GST is all set to make India a common market

The biggest indirect tax reform in India’s history – the Goods and Service Tax (GST) is almost on the launch pad with the Rajya Sabha is about to pass it today. Congress party has instructed its members to ratify the bill.

There are three major amendments to the 2014 bill and the major one is the deletion of the 1% additonal tax on supply of goods that tries to compensate the producer states while agreeing for a destination based tax.

Deletion of this 1% tax makes GST more purposeful as it would have become a distortion on economic activities by posing an additional tax burden for the consumers.

The amendment also makes it mandatory for center to compensate for any revenue loss for the states. This change has attracted all states to rally behind the new tax regime.

There are two important achievements with GST. Frist, India is emerging as a unified tax jurisdiction with respect to indirect taxes and this will make the country a common market.

Tax implication of movement of goods and services within the country will be the same. This tax structure is the ideal one for a unified economy. Existence of entry taxes like Central Sales Tax, Octroi etc. are not there with the GST.

The elimination of tax on tax problem or what is known as cost cascading effect of a tax is another positive element of the GST. Unifying the major central and state taxes means there is firm understanding about the incidence of central taxes like excise duties on a product when the state is imposing sales tax on it. A deduction for excise duty will reduce the tax impact of sales tax.

Second, GST belongs to the family of Value Added Taxation. The VAT itself is a more refined version of indirect taxation though some difficulty may come from the administrative angle for a short time. VAT structure will give more compliance and revenue realization for GST.