GST: The good tax that will service you

New Delhi: The GST googly

The finance minister announced a tentative date of year 2010 for implementation of the GST or the Goods and Service Tax. For those of us who are still trying to understand the service tax the GST seems like another googly.

The GST was first bought to the fore by the Kelkar FRBM task force report. As Mr. Satya Poddar, Tax Partner, Ernst & Young who has been instrumental in the formulation of the GST in Canada says, "the GST is a comprehensive VAT or Value Added Tax. It should ideally replace the current Service tax, VAT, CENVAT, Octroi duties, Entry taxes, Excise etc".

In essence the GST should replace all indirect taxes including central excise to make it economically effective and achieve the goal of simplicity.

There is also the big minefield question of sharing the revenues between the states and the centre. All these issues will have to be sorted out and they will need a strong political will to do so.

What will GST mean to the man on the street?

The GST will affect everyone

We will pay GST on every product we purchase and every service we avail. You will pay it on a packet of biscuit or a meal in a 5-star hotel.

The government does not get to play the moralistic papa

The government will have lesser discretion on taxes there will lesser categories of taxes and they will be transparent. So you pay according to the price of the product not the artificially hiked up rate due to taxes.

You know exactly how much you are paying the government

Today the common man does not know how much of the product price he is paying goes by way of sales tax, VAT, excise, entry tax etc. The GST will be a single transparent tax and will give you a clearer understanding of the tax component of the product cost.

Imports do not get taxed at a higher or lower rate

Whether you are buying an Indian wine or a French one it will be taxed at the same rate. It will give a level playing field and a consumer an access to better goods. Even the Indian corporate will aim at being more efficient and give us cheaper and better product. As Mr. Satya Poddar explains, "Efficiency, Equity and Simplicity are the corner stone of an effective GST".

Lesser tax evasion

A simpler system always cuts down the possibility of tax evasion. The more the complexities of a system the easier it is to find loopholes. To implement the GST the government will also have to make a large effort in better and automated tax enforcement system, which would also bring down the incidence of tax evasion. As Ajay Shah, independent scholar and ex-consultant to the Finance Ministry says, "VAT or GST chains are self-enforcing. It is harder to evade a proper VAT. If one person offers to sell you steel in cash without a bill, while you can buy steel by cheque with a bill, the latter is better because you'll get VAT credits on the bill."

Faster economic growth

GST or a comprehensive VAT means integration into the world economy. It will encourage FDI with simpler laws and will result in a better standard of living for India.

Prices should come down

The GST will do away with a multitude of taxes and the resulting tax will be lower than the current total taxes we pay on every product we buy. According to Udayan D Choksi of Deloitte Haskins & Sells, "Since a unified GST would eliminate cascading of taxes, the effect of GST on prices should be positive. It will however depend on how comprehensively the GST is implemented." However Ajay Shah puts in a word of caution, "GST is really a long-run structural reform with a small one-time effect on prices".

What will the GST rate be?

Lets look at international rates first

Canada has a GST rate of 7 per cent which it trying to bring down

Australia has a GST rate of 10 per cent

Singapore has a GST rate of 5 per cent

The EU has a minimum VAT rate of 15 per cent.

What about India? Heetesh Veera, Partner, Earnest and Young hazards a guesstimate at the GST being between 16-20 per cent. At the rate the service tax is being increased every year his estimate might be right on target. This will be the level of the total GST as seen by the consumer, which will internally be shared between centre and states.

The author, Shalini Amarnani, is a freelancer.