need to plan for the transition to the GST.
Time to Plan for GST: The draft laws will clarify finer aspects of GST such as rates, classification and compliances. However, based on the material in the public domain, one can begin with spreading awareness among various stakeholders within the organization and identifying broad areas of action before the draft laws are published. Experience of VAT implementation suggests that there may not be enough lead-time available between the date of announcement of GST implementation and the actual date of GST implementation.
Taxable event: The “Taxable event” will be the „supply of goods? and the „supply of services?. Hence, the current taxable events such as ‘manufacture of goods’, ‘sale of goods?’ And ‘rendition of services’ will not be relevant under the GST regime.
Applicability of both CGST and the SGST on all transactions: A transaction of ‘supply of goods’ will attract both the CGST & SGST as applicable on goods. Similarly, a ‘supply of service’ will attract both the CGST & SGST as applicable on services.