Gujarat: Tax and economic reforms | Gujarat State PSC (GPSC) Preparation: All subjects - GPSC (Gujarat) PDF Download

Gujarat Goods and Service Tax

• The Gujarat Legislative Assembly ratified and passed the newly introduced State Goods and Services Tax (GST) Bill, making Gujarat the third state to do so after Telangana and Uttar Pradesh. The implementation of GST is expected to resolve taxation-related disputes between states and strengthen the Indian economy. Although the state may lose some tax revenue initially, the central government has agreed to provide 14% compensation for the next five years to offset the loss.
• As per the new Bill, the existing Value Added Tax (VAT) Act will be repealed after the GST Bill is passed by the Gujarat Assembly. However, VAT will still apply to certain petroleum products like petrol, diesel, crude oil, natural gas, liquor, and aviation turbine fuel (ATF).

What is GST?

GST (Goods and Services Tax) is a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services across India. It is designed to replace the various taxes levied by both central and state governments, unifying the country under a single tax system.
Key features of GST include:

• Destination-Based Taxation System: GST is levied at the place where the goods or services are consumed.
• Established by the 101st Constitutional Amendment Act: This act provided the legal framework for the implementation of GST.
• "One Nation, One Tax": GST aims to create a unified market across India by replacing multiple taxes with a single tax.
• Value Addition Tax: GST is calculated based on the value added at each stage of production or service delivery. Only the final consumer bears the tax for their part of the transaction, avoiding the cascading effect of taxes seen in the previous system.
• GST Council: A governing body, chaired by the Finance Minister of India, is responsible for making decisions related to GST.

Taxes Incorporated into GST

At the State Level

• State Value Added Tax (VAT) / Sales Tax
• Entertainment Tax (excluding taxes levied by local bodies)
• Octroi and Entry Tax
• Purchase Tax
• Luxury Tax
• Taxes on lottery, betting, and gambling

At the Central Level

• Central Excise Duty
• Additional Excise Duty
• Service Tax
• Additional Customs Duty (Countervailing Duty)
• Special Additional Duty of Customs

Benefits of GST

For Central and State Governments

• Simple and Easy to Administer: GST replaces multiple indirect taxes at both central and state levels with a single tax, simplifying the tax structure. Supported by a robust IT system, GST is easier to administer, reducing the complexities associated with previous tax systems.
• Better Control on Leakage: GST enhances tax compliance through its transparent and IT-driven system, reducing opportunities for tax evasion. The design of GST includes mechanisms that incentivize traders to comply with tax regulations, thereby minimizing leakage.
• Higher Revenue Efficiency: With reduced costs of tax collection and increased ease of compliance, GST is expected to boost tax revenues. The efficiency in revenue collection will improve as the system becomes more streamlined and transparent.

For the Consumer

• Lowering of Inflation: The introduction of a single and transparent tax system is expected to reduce the overall tax burden, which can lead to lower inflation rates.
• Relief in Overall Tax Burden: GST consolidates various taxes into one, potentially lowering the cumulative tax burden on consumers.
• Tax Democracy: GST promotes fairness in taxation by taxing luxury items at higher rates while keeping basic goods either tax-free or at lower rates, making the system more equitable.

For the Business Class

• Ease of Doing Business: GST simplifies tax compliance, making it easier for businesses to operate. The unified tax system reduces the complexity of adhering to multiple tax regulations.
• Uniformity of Tax Rate and Structure: With standardized tax rates and structures across the country, businesses can make better-informed decisions and investments, fostering a more predictable business environment.
• Removal of Cascading Effects of Taxes: GST eliminates the cascading effect of taxes, where tax is levied on top of tax, thereby reducing the overall tax burden on businesses and consumers alike.
• Reduction in Transactional Costs: The streamlined tax system under GST reduces transactional costs, enhancing the competitiveness of businesses.
• Benefits to Manufacturers and Exporters: GST is expected to boost the competitiveness of manufacturers and exporters by providing a more efficient tax structure and reducing costs.
• Overall Economic Impact: GST is anticipated to raise the country’s GDP by 2 percentage points, contributing to economic growth and development.

GST Council

• First Federal Institution: The GST Council is recognized as India's first federal institution, according to the Finance Minister. It plays a crucial role in approving all decisions related to taxation across the country.

• Composition: The council consists of representatives from the central government, all 29 states, and the union territories of Delhi and Puducherry. The central government holds one-third of the voting rights, while the states collectively hold two-thirds.

• Decision-Making Process: Decisions within the GST Council are made based on a majority vote. This ensures that both the central and state governments have a say in the taxation policies under GST.

