The attempt to set future agenda for ensuring inclusive growth through rural development by the Manmohan Singh headed central ministry is laudable. The development of agriculture, industry, infrastructure and service need pumping of huge volume of money and immense support from the government. If the government wishes to mobilise funds from the direct tax sources by increasing the rate would be a preposterous proposal. The increased government borrowings are the need of the hour as the economic situation becoming vulnerable and the present source is highly dangerous. Thus challenge of finding new sources of funds before the government would be of immense magnitude. With the new taxation system, the government can generate additional revenues from indirect taxes without enhancing the existing tariff. The fact is that indirect tax is one area where very fewer reforms have been made over a couple of decades. Kelkar, Chairman of the 13th Finance Commission has evolved an excellent and most modern indirect tax regime known as GST (Goods and Service Tax), which, if all goes well would be made operational from April 1, 2010. The government faces many challenges in implementing and making it a success in terms of revenue collection. A consensus has to be arrived at in the Empowered Committee of States Finance Ministers (ECSFM) so that all states agree to it and help to evolve a tax regime. This is in congruent with the new global financial order dominated by corporate governance.
Need for tax reform
As compared with Nehruvian and Gandhiyan socialistic pattern of economy, the 1990s economic policy taken liberalization, globalization and privatization (LPG) as new mantras of development. New economic and industrial policy spurred the growth [[provide some data for this]] and India could shed its stereotype image of Hindu growth rate. We brought in reforms in almost all sectors of economy; leading to rapid growth in sectors like service, manufacturing, capital market and finance. Gradually, the culture of corporate governance and finance capitalism seeped in our country’s economic arena. But indirect tax regime remained one area where minimum amount of reform was made. In fact it represents the grotesque face of erstwhile economy fettered with obstinate regulations. With the economic growth registering around 7-9 per cent, over a decade, India needs to bring about a massive overhauling of the existing tax regime.
* Sl.Gr. Lecturer, Govt. College Kanjiramkulam
**Lecturer, Govt. College,Kanjiramkulam
The present pattern of different sectors’ contribution to the GDP in percentage terms is vastly different from what it was in pre-nineties. For instance, the service sector’s contribution has swelled up to 50 per cent and that of manufacturing sector stands at about 25 per cent, whereas the contribution of agriculture has been drastically reduced to 24-25 per cent in the GDP. This changing pattern is suggestive of the fact that we ought to evolve a new and modern but unified tax regime which should commensurate with the changing times. It is in this perspective that the tax regime is urgently required to be overhauled, simplified and unified.
GST Principles
The proposed GST seems to be based on certain principles. Firstly, the introduction of GST is likely to rationalise irrational, complicated, cumbersome and multiple indirect tax and thereby plug the loop holes in this system. It will help stop pilferage and at the same time will offload the overloaded tax burden from some organisations. Secondly, the multiple taxations have led to birth of a somewhat repressive and lethargic system of tax collection and are doing more harm than good to the growth of the economy. The red-tapism in this area is loathing and no progressive country can afford it. The GST would hopefully do away with many, if not all, such anomalies in the system and metamorphose it into an efficient agency based on scientific and rational system of assessment. It would in a long run help increase the overall amount of tax collection. Thirdly, the present system of refunding of taxes is a horrible experience. The un-refunded tax on capital goods is a bane for capital accumulation. This, in a way, hinders the savings that is a pre-requisite to the growth. If this over-taxation is done away with, it will come as a boon for the honest taxpayers.
At present, indirect taxes are collected at various points, right from manufacturing to retailer’s outlet. It involves cumbersome process of assessment and primitive ways of collection. Such systems ultimately encourage tax evasion and also increase cost of commodities. GST proposes that the indirect taxes would be levied at the destination point which would be less distorting and non-complicated.
Operational issues
Few states like Tamil Nadu, Madhya Pradesh and Chhattisgarh have opposed or expressed reservations on implementing this pan-India consumption-based tax as many of their concerns were not resolved. When VAT was introduced in 2005, few states like Tamil Nadu did not join in the initial stage. But later, all the states introduced it, but different rates to different states fade the beauty of VAT system.
Although the Centre is mulling five-year compensation, the states are opposed to the idea of any time frame. Under the GST structure, the tax will be collected by the states where the goods or services are consumed. This might result in heavy losses for the producer states. The tax on service and goods are in different lists. Hence Constitutional amendments are required to bring these two in the power of the state and central government.
Benefits expected
The government is exploring the possibility of compensating states for revenue loss because of the goods and services tax (GST). The move could encourage states to go for the new tax regime, which is scheduled to take effect from April 1, 2010. The country could gain $15 billion annually by implementing the tax. “Some states may want assurances that existing revenues will be protected when they implement the goods and services tax. The Finance Commission is willing to consider offering compensation,” Vijay Kelkar, Chairman of the 13th Finance Commission, said at an industry event. He said the implementation of GST had raised Canada’s GDP by 1.4 per cent and would help India redistribute the tax burden equitably between manufacturing and services. The new levy will replace all major central and state taxes. It is expected to lower the tax rates by broadening the tax base and minimising exemptions.
