Why GST is the biggest of the reforms since 1991

India had several rounds of reforms; even in tax front, but this GST foot step is a big one. The greatness of the Goods and Service Tax that will be unveiled in a scheduled midnight one hour ceremony on June 30th is that it marks progressive, coordinated and development oriented mindset of the centre and states. Greater political maturity of our leaders to implement an economic reform of par excellence is clearly visible.

                Big reforms in the past, led by John Mathai, Nicholas Kaldor, Justice Wanchoo, LK Jha or Chelliah – all missed the political punch now embedded with GST. More than that, you can’t see the level of state participation by sacrificing their fiscal autonomy as in the case of GST.

India’s political leadership – at the centre and states had shown the spirit to come together to understand and launch a tax reform and this is a good sign for future changes.

Historically, India’s tax system is often described as a tax jungle. Numerous taxes, several rates, countless exemptions and deductions and beyond all, sharing of these taxes by three governments to impose and collect, produced complexities. As a result, the tax system became inefficient many way.

The input tax credit

The commodity taxes were imposed by the centre and states in the form of production tax (excise duties by the centre) and sales tax (sales taxes by the states). When a commodity is born and sold to the ultimate consumer, both governments have imposed taxes on their like without caring what the other do on it.

Here comes the differentiating factor of GST. It gives an input tax credit where a tax payer can deduct the tax previously given from his total tax. Advantage of the input tax credit is that a tax will not add up to price when the next stage producer calculates his tax. Technically, the problem of a previous tax adding to the price is known as cost cascading effect of a tax.

Looking back to the origin of GST

The identity of GST is that it belongs to the family of Value Added Tax. Launch of VAT for commodity taxation was first proposed by LK Jha who was an Indian Civil Service officer during mid-1970s. Jha was taught by eminent economists including Lord Keynes (Cambridge) and Harold Laski (LSE) and became the governor of the RBI. He led the indirect taxation enquiry committee in 1976 and suggested VAT in the form of MAN VAT (VAT at the Manufacturing level; VP Singh introduced it as MODVAT).

The centre launched CENVAT for its excise duties since 1999; but states not followed. What compelled states to reluctant for introducing VAT in the 1990s was their fear of fiscal autonomy and revenue loss.

 It was almost thirty years later in 2006 that VAT was introduced for state sales taxes; but not before the death of LK Jha in 1988.

GST first got mention with the Vajpayee Ministry in 2000. But there were more concerns. Deliberations and discussions were conducted over a stretch of sixteen years and now the GST in on the platform.

The place of GST reform

The GST is a remarkable piece of reform given the federal nature of the country. so far states and centre were having their trade mark commodity taxes, where they enjoyed fiscal autonomy rather than just tax revenue realization. They never mind each other while imposing their commodity taxes like excise duties and sales taxes on the same commodity. For the centre the excise duty was the most important revenue for six decades. On the other hand, for states, the sales tax is the largest tax revenue even now.

Both parties agreed to relieve their fiscal power while adopting a unified tax and from Friday, July 1st, 2017midnight onwards. We will have no excise duties, no sales tax, no service tax and several other taxes. We were seeing these taxes since independence (Service taxes introduced in 1994). Rather, there will be the GST. As a single unified tax across the country, India will now pay a single rate on a given commodity for the first time in history. This is what the GST has brought to us.