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The goods and services tax (GST) is set to be rolled out from 1st July after the centre and the states reached an agreement on the contentious issue of the sharing of administrative powers. Under the proposed tax regime, 90% of all assessees with a turnover of Rs 1.5 crore or less will be scrutinised and audited by state authorities; the remaining 10% by the Centre. Above that limit, the Centre and states will assess in a 50:50 ratio.
This is without doubt a big win for finance minister Arun Jaitley. The breakthrough is especially welcome for a number of reasons. For one, it would hopefully allow the creation of a single market for the whole country after July this year for the first time in 60 years and ensure major economic gains.
This also gives the Indian industry much needed clarity and additional time for preparing for the indirect tax reform. Finalizing the rollout date helps the government incorporate GST revenues in its budget calculations.
Also, in the post-demonetisation scenario, it is good both for the Centre and the state to have a late GST. Indian economy is already having a tough time with the manufacturing and services sectors having taken a hit.
According to an article in the Times of India, the centre and states have also done well by sorting out the administrative issues by settling for a vertical rather than horizontal division as initially demanded by the states, which would have given them jurisdiction over all taxable units with a turnover below Rs 1.5 crore.
A vertical division not only ensures that both the states and central government will be empowered and gain expertise in administrating tax payers in all slabs, but it will also ensure that the tax administration does not distort the size of the production units in the long term.
The GST rollout is also important as indirect taxes will be levied at the production levels instead of the consumption point. This favored the more developed states while the other states were drained off the already limited taxation avenues open to them.
This called for some sacrifices from the more developed states who finally agreed when the central government agreed to full compensation of any shortfall in revenues for a five-year period after the rollout of the GST.
All in all, the economy is set to gain considerable competitiveness once the current indirect system is dismantled and the GST is rolled out by July. The delay of three months should also allow the production units to amend their mechanisms and ensure a smooth changeover to the new GST system.
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