The ongoing economic downturn and slowdown of economy across the world has given India a golden opportunity to stake claim and get a cushioned berth in the world order. But for this, we are required to increase our volume of GDP at least twice the present level. The direct taxation regime has been by and large undergoing annual fine-tuning. As a result of it, the revenue receipt in this account has considerably increased but reform on such scale in indirect taxes has not been done. Indirect taxes are, therefore, urgently required to be made rationale and unified. If the GST is introduced it would certainly increase the volume of the tax collection, thereby provide a great stimulus to our gently moving economy which has arrived at a level playing field vis-a-vis many major economies of the world. *
Need for tax reform
As compared with Nehruvian and Gandhiyan socialistic pattern of economy, the 1990s economic policy taken liberalization, globalization and privatization (LPG) as new mantras of development. New economic and industrial policy spurred the growth [[provide some data for this]] and India could shed its stereotype image of Hindu growth rate. We brought in reforms in almost all sectors of economy; leading to rapid growth in sectors like service, manufacturing, capital market and finance. Gradually, the culture of corporate governance and finance capitalism seeped in our country’s economic arena. But indirect tax regime remained one area where minimum amount of reform was made. In fact it represents the grotesque face of erstwhile economy fettered with obstinate regulations. With the economic growth registering around 7-9 per cent, over a decade, India needs to bring about a massive overhauling of the existing tax regime.
* Sl.Gr. Lecturer, Govt. College Kanjiramkulam
**Lecturer, Govt. College,Kanjiramkulam
The present pattern of different sectors’ contribution to the GDP in percentage terms is vastly different from what it was in pre-nineties. For instance, the service sector’s contribution has swelled up to 50 per cent and that of manufacturing sector stands at about 25 per cent, whereas the contribution of agriculture has been drastically reduced to 24-25 per cent in the GDP. This changing pattern is suggestive of the fact that we ought to evolve a new and modern but unified tax regime which should commensurate with the changing times. It is in this perspective that the tax regime is urgently required to be overhauled, simplified and unified.
GST Principles
The proposed GST seems to be based on certain principles. Firstly, the introduction of GST is likely to rationalise irrational, complicated, cumbersome and multiple indirect tax and thereby plug the loop holes in this system. It will help stop pilferage and at the same time will offload the overloaded tax burden from some organisations. Secondly, the multiple taxations have led to birth of a somewhat repressive and lethargic system of tax collection and are doing more harm than good to the growth of the economy. The red-tapism in this area is loathing and no progressive country can afford it. The GST would hopefully do away with many, if not all, such anomalies in the system and metamorphose it into an efficient agency based on scientific and rational system of assessment. It would in a long run help increase the overall amount of tax collection. Thirdly, the present system of refunding of taxes is a horrible experience. The un-refunded tax on capital goods is a bane for capital accumulation. This, in a way, hinders the savings that is a pre-requisite to the growth. If this over-taxation is done away with, it will come as a boon for the honest taxpayers.
At present, indirect taxes are collected at various points, right from manufacturing to retailer’s outlet. It involves cumbersome process of assessment and primitive ways of collection. Such systems ultimately encourage tax evasion and also increase cost of commodities. GST proposes that the indirect taxes would be levied at the destination point which would be less distorting and non-complicated.
Operational issues
Few states like Tamil Nadu, Madhya Pradesh and Chhattisgarh have opposed or expressed reservations on implementing this pan-India consumption-based tax as many of their concerns were not resolved. When VAT was introduced in 2005, few states like Tamil Nadu did not join in the initial stage. But later, all the states introduced it, but different rates to different states fade the beauty of VAT system.
Although the Centre is mulling five-year compensation, the states are opposed to the idea of any time frame. Under the GST structure, the tax will be collected by the states where the goods or services are consumed. This might result in heavy losses for the producer states. The tax on service and goods are in different lists. Hence Constitutional amendments are required to bring these two in the power of the state and central government.
Benefits expected
The government is exploring the possibility of compensating states for revenue loss because of the goods and services tax (GST). The move could encourage states to go for the new tax regime, which is scheduled to take effect from April 1, 2010. The country could gain $15 billion annually by implementing the tax. “Some states may want assurances that existing revenues will be protected when they implement the goods and services tax. The Finance Commission is willing to consider offering compensation,” Vijay Kelkar, Chairman of the 13th Finance Commission, said at an industry event. He said the implementation of GST had raised Canada’s GDP by 1.4 per cent and would help India redistribute the tax burden equitably between manufacturing and services. The new levy will replace all major central and state taxes. It is expected to lower the tax rates by broadening the tax base and minimising exemptions.
The ongoing economic downturn and slowdown of economy across the world has given India a golden opportunity to stake claim and get a cushioned berth in the world order. But for this, we are required to increase our volume of GDP at least twice the present level. The direct taxation regime has been by and large undergoing annual fine-tuning. As a result of it, the revenue receipt in this account has considerably increased but reform on such scale in indirect taxes has not been done. Indirect taxes are, therefore, urgently required to be made rationale and unified. If the GST is introduced it would certainly increase the volume of the tax collection, thereby provide a great stimulus to our gently moving economy which has arrived at a level playing field vis-a-vis many major economies of the world. *
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