GST Bill: Historic economic reform,making India a unified market

Written on Monday, August 8, 2016
By Kotak Mutual Fund

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India’s Upper House of Parliament (Rajya Sabha) has finally passed the GST (Goods and Services Tax) enabling Constitutional Amendment Bill. This is indeed a landmark bill and passage of the same marks a very important step in the overall reforms process in the country. Post this, the Lok Sabha (or the lower House of Parliament) will have to pass the bill with a 2/3rd majority. The passage of the bill in the Lok Sabha would however be less challenging than it was in the Rajya Sabha as the government has the required numbers there.

Tax Comparison before and after GST

The amendment to the Constitution will have to be ratified by at least 50% of the states over the next few months and the amendment process will be complete after the President’s assent. This would provide a constitutional backing to the formation of the GST Council, which will be set up as a constitutional body. The GST council will decide on several key aspects of the tax structure including the GST rate, cesses and surcharges to be subsumed, an exemption list, threshold limits and tax-sharing between the states and the centre. This will be followed by passage (via a simple majority) of a Centre GST Law, IGST Law (Integrated GST for inter-state trade) and State GST Laws. The legal process must be completed by December in our opinion, for a timely roll-out of GST from 1 April 2017.

 

Key features of the GST bill :
The GST is a game-changing reform as it will simplify and unify the indirect tax regime in the country, which is currently filled with complexity. The GST will subsume all other indirect taxes levied at the central and state levels. The bill excludes alcohol from the purview but includes petroleum and petroleum products, which will be included at a date notified by the GST council. The bill states that the centre will compensate states for any potential revenue loss for a period of five years. The GST Council will decide modalities such as threshold, tax rates and exemptions under GST.

 

Changes incorporated in the GST bill :
The Rajya Sabha passed the GST Bill with five key changes:

  -Removal of provision of 1% (inter-state) trade tax.
  -Mandatory compensation to be provided by the central government for any losses to states for five years.
  -The GST council shall establish a mechanism to adjudicate any dispute arising out of its recommendations between centre and state/s or between states.
  -Clarification on the definition of Integrated GST (IGST) for inter-state trade and that states’ share of IGST will not be a part of Consolidated Fund of India.
  - Restating that CGST and centre’s share in IGST will form part of the states’ devolution pool.

 

GST rate:
GST rate structure will be decided by the GST council. This, in turn will determine the economic impact and the impact on inflation of the GST implementation. In a report last year, the government’s Chief Economic Advisor (CEA) had pegged the standard rate (the rate at which all goods and services would be taxed unless specified otherwise) at 18%, 12% for ‘essential’ items, and 40% for ‘luxury’ items. There would also be a separate rate for precious metals. The above structure assumes that petroleum, electricity and alcohol will be outside the GST.

 

GST Impact:
Studies show that GST could raise GDP by 0.9-1.5% over time. While the implementation of GST is indeed a huge step forward, the full benefit to GDP will likely accrue over a few years. Over the medium term, GST would help put in place a more efficient tax structure and remove interstate tax barriers which would boost productivity and growth, widen the tax base and structurally lower inflationary pressure. On the fiscal side, the GST will raise Government (central + state) tax collection with the central government’s share most likely rising. However, the bill states that the centre has promised full compensation to the states for any revenue loss over the next five years.

 

General Disclaimer:
Internal guidelines wherever mentioned are operational limits imposed internally and may change from time to time.
The information contained in this (document) is extracted from internal database and analyst computations. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. Neither Kotak Mahindra Mutual Fund / Kotak Mahindra AMC Trustee Co. Ltd./ Kotak Mahindra Asset Management Co. Ltd, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

 

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