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September 24, 2010

Is GST VAT? What are the hurdles involved in implementing it?

Everybody is keenly awaiting for the proposed GST draft which will replace the existing system of VAT in India. VAT is value added tax (on products). GST is like VAT but applies to Services also (apart from products). In India, we have VAT and Service Tax whereas in many countries you have only GST. VAT and GST is a tax on consumer expenditures and in theory should not fall on business activities. When a business operating in a VAT/GST country buys goods or services it pays tax to the supplier, which is called an input tax. When the same business sells goods or services, whether to another business or to a final consumer, it is required to charge tax, which is called an output tax. The business then must periodically total the input tax and deduct it from the output tax, paying the excess to the government agency responsible for collecting it.
GST is India’s most ambitious indirect tax reform, which seeks to stitch together a common market and reduce costs to replace the current fragmented regime. In India Dual GST would be implemented 20% & 12% split evenly between state and center. CST (Central Sales Tax) would be scrapped in a GST regime.
I am opposed to is unethical to tax luxury cars & sugar at the same rate says kerela FM.
1. Opposition from states: At present, the states are opposing the 12% single GST. Arriving at an acceptable GST rate has been bogged down by differences among the states and also between states and other entities like the TFC task force on GST architecture. Thumb rule is that larger the number of taxes subsumed in GST, lower will be the revenue neutral rate. The states have been reluctant to subsume all taxes into GST as it would mean loss of power to unilaterally change some taxes. Two drafts of the proposed new tax regime failed to find acceptability by states and the third has been referred to empowered committee of state finance ministers.
2. Improper Structure: There is much debate on the likely aggregate rate of the GST. It is also possible that several other design elements of the GST can undergo changes.
3. GST requires constitutional amendments currently the Centre cannot impose tax beyond manufacturing and states cannot levy service tax. Unlike Direct Tax Code (DTC), GST is a transaction-based tax and hence can be introduced any time.

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