Goods and Service Tax: Part ii

Drawbacks of VAT

In our last part we read about one problem with VAT, now let us discuss other aspects of VAT.

Continued

Other problem with VAT is related to Centre sales Tax, now the idea of centre sales tax is inconsistence with the idea of GST (Goods and service Tax).

What is a central sales tax?

For example, there is movement of goods from Karnataka and Tamil Naidu, on the border of these two states the central government levies a central sales tax let us say 2% collects this tax and send it back to the originating state in this case Karnataka. But what happens, for instance the goods from Karnataka are valued at 10rs after the imposition of central sale tax they become 12 and it is also possible that in Tamil nadu these goods will not be competitive in the competitive nature of Tamil nadu economy. So this is discrimination on the part of government against those goods that are originating from a different state and those goods that are being sold in a different state. That means, in Indian case there has to be seamless movement of goods.

Not only this, there is another problem. The Economist magazine came up with an article that it takes huge time for the movement of goods from one state to another state because of central sales tax that means the trucks that transport from state to another are parked 60% of their time which leads to huge amount of time loss on their way. So what is the solution, the solution is that central sales tax, all indirect tax (for example, when you go to a restaurant you order something to eat and drink and in the end you just don’t have to pay for the things you ordered but also VAT, Service tax, sometimes you have to entertainment tax, education cess) should be abolished. So all these taxes are abolished and the summed up tax is known as GST.

GST and it’s background:

Kelkar Task Force on FRBM (Fiscal Responsibilty and Budget Management) ACT, 2004 headed by Dr. Vijay Kelkar. The mandate of the Kelkar task force was to recommend how we can efficiently implement FRBM ACT 2004. The Kelkar Task Force on the other hand recommended the Goods and Service Tax.

What is GST?

GST is an idea in which all these indirect taxes would subsumed as one tax. All the indirect taxes, whether levied by the central or the state government including custom duties, all these taxes will be subsumed and we will have one Goods and services Tax. The central sales tax will also be abolished. So all these indirect taxes that have cascading effect on the consumer will be eliminated because of Goods and Services Tax.

GST and its effects:

GST is in nature of VAT that is in GST you tax on value addition you don’t tax on tax. The nature of GST is similar to VAT that is in GST you tax on value addition you don’t tax on tax. But VAT is only for goods, service tax is for services and GST is for both goods and services. Because in this era of technology it is very difficult to distinguish in many cases what are goods and what are services. So goods and services delivered at the same time you have to pay goods and services tax.

Benefit’s of GST:

Cost Reduction: When the cost of products will reduce that means under demand and supply for those goods will also increase. If the cost will reduce the demand of the product will increase, when demand for those products will increase so will the GDP. That is one part. Other part, the cost reduces the customers that buy these things end up saving more, means saving rate in this country would increase when saving rate would increase the government would use these funds for infrastructure projects that means GDP will grow and also Tax collections will be huge.

In our next part we will talk about other benefits and other effects of GST and its implementation.