Implementation Of GST The Call Of The Hour
The Centre will have the power to tax inter-state supply of goods and services through levy of Integrated Goods and Service Tax (IGST). All transactions of goods and services will attract both Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) except on those exempted
The present NDA Government is keen to implement the ‘Goods and Services Tax’ (GST) by April 01, 2016. This indirect tax reform is not only desirable but also imperative in the emerging economic environment. Reforming the indirect tax system is critical to achieve fiscal consolidation amongst other vital issues. Fiscal deficit, the gap between government expenditure and revenue, was 4.5 per cent in fiscal year 2013-14. The present government has brought it down to 4 percent of GDP in 2014-15, but that is not enough. In order to reduce the deficit further “the government has to implement structural tax reforms such as the ‘goods and services tax’ (GST), which will lift the government’s tax revenues, lower the cost of doing business and boost growth,” says credit rating agency Crisil.
Arun Jaitley, the Union Finance minister, with the backing of the Prime Minister passed the long pending GST Bill in the Lok Sabha. Furthermore, after much deliberation they could refer the Bill to the select committee for scrutiny before they table the bill at Rajya Sabha. The NDA Government, which is in a minority in the Rajya Sabha yielded to the opposition’s demand. With the bill being sent to the House panel, it has moved closer to becoming a law. India follows a federal structure wherein the authority to impose taxes has been distributed amongst the central government and the state governments. Our basic tax collection method is still based on the Emperor Akbar’s tax system from mid 16th century. In his time, there were separate tax collectors (zamindars) to collect taxes and it was then sent to the capital. Even today the states are not ready to part with the freedom to collect their taxes independently.
Parties Opposing GST
The Constitution (One Hundred and Twenty-second Amend-ment) Bill, 2014 was introduced in the Lok Sabha by Finance Minister Arun Jaitely on December 19, 2014. The Bill was passed by the House on May 5, 2015 receiving 352 votes for and 37 against. All 37 no votes came from members of the AIADMK. The Indian National Congress, which opposed the Bill, walked out of the House before voting began. Although, the BJD and the CPI(M) had previously opposed the Bill, they cast votes in favour. The Government attempted to move the Bill for consideration in the Rajya Sabha on May 11, 2015. However, members of the Opposition repeatedly stalled the proceedings of the House. In order to appease the Opposition’s demand for further scrutiny of the Bill, Jaitely moved a motion to refer the Bill to a Select Committee. The 21-member committee is expected to give its report by the end of the Monsoon session.
The primary objective of this tax reform is to address the problems of the current indirect tax system. Indirect taxes are those that can be passed on to someone else opposed to direct taxes, which are to be borne by those on whom they are levied. In India, indirect taxes have been playing an increasingly important role. Presently, they account for about 68 per cent of the total tax revenues of the central government. The present indirect Tax has four major constituents—Excise duty, Service tax, Sales tax/VAT and Customs duty.
Excise duty is tax on articles produced or manufactured in the country and intended for home consumption. Service tax is levied by central government on all services except the services covered under negative list and services specially exempted. Sales tax, on the other hand, is levied on the sale of moveable goods at rates, which vary with the type, and nature of goods and the state in which the sale has taken place. ‘VAT’ executed by state governments is applied on each stage of sale, with a particular apparatus of credit for the input ‘VAT’ paid. Customs duty is a tax collected on goods imported into or exported out of the boundaries of a country.
Apart from these, some other taxes including Entry tax, Octroi, Entertainment tax, Purchase tax etc. constitute the Indian indirect tax structure. Some State Governments levy Entry-tax on entry of certain goods into the State. Octroi is levied by Municipals upon the entry of certain goods into specific boundaries. Whereas the Entertainment tax is levied on entertainment to which persons are admitted on payment. The purchase tax is paid on purchase of goods from unregistered dealers. The Purchase tax behaves differently as per State VAT Act and Rules. As one can see, the indirect tax system is currently mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain. As a result, there are several shortcomings in the present structure, some of the important ones are:
- Tax Cascading: ‘Cascading -effect’ is one of the major distortions of the indirect taxation regimes. The ‘cascading-effect’ is taxation over taxes. Federal structure of Indian democracy, allows both the states and the Centre to levy taxes separately, which leads to cascading. As a result, the Indian products are less competitive in the International market.
- Narrow tax base: Tax base is not wide enough, because a lot of the services offered are outside the tax net.
- Levy of Excise duty on manufacturing point: The Cenvat is levied on goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax.
- Inability of state to levy tax on services: Currently, states don’t have the power to levy service tax.
- Interpr-etational issue: Litigation on interpretation of various provisions and determining category of commodities.
- Bureaucracy related to tax-collection: Octroi and entry tax at municipal/state borders are the reason why long-distance trucks are parked 60 per cent of the time.
To overcome these limitations the indirect tax reform was envisaged. The GST is India’s biggest proposed indirect tax reform since 1947. In 2000, the Vajpayee Government started discussion on GST by setting up an empowered committee headed by Asim Dasgupta, then Finance Minister of West Bengal. The UPA government brought a Bill in Lok Sabha in 2011, but failed to get it passed. On May 6, 2015, Lok Sabha passed the 122nd Constitutional Amendment—’Goods and Services’ Tax Bill, which was introduced by NDA Government.
