UPSC IAS Prelims : Indian Economy : Goods and Services Tax(GST)

Goods and Services Tax is called as the second generation reform and often stated as Big-bang reform. It will convert the present tax regime into a simplified one.

Created On: Jul 19, 2016 15:05 IST
Modified On: Jul 20, 2016 17:28 IST

Why GST is seen as one of the biggest taxation reforms often called as big bang reform. How will it help in economic growth? Explain

India Politically is a single entity but marketwise it is fragmented into smaller blocks. Each state has its own taxation policy. A particular product can cost cheaper in one state and dearer in the neighbouring state. Presently India has multiple tax regimes. Union government charges Excise duty on manufactured goods, Service tax on services offered and cess etc

Similarly state government’s charges sales tax, value added tax, octroi etc. Goods and Service Tax (GST) will subsume all this tax into a uniform tax regime across India. It will lessen the burden of cascading effect of taxes. It will simplify tax administration and make compliance easier. It will widen the tax base and significantly add to GDP. Given the government emphasis on “Make in India” it has become a Sine qua non.

There are also a number of apprehensions about GST that it will curtail states freedom to tax which is enshrined in the Constitution of India. It will take away State power to tax differentially based on its priority and necessity.GST will shift the entire burden on final consumers of Goods and Services. GST, like all indirect taxes, is a tax on consumption spread uniformly among rich or poor. Different states are sceptical about their revenue loss

 Governments are fearful that higher corporate taxes will lead to Capital flight so they are turning to Indirect taxes. Indirect taxes have a wider base than direct taxes and are difficult to evade. The poor and working classes spend a greater proportion of their income on essential consumption. That’s why indirect taxes are considered regressive compared to direct taxes.

Union Government has set 1st April 2016 as roll-out date for GST. The 122nd Constitutional Amendment Bill (GST) has been passed in the Lok Sabha. The proposed GST will have a dual component. The Centre will administer the Central GST (CGST) and the States the SGST. Compliance will be monitored independently at the two levels. The rates for both CGST and SGST will be fixed by GST Council, whose members will be state finance ministers and chairman will be the Union finance minister. Draft bill says GST Council will fix not just rates but “rates including floor rates with bands”.

GST reform has been languishing almost for a decade. It is the need of the hour as Countries are more and more dependent on external funding for Growth and Development. Cumbersome taxation regime deters potential Investors. The India story especially with regard to “make in India” will be incomplete unless this reform is done. Across the Globe Countries have moved towards liberal and simplified tax regime. Providing 10 million jobs per year seems elusive without a simplified tax regime. Apprehensions about burden can be overcome by safety nets and budgetary disbursements.


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