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27 February 2016
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GST can increase the GDP (Gross domestic product) of India and can increase
its total revenue collections. It will additionally facilitate additional exports
and has the potential to boost employment, with the exception
of tantalising additional foreign investors.
A very important implication of GST is that it would reduce tax burden on
producers and foster growth through more production. Manufacturing is a
costly business under the current taxation system where a producer has to
pay taxes not only on raw material procurement, but also on the final receipts
from sale of goods. This double taxation prevents manufacturers from
producing to their optimum capacity and retards growth. GST, on the other
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hand, would take care of this problem by providing tax credit to the
manufacturer. Basically, the tax already paid by him will be deducted from his
final sale tax receipts and he would only have to pay the difference, i.e. for
the value added to the product by him. Also, due to absence of tax credits
applicability for interstate transactions, a manufacturer producing in one
state has to pay taxes on sale of those goods in other states as well. This
adds to their cost and leads to lower productivity. The various tax barriers
such as check posts and toll plazas lead to a lot of wastage for perishable
items being transported, a loss that translated into major costs through
higher need of buffer stocks and warehousing costs as well. A single taxation
system could eliminate this roadblock for them.
A single taxation on producers would also translate into a lower final selling
price for the consumer. Currently, for a customer, the tax burden of goods in
anywhere between 25-30 per cent while GST proposes a tax rate of 18 per
cent in the first year of implementation and would be brought down over the
second year and in later years. The consumer would not only be able to
purchase more goods with the same amount of money, he would also look to
buy more, thereby spurring market demand. Also, there will be more
transparency in the system as the customers would know exactly how much
taxes they are being charged and on what base.
GST would add to government revenues by widening the tax base. Until now,
services had been exempted from taxes. GST, however, brings them under
the purview of taxation as well. This would eliminate tax evasion by
corporations that escape taxes by bundling their goods along with services or
whose products fall on the borderline of a good and a service, such as
software products. Also, GST provides credits for the taxes paid by producers
earlier in the goods/services chain. This would encourage these producers to
buy raw material from different registered dealers. This would bring in more
and more vendors and suppliers under the purview of taxation and reduce
the ambiguity of the existing unorganised sector. According to the National
Council of Applied Economic Research study conducted in 2009, the GST
could provide gains in Indias GDP in a range of 0.9 to 1.7 per cent over the
years starting from its implementation, assuming the revenue-neutral rate to
be anywhere in the range of 6.2 and 9.4 per cent. The revenue neutral rate is
the net difference in the overall collection of centre and states (the idea is
that if implemented, GST could lead to tax revenue losses in some states. In
such a situation, the central government would be compensating them for
the same for the next 5 years). Additionally, GST is also expected to exclude
state excise on alcohol and tobacco from its purview. This implies that a large
revenue source still rests with the state government to generate cash flows
from.
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