Caution: Lots of Jargon ahead! And a simple Youtube video somewhere in between.
GST in India is one of the best examples of how an economy could defer its progress when it interacts with politics. The highlight of GST regime is that it reduces the cost of goods at every stage of value addition through a feature called ‘Input tax credit’, commonly referred to as the ‘Set off mechanism’. What’s magical about this feature is that it eliminates the problem of ‘Cascading effect’ of taxes- also called a ‘tax on tax’. This is something similar to what we have already done, the problem of ‘Double Counting’ in GDP (except that here it applies to taxes first and then has a domino effect on the GDP). The readers are advised not to lose their heads in the jargon, and watch the video https://www.youtube.com/watch?v=61744Y6FTbM to understand the basics of GST. Then supplement their understanding with an example in Q2 of this link http://empcom.gov.in/content/20_1_FAQ.aspx. However, the point is that what GST aims to do is partially already there in the current tax regime of CENVAT (Central VAT) and State VAT upto stage of production. So GST would just expand its coverage to include the Distribution stages, for CENVAT. It will also include some indirect taxes which are currently missing from the current regime’s purview. For State VAT, GST will try to extend the benefit of ‘set off’ to CENVAT and CST (Central Sales Tax).
GST was first introduced by the UPA-II government in March 2011 but its passage dragged on to the NDA government (hopefully, this monsoon will be the ‘harbinger of joy’ for not just farmers!). The bill has received a thumbs up from Lok Sabha but is stuck in Rajya Sabha. This http://www.gstindia.com/debate-is-gst-a-game-spoiler-or-game-changer/ is an article by Veerappa Moily which details the differences between GST bill proposed under UPA-II and the one under NDA presently – take it with a pinch of salt since he is a member of Congress.
The broader sense behind bringing GST is to lower the tax rate and broaden the tax base. This will increase the tax to GDP ratio and reduce our fiscal deficits. It has also been implicated in one of the above links that by reducing the cost of goods produced and transferring the relief to end-consumers, it would make India’s exports more competitive in international market. It will also have a ripple effect on foreign investment and ease of doing business.
*This was originally posted on FISCUL, Lady Shri Ram college facebook page. These posts use a different format by supplementing them with links which have been used for the research and are hence kept short and crisp.