India’s biggest tax reform initiative could see a staggered implementation, starting with a nationwide unified tax system for goods from April 2016 and extended to services later. With Union Cabinet giving approval to the Goods and Services Tax (GST) on Wednesday, the way for tabling of the new legislation in the current session of Parliament has opened up. The launch of GST has been delayed by nearly seven years, as states were concerned about revenue losses on introduction of the new tax regime. The GST will cut down the large number of taxes imposed by the Central Government and states and will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses. The simplification of taxation system will also have positive impact over trade and industry to maintain imparity between the regions. The GST can dramatically alter the tax administration by replacing this string of central and state levies such as excise, value-added tax and octroi with a single unified tax, thereby creating a common national market. At present, petroleum products will not be included in the GST but will remain within the Central Act and will be brought in at a later stage through the GST councils. Alcohol will be exempt from GST and states would have the freedom to decide their own levy. Service tax will be subsumed within GST. In case of losses in the states’ exchequer, the Centre will give 100 per cent compensation for the first three years, 75 per cent compensation for the fourth year and 50 per cent compensation for the fifth year. The GST Constitutional Amendment Bill, which was introduced in the Lok Sabha in 2011, has lapsed and the Modi government will be required to come up with a fresh Bill. If successful, the implementation of GST could add two percentage points to GDP growth.
