Revenue secretary Hasmukh Adhia outlines the basics of the revolutionary tax reform
The need for the Goods and Services Tax, or GST, was born out of the fact that in India today, we have two different authorities charging indirect taxes on goods and services – the Central government and the state governments. And it is not as though they charge a single, uniform rate – there are different kinds of taxes at both levels, such as service tax and excise duty at the Central level, and luxury tax, entertainment tax and VAT at the state level.This multiplicity of taxes at both levels was the reason for GST – to bring in one tax that is levied simultaneously by the states and the Centre. The discussion on GST alone has taken nearly a decade, gathering speed over the last two years, and we are now ushering in a new era for the Indian economy.
What happens to the taxes
All taxes are subsumed into GST, except a few such as registration charge and stamp duty on real estate, entertainment tax which is levied by local bodies, electricity duty, state excise duty charged on portable alcohol (which lies with the state government alone) and the five petroleum products that can be subsumed into GST at any time but are not at the moment part of it – petrol, diesel, aviation turbine fuel, natural gas and crude oil. The reason for the latter is that the states and Centre levy taxes separately for them and the income is very high. This makes them a form of insurance – if states don’t gain too much buoyancy from GST, at least this part of their income stands assured.
How the states benefit
The states will have more buoyancy with GST, in terms of the compliance of taxation being better, since everything is IT-driven and the system is self-disciplining. The latter makes sure no one can hide their actual turnover. The chances of tax evasion, therefore, are much lower under GST.
What happens if a state loses revenue In case a state loses revenue under GST, a compensation mechanism has been created – there is a list of demerit goods on which cesses are levied, such as pan masala, cigarettes and luxury cars. There was also previously a clean environment cess on coal that will be collected again as a compensation cess – `400 per tonne of coal that is either sold in India or imported. All these together form a compensation kitty out of which proceeds will be given to any state that loses revenue.
Exemptions and composition schemes Under GST, taxpayers with an aggregate turnover of less than `20 lakh pa are exempt from taxation. There are 11 Special Category States, as defined in the Constitution of India, for whom the exemption threshold is `10 lakh. These include the North-East and hill states. Among them, Jammu & Kashmir has chosen to keep the limit at `20 lakh. For traders, manufacturers and restaurants with an aggregate turnover of up to `75 lakh pa, 1 per cent of the total turnover has to be paid by traders, 2 per cent by manufacturers and 5 per cent by restaurants. They cannot take or give input tax credit – only one lump sum is to be paid, along with a monthly filing of returns. For the Special Category States, the limit for this composition scheme is `50 lakh, and Jammu & Kashmir and Uttarakhand have chosen to keep it at `75 lakh, despite being hill states.
The four major tax rates
The four major tax rates that have been determined by the council – 5 per cent, 12 per cent, 18 per cent and 28 per cent – have been arrived at after intensive discussions and data analysis. It was found that there were so many tax rates at the state and Centre levels that we needed to create something standardised and revenue-neutral.
There was a category of items on which states were levying 14.5 per cent VAT and the Centre was charging 12.5 per cent excise duty. This came to a total of 27 per cent. Some of these goods were transported inter-state, which would include an additional 2 per cent Central Sales Tax burden – and so, the total came to 29 per cent. The council then fixed on a 28 per cent slab, where all these goods would be included. All consumer durables are in this category. Then, there were some items where states were levying 5 per cent VAT and the Central excise duty being charged was 6 per cent – these were fit into the 12 per cent slab.
The remaining items, including service tax, fit into 18 per cent. The rate of 5 per cent applies to basic necessities where only a state VAT of 5 per cent was being levied and there was no Central excise duty. These include essential items of daily use such as edible oil, sugar, tea, coffee and so on. Many essential items are outside the tax net too, such as rice, dal and wheat except when they are sold by registered, trademark brands. For these, the rate stands at 5 per cent. Milk remains exempt, regardless of whether it is sold loose or packed. These four tax rates can be changed at any time, if the council so decides.
– As told to Nandini D Tripathy Hasmukh Adhia is the revenue secretary, Government of India, and the views expressed in the article are his own