Every country has own policy to define the tax, which has certain impact on the economy. Indian government has also taken a decision and on the way of implementing new tax reforms in the form of GST (Goods and Service Tax), which would replace the state VAT (Value Added Tax) and CENVAT (Central VAT) by April 1, 2010. Before putting light on it, I should put some efforts to make it familiar to every one that what is it and how is it going to impact Indian economy.
It is a single comprehensive tax levied on the goods and services consumed in the economy. However as per the Empowered Committee, which is working for its implementation, it will have dual model system in India i.e. Central and State GST. And, is likely to be between 12-16%. It is implemented in over 140 countries across the world, and most of the countries have 15-20% rate, whereas France was the first country to implement it in 1954,
Before discussing the impact of GST in India, it is evidently essential to discuss the present tax regime across the country. I believe that the almost every reader of this article must have traveled across the states via road and I assume that most of the people have seen a big traffic jam at the boarders of the respective states. Let me get you through the inside story of this incidence. In India, every state has own form requirement. E.g. UP: Form 31& 49 for incoming and outgoing, Rajasthan: Form 18A & 18 B etc. These forms are to be produced while crossing or entering the border and needless to say that checking of documents take long time and drastically increases the transit time by 50% higher compared to other countries from source to destination. And, also is the reason of big kiosk at the borders. Consequently the logistics cost in India is 11%-15% of the landed price compared to 6%-8% in developed countries. Due to it, return on investment per truck is very low in India. In India, distribution network is designed more by the tax consideration rather than the requirements of servicing customers at optimal cost. Most of the consumer goods companies operate with at least one distribution center in each state, where they sell, to avoid inter-state CST. Such companies operated with 25 to 50 warehouses all over India, which is a very high number compared to developed economies (less than 5) or even China (less than 10). If there is no tax consideration for deciding the distribution network, then the total warehouse space can be reduced by 20 -50%, and will help in reducing distribution cost.
Therefore the prime objective of tax reform should be to address the problems of the current system discussed above. It should establish a tax system that is economically efficient and neutral in its application, distributional attractive, and simple to administer. Another important objective of tax reform is simplifying the tax administration, which is somehow dependent on the following factors, the tax design, which has to be ration and neutral. And it should be classified in a such way that covers broader base of the goods, which would headed towards less disputes and less administrative expenses. It would also encourage for the tax compliance. It is also needed to be taken care that the committee enforce the maximum utilization of the information technology, while preparing the form, design, procedures, great transparency in the processes of filing the tax returns, refunds, quality of services and audits. India still has the only one major road transport system, which constitutes approximately 80% of the total transport. And it has 28 states, which is again a big task to implement the one tax system while every state has own tax structure and full keeping the control with itself. A great amount of synergy is required while implementing the new tax system, as the states definitely would have own interest and reservation about the policy, so it should not contradict the interest of the respective state too.
As per Indian Public Finance Statistics, Ministry of Finance, total taxes contributed approximately 6% in GDP in 1950-51 however it stood up by approximately 20% in 2008-09, which is a tremendous trigger for the growth in the economy and also has an incredible scope for the further improvement and efficiency. An “Empowered Committee of the State Finance Ministers” (EC), constituted by the Government of India in July 2000, which is delicately working on it and optimistic to be launched by the deadline. As per Asim Dasgupta, Chairman of the EC and the finance minister of West Bengal, it will be proved as a mile stone for Indian economy, is confident for the increment of the GDP by 2%. However, As per the working paper submitted (March 2009) to the Department of Economic Affairs, Ministry of Finance (Government of India) on GST reforms and intergovernmental considerations in India by Mr. Satya Podar and Mr. Ehtisam Ahmad, estimated that this replacement resulted in an increase in potential GDP by 1.4%, consisting of 0.9% increase in national income from higher factor productivity and 0.5% increase from a larger capital stock (due to elimination of tax cascading) However, these benefits are critically dependent on a neutral and rational design of the GST.
