Why the GST reform is transformational?

And finally it happened, India’s disagreeing political class were able to sideline their vote-seeking differences on an issue unrelated to politics- an economic reform. Nearly ten years after the first step towards a national common market by creating a Goods and Services Tax, the Parliament has passed it.

The move is simply transformational – tax boundaries will not divide India from within. There is no meaning in saying that you are moving a good from Tamil Nadu to Maharashtra or from Haryana to West Bengal. There will be only one tax identity – a pan Indian identity and rate structure; that is the GST.

Till now, for the last seven decades, barricades and tax points were set at state boundaries to collect harassing state entry taxes – a situation you can see only when you move from one country to another. With GST, the taxes like CST and Octroi that divided our big economy into different pieces are no more. States need not deploy their tax officials and semi-security persons across state borders to check smuggling and the like. India is emerging like a common market for the first time in history.

There are other positives from GST, like better tax revenue with little pain to the economy. The GST’s identity is that it belongs to the family of Value Added Taxation. So far the countries who embraced GST recognize that as a tax method, the GST is the best as it least disturbs (‘distort’ is the technical term) economic activities at the same time giving tax revenue. There is good tax compliance as well (means less evasion).

Now for the first time, state sales taxes (state VAT) and the central excise duties (CENVAT) are tied in a single knot. One knows each other. A state while imposing ten per cent tax on a Rs 10 commodity should knew that out of this, only 8 Rs is the value added of the commodity and the remaining Rs 2 has occurred due to excise duties paid to the Centre. Hence the state’s sales tax will be only on the Rs 8 and not on Rs 10. This means that the tax on tax (or cost cascading effect of a tax) is eliminated with GST.

The reform steps are just started and there remains issues like deciding the tax rate that need consensus among the states and between states and the centre. But we can hope that the present positive momentum can continue to finish the remaining work for GST.

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