GST-TRUE BENEFITS VS HYPE !!!

A few days ago the bill to adopt GST in India was passed by the Parliament  accompanied with  a lot of     fanfare. I read so much stuff in newspapers and whatsapp was flooded with lot of messages on the great changes GST is going to bring.  Many people are expecting many things. I somehow felt that  the metrics to understand GST was slightly amiss. 

I just thought of putting up my ideas up here.

In our country there are fundamentally 2 types of taxes

1.  Direct Tax: which is on one's income  called income tax collected by the Central Government 
2.  Indirect Tax which is again classified into 3 types as follows 
1.  Manufacturing Tax a tax called as excise duty which is levied on any manufacturing activity collected by the central government with a current rate of around 12%.
2. Sales Tax which is collected by the respective state governments which is levied on the selling activity currently levied at 14 %. 

So if there is any thing that is manufactured and sold the central government gets around 12 % and the state government gets around 14 %. 

There is a concept called VAT ( value added Tax). VAT is better explained by an example. Suppose a piece of machinery is in manufactured and sold from the factory at Rs 100 then, when the manufacturer sells it to the master distributor he bills it at Rs 100 Price plus 12 % Manufacturing tax plus 14% Sales Tax. Let us assume here that the Sales Tax is VATtable. Thus the state government gets Rs 14 out of the transaction and the central government gets around Rs 12 from the transaction. When this master distributor sells this machinery to the dealer he does not have to pay manufacturing tax as  he is not a manufacturer, but being involved in the activity of sale he has to pay sales tax. Imagine that the distributor  has sold the machine to the dealer at Rs 150 then the sales tax would be only computed on the Value addition done by him  as follows. 

Sales tax payable on Sale Price - Sales Tax already paid on Cost price. i.e. 21 (i.e.14% of 150)-15.68( 14% on 112)= Rs 5.32   

Thus the tax payable by the seller would be only on value addition to the extent of 150-112 @14% amounting to Rs 5.32.

In India over a period of time both Sales Tax and Manufacturing Tax have been made VATtable. 

There are a few exceptions in the case of inter-State Transactions. However they are often subsidized and a much lesser percentage of tax ( 2%  called CST) is payable in such cases. So all the discussions that implementing GST will reduce multiple levels of taxation and there by bring huge benefit to the industry seem to be misleading.

Now when the service industry started growing government wondered that service is also like production so there should be something like a manufacturing tax on service. So they decided to introduce a manufacturing type tax on services and called it service tax. The Excise department ( manufacturing tax department) of the central government was allocated the task of collecting the service tax. The rate of this tax was similar to the manufacturing tax. First the government thought some services should be included in to this then slowly they brought in almost all the services and levied this tax.  So this third type of tax which can be called manufacturing tax on services came into existence. 

Now the government wondered that the service is also being sold so there should be a sales tax on the services as well and while they were pondering on this they thought that we should merge the sales tax and manufacturing tax and bring one uniform tax called GST ( Goods and Service Tax). 

Ideally the GST percentage should have been 12% manufacturing( or 12 % service tax)  and 14% sales which is 26%. This 26% tax is what all us pay today on everything that we buy( excluding certain items like Gold Steel etc where the percentage is lower). 

But till now, since,  sales tax has not been levied on services it has been thought that an additional revenue can be generated by increasing the tax on services so the sales and manufacturing tax on goods can be reduced by some percentage. For Eg Suppose GST is levied at 18% then there would be a gain of 6 % on services and a loss of 6 % from manufacturing.  So overall there would be a balance.  The net effect of the GST bill would be that services would become costlier and goods would become cheaper  by around 6 percent. 

I really fail to understand the premises that certain parties are putting up to limit the GST collected to around 18%. Right now as of today we are paying a 26% tax on any goods that we purchase like tooth paste,  soaps, furniture and so on. So obviously the simple thing would have been to say that GST would be levied @26% for goods and  12 % for services. Everything would have remained same except that industry would have had to contend with lesser paper work. However by bringing down the tax payable on goods and increasing the tax payable on services I fail to understand what motive some of these parties are trying to achieve.  Some could argue that generally the poor buy goods and the rich buy services ( like services of hair cutters, auditors, taxis, theaters, restaurants gymnasiums etc). If that is truly the case then the move is good if it does not overall reduce the national income!!!

However the major benefit would be that the industry will have to deal with only one department instead of facing the idiosyncrasies of 3 departments viz Service Tax Sales Tax and Excise. Instead of filing three monthly quarterly and annual returns there would be only one return filing now which will definitely increase the comfort factor of enterprises. Focus would be more on making and selling good products/services than filing various returns. Care should be taken by the government to make simple and uniform procedures for GST. The filing of returns should be in simple format. The facility to avail input GST  credit should and online and simple just like TDS. If proper unfiormity is maintained it will also lead to de-clogging of the perennially clogged Tax Check Posts in the state borders. This may also decrease the transit time of the goods and reduce the cost of freight.

I hope that this also brings down the employment of personnel required by these government tax  departments which is a very huge load on the national exchequer. 

Having been a businessman for the better part of my career I would like to really welcome such a step as this would lead to higher productivity and any measure that reduces interaction with statutory departments of India is always more than welcome ( If you caught my hint)!!