Therefore we can head towards the conclusion that how important is it for the Indian economy and the common man as well. It will not only enhance the Indian tax efficiency but also save a lot of cost in logistic hurdles. As per the various research and analysis it has been concluded that it would be able to enhance the GDP’s growth significantly.
It is a single comprehensive tax levied on the goods and services consumed in the economy. However as per the Empowered Committee, which is working for its implementation, it will have dual model system in India i.e. Central and State GST. And, is likely to be between 12-16%. It is implemented in over 140 countries across the world, and most of the countries have 15-20% rate, whereas France was the first country to implement it in 1954,
Before discussing the impact of GST in India, it is evidently essential to discuss the present tax regime across the country. I believe that the almost every reader of this article must have traveled across the states via road and I assume that most of the people have seen a big traffic jam at the boarders of the respective states. Let me get you through the inside story of this incidence. In India, every state has own form requirement. E.g. UP: Form 31& 49 for incoming and outgoing, Rajasthan: Form 18A & 18 B etc. These forms are to be produced while crossing or entering the border and needless to say that checking of documents take long time and drastically increases the transit time by 50% higher compared to other countries from source to destination. And, also is the reason of big kiosk at the borders. Consequently the logistics cost in India is 11%-15% of the landed price compared to 6%-8% in developed countries. Due to it, return on investment per truck is very low in India. In India, distribution network is designed more by the tax consideration rather than the requirements of servicing customers at optimal cost. Most of the consumer goods companies operate with at least one distribution center in each state, where they sell, to avoid inter-state CST. Such companies operated with 25 to 50 warehouses all over India, which is a very high number compared to developed economies (less than 5) or even China (less than 10). If there is no tax consideration for deciding the distribution network, then the total warehouse space can be reduced by 20 -50%, and will help in reducing distribution cost.
Therefore the prime objective of tax reform should be to address the problems of the current system discussed above. It should establish a tax system that is economically efficient and neutral in its application, distributional attractive, and simple to administer. Another important objective of tax reform is simplifying the tax administration, which is somehow dependent on the following factors, the tax design, which has to be ration and neutral. And it should be classified in a such way that covers broader base of the goods, which would headed towards less disputes and less administrative expenses. It would also encourage for the tax compliance. It is also needed to be taken care that the committee enforce the maximum utilization of the information technology, while preparing the form, design, procedures, great transparency in the processes of filing the tax returns, refunds, quality of services and audits. India still has the only one major road transport system, which constitutes approximately 80% of the total transport. And it has 28 states, which is again a big task to implement the one tax system while every state has own tax structure and full keeping the control with itself. A great amount of synergy is required while implementing the new tax system, as the states definitely would have own interest and reservation about the policy, so it should not contradict the interest of the respective state too.
As per Indian Public Finance Statistics, Ministry of Finance, total taxes contributed approximately 6% in GDP in 1950-51 however it stood up by approximately 20% in 2008-09, which is a tremendous trigger for the growth in the economy and also has an incredible scope for the further improvement and efficiency. An “Empowered Committee of the State Finance Ministers” (EC), constituted by the Government of India in July 2000, which is delicately working on it and optimistic to be launched by the deadline. As per Asim Dasgupta, Chairman of the EC and the finance minister of West Bengal, it will be proved as a mile stone for Indian economy, is confident for the increment of the GDP by 2%. However, As per the working paper submitted (March 2009) to the Department of Economic Affairs, Ministry of Finance (Government of India) on GST reforms and intergovernmental considerations in India by Mr. Satya Podar and Mr. Ehtisam Ahmad, estimated that this replacement resulted in an increase in potential GDP by 1.4%, consisting of 0.9% increase in national income from higher factor productivity and 0.5% increase from a larger capital stock (due to elimination of tax cascading) However, these benefits are critically dependent on a neutral and rational design of the GST.
Therefore we can head towards the conclusion that how important is it for the Indian economy and the common man as well. It will not only enhance the Indian tax efficiency but also save a lot of cost in logistic hurdles. As per the various research and analysis it has been concluded that it would be able to enhance the GDP’s growth significantly.
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