Supporting Laws to Implement GST

To implement GST effectively, several supporting laws were required in addition to the Constitution Amendment Act. The GST Council recommended five key supporting laws, four of which needed to be passed by the Parliament, and the fifth by the respective state legislatures:

• The Central Goods and Services Tax Bill 2017 (CGST Bill): Governs the collection of GST by the central government on intra-state supplies.
• The Integrated Goods and Services Tax Bill 2017 (IGST Bill): Deals with the collection of GST on inter-state supplies, administered by the central government.
• The Union Territory Goods and Services Tax Bill 2017 (UTGST Bill): Applies GST to supplies within the union territories.
• The Goods and Services Tax (Compensation to the States) Bill 2017 (Compensation Bill): Ensures that states are compensated for any revenue losses due to the implementation of GST.
• State GST (SGST) Bills: Each state legislature must pass its own GST bill to implement the tax within its jurisdiction.

GST Tax Slabs

• Standard Tax Slabs: The GST Council has established multiple tax slabs—0%, 5%, 12%, 18%, and 28%—for different categories of goods and services. Additionally, there are categories of exempted and zero-rated goods.
• Additional Cess: A cess is levied on certain luxury and sin goods, such as luxury cars, aerated drinks, pan masala, and tobacco products, over and above the 28% tax rate. The revenue generated from this cess is used to compensate states for revenue losses due to GST.
• Highest Tax Slab: The highest tax slab under GST is pegged at 40%. Determining which goods and services fall into which tax bracket is a complex task managed by the GST Council.

Demonetization and Cashless Economy

What is Demonetization?

Demonetization is a financial process in which a currency unit's status as legal tender is declared invalid. This usually occurs when old currency notes are replaced with new ones. In India, the 500 and 1000 rupee notes were demonetized and ceased to be legal tender from November 8, 2016.

A Brief Past

• Demonetization in India previously occurred in 1978 when the government demonetized Rs. 1000, Rs. 5000, and Rs. 10000 notes under the High Denomination Bank Note (Demonetization) Act, 1978.
• The key difference between the demonetization in 1978 and 2016 is the volume of higher denomination currency in circulation; it was significantly higher in 2016.
• The 2016 demonetization was executed by the government under Section 26(2) of the Reserve Bank of India Act.

Implications of Demonetization

• Collapse of Parallel Black Economy: A significant portion of the black economy, estimated at around Rs 3 lakh crore out of Rs 17 lakh crore in total currency circulation, is expected to collapse.
• Counterfeit Currency: The move dealt a severe blow to counterfeit Indian currency syndicates operating both within and outside the country.
• Impact on Employment: A large segment of the Indian economy operates outside the banking system, and the cash shortage adversely affected the informal sector that relies heavily on cash transactions.
• Impact on Elections: Demonetization is expected to reduce the influence of cash in elections, leading to cleaner and more transparent electoral processes.
• Impact on the Economy:
  • Borrowings and GDP: It is anticipated to increase borrowings, improve inflation outlook, and boost India’s gross domestic product (GDP).
  • Investment and Infrastructure: The move is likely to revive investment opportunities, especially in infrastructure and manufacturing sectors.
  • Interest and Tax Rates: Lower interest rates and reduced income tax rates could be possible outcomes.
• Real Estate Market: A significant drop in land and property prices was observed, leading to a cleansing of the real estate sector.
• Impact on Higher Education: The discouragement of black money through high capitation fees made higher education more accessible.
• Security Implications:
  • Terror Financing: The reduction in counterfeit currency and hawala transactions affected terror financing.
  • Kashmir Unrest: The long-standing unrest in the Kashmir valley diminished post-demonetization.
  • Insurgency and Maoists: The drying up of black money, which funds Maoist operations through donations and extortions, hampered their activities.

Chatrapati Shivaji Maharaj Shetkari Sanman Yojana – 2017

• The Maharashtra state government has released the farmer’s list under the Chhatrapati Shivaji Maharaj Shetkari Sanman Yojana (CSMSSY) 2017. This farm loan waiver scheme, initiated by the Maharashtra government, aims to forgive the agricultural loans of the state’s farmers. Farmers can verify their inclusion in the list, which is available district-wise, block-wise, and Gram Panchayat-wise. They can also check their names on the official website at csmssy.in.
• Eligible and needy farmers who registered for CSMSSY 2017 were given an application ID, and the lists of farmers by district, taluka, and Gram Panchayat/Nagar Parishad can be accessed.
• As per the official CSMSSY website, a total of 4,607,203 farmers in Maharashtra have registered on the portal, and 3,928,529 farmers have applied for the loan waiver scheme as of August 31.