Ms. Bhushana Karandikar

kbhushana@gmail.com

Background The constitution of India gives us power to tax and to

spend…

Clear demarcation of powers to tax between states and central

Fortunately this is open book….we do amendments…!!

Power to tax Article 265, Schedule VII

Union list

State list

Concurrent list

Indian Fiscal Policy Trends Till, 1980 with our planned development model, we

followed conservative fiscal policy, tax system used more as an instrument to transfer resources from private to public sector

After 1980 we made some changes mainly MODVAT

The tax reforms gained pace only after 1991, liberalization policy

Why Tax reforms needed Service sector was the major driver of growth left out

of the tax preview.55% of GDP comes from the tertiary service sector

The transactions, compositions of trade were undergoing massive changes , specially after Information and telecommunication revolution services are ingrained in goods too, example mobile phones , TV

Why tax reforms were needed

With Liberalization, came more competition with imported products, more opportunities of trade and it changed the world view of policy makers

Central tax reforms Tax reforms till today, for the central taxes came in two

forms

By Changing the modalities of existing tax collection methods

By expanding the tax base with inclusion of services

Central tax reforms MODVAT was first introduced in 85-86

In 2004 CENVAT was applied

This was change in tax collection method and helped Indian industries to be competitive as it minimized the cascading effect

Changes in Central tax systems Service tax was introduced in 1994 for limited 15

services and in 2004 became all comprehensive.

It gave, (Service tax )much needed buoyancy to the revenue, with spectacular increase

Central Tax structure Union

Government

Indirect taxes

CentralExciseDuty

Service tax

Direct taxes

Income tax

Introducing State VAT The long withdrawn process of adopting VAT instead

of state taxes is watershed moment in the Indian fiscal history.

The state sales taxes regime had multiple tax rates,( more than 10) ad hoc concessions, different tax rates for the same commodity, as well as unhealthy competition with other states

Introducing state VAT The first VAT meeting of all state finance ministers

was held in 1995

In Jan 2000, empowered committee of state finance ministers was created and they steered the further progress, major issues being compensation to states, rates, tax net

Along with this Central govt supported trainning of tax officers as well as stake holders

From April 2005 states started implementing VAT

State VAT structure

State government

Sales tax Luxury taxWorks

contract taxCST

Impact of Tax reforms Most encouraging is the revenue growth rates for

central government as well as states governments

Trade volumes have increased, specailly after global crisis, we could show positive growth rates

Why we need even more reforms/GST So with these reforms as well we are away from

efficient tax system

For CENVAT, non inclusion of several taxes, cess, surcharge out of the frame work.

Exclusion of service taxes in set off for manufacturers

Exclusion of value chain down the manufacturers

Why we need even more reforms /GST State VATs tax on ( factory price+ CENVAT), this is a

major distortion and leads to cascadation effect

It excludes services or any goods + services commodities from the tax net

There are various other taxes such as luxury tax, entertainment tax

Why we need more Tax reforms/GST

Considering both, Central and state tax structures it is clear that it still carries the tax cascadation effect resulting

Increase in cost of production

Making Indian suppliers at competitive disadvantage in International market

Estimating burden of tax cascadation World bank report says we spend more on logistics

than on labour and energy

Though we do not have current estimates of this effect but other studies in similar federal structure puts it to the tune of 25 to 30%

Why we need more reforms/GST In short, global economies have already shifted to

destination based taxes , mostly GST

Ours ,CENVAT, State VAT are still origin based, with GST application it will be destination based tax

Benefits of GSTGST implementation will affect

1) Growth NCEAR( 2010) report quotes up to .9 to 1.7% of GDP

2) Compliance costs

3) Unified market

4) Greater probability of detection of evasion

Journey so far April 1 2007 P Chidambaram opens up GST concept

April 2008 First draft of the empowered committee (EC)

November 2009 First discussion Paper by EC

March 2011 to 2013 Bill introduced in Loksabha

December 2014 Bill introduced in Loksabha

Journey so far May 2015 Bill passed and submitted to Rajya sabha

August 2016 Rajyasabha passes the bill

Sept 2016 President approves it and 23 states

Sept 2016 Establishment of GST council