Let us understand what exactly this ‘much-talked-about’ the ‘Goods and Services tax’ is. GST is a comprehensive indirect tax on goods (manufacturing) and services. It will convert the country into one unified market, replacing most indirect taxes with one tax. GST will be levied on buyers of goods and services, or where the service is consumed. It is a tax on goods and services with continuous chain of set-off benefits from the producer’s point and service provider’s point up to the retailer’s level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism. France was the first country to introduce GST in 1954. Ever since world over, GST has been successfully implemented in over 150 countries.
While countries such as Singapore and New Zealand tax virtually everything at a single rate Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs replacement and processing services. It is only recoverable on goods used in the production process, and GST on fixed assets is not recoverable.
There is a separate business tax in the form of VAT. For example, when the GST was introduced in New Zealand in 1986 it yielded revenues that were 45 per cent higher than anticipated, in large part due to improved compliance. It is more neutral and efficient structure could yield significant dividends to the economy in increased output and productivity. The GST in Canada replaced the federal manufacturers’ sales tax which was then levied at the rate of 60 per cent and was similar in design and structure as the CENVAT in India. it is estimated that this replacement resulted in an increase in potential GDP by 24 per cent, consisting of 12.4 per cent increase in national income from higher factor productivity and 50 per cent increase from a larger capital stock (due to elimination of tax cascading). The Canadian experience is suggestive of the potential benefits to the Indian economy. This means gains of about US$15 billion annually. This is indeed a staggering sum and suggests the need for energetic action to usher the GST regime at an early date. GST rates of some countries are given below.
(Sanjay K Bissoyi)
The GST will enable to overcome substantially the above stated shortcomings of Indirect tax structure. It will also simplify the compliance procedures and harmonise the Centre and State tax administrations. Since GST structure would follow the destination principle, the imports would be subject to GST, while exports would be zero-rated. This will help to boost much needed export and manufacturing.
In the proposed structure, both the levels of government will levy the GST concurrently. It will comprise of a Central GST (CGST) and a State GST (SGST), which will be legislated, levied and administered by the respective levels of the government. In other federal countries like Brazil and Canada, a dual GST system is prevalent.
GST will subsume all central and state indirect taxes and levies, including various Central indirect taxes and levies such as Central Excise duty, Additional Excise duties, Excise duty levied under the Medicinal and Toilet Preparations (Excise duties) Act, 1955, Service Tax, Additional Customs duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services and State Value Added tax/sales tax, Entertainment tax (other than the tax levied by the local bodies), Central Sales tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax,
Taxes on lottery, betting and gambling and State cesses and surcharges in so far as they relate to supply of goods and services.
Moreover, the Centre will have the power to tax inter-state supply of goods and services through levy of ‘Integrated Goods and Service Tax’ (‘IGST’). All transactions of goods and services will attract both CGST and SGST except on those exempted. Inter-State supply of goods and services will be taxed on the destination basis. The Centre would levy ‘IGST’ which would be CGST plus SGST on all inter-State transactions of taxable goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases.
Another important feature of the Bill is a proposal to levy additional tax on supply of goods on inter-state trade. The additional tax will not exceed 1 per cent and will be collected by the central government for a period of two years. The amount so collected will be assigned to the states from where the supply originates.
A decision on whether to impose a tax on petroleum products under the proposed GST will be taken two to three years after the new system is implemented. The date on which such tax under GST shall be imposed has been left to the decision of the GST Council at a later date after introduction of GST. For these two to three years, petroleum would be within the GST but the Centre and states would be allowed to impose excise duty and value added tax (VAT), respectively. By incorporating petroleum in the purview of GST, the Finance Minister has taken a very intelligent measure to avoid another constitutional amendment.
Alcohol has been kept out of the GST ambit. Tobacco products would be subjected to GST with input tax credit (ITC). Centre may be allowed to levy excise duty on tobacco products over and above GST with ITC.
The government is proposing a revenue-neutral rate (‘RNR’) for GST. ‘RNR’ is the rate that allows the Centre and states to sustain the current revenues from tax collections and, therefore, takes within its ambit; any tax losses because of taxes subsumed or phased out.
Many government panels and independent experts had in the past put the revenue-neutral rate for GST between 12 per cent and 20 per cent , but the National Institute of Public Finance and Policy, asked by the present government to compute the RNR for GST exclusive of petroleum taxes, mooted a higher rate of 27 per cent . Analysts feel these rates are nearly the same as—if not slightly higher than—the current rates of indirect taxes at the central and state levels. Ideally, the rates for GST, which captures a much larger tax base, ought to be significantly lower than current rates and bring concomitant additional competitive strength to the economy. Globally, the average GST/’VAT’ rate is around 16.4 per cent. The average rate in Asia-Pacific is 9.88 per cent and Canada and Nigeria have the lowest rate of 5 per cent. However Finance Minister Arun Jaitley has assured that the proposed GST will be much lower than the 27 per cent. The threshold exemption is built into the proposed GST to keep the small traders out of the tax net. The small traders, with turnover below 10 lakhs, need not register for GST.
The bill has also recognized the need to have a GST council. The Union Finance Minister will head the council, while Minister of State for Revenue and state finance ministers will be the members. In addition, the Bill proposes to set up a Dispute Settlement Authority that would look into disputes between the States and the Centre. Appeals from the authority would directly lie with the Supreme Court.
In India, implementing unified indirect tax structure is a herculean task. It is perhaps easier for the 28 member states to form the European Union (EU) with unified market and one currency. The GST bill requires a Constitutional Amendment. It has to be passed in both the Houses of the Parliament by a special majority i.e. by a majority of the total membership of that House and by a majority of not less than two-thirds of the members of the House “present and voting”. In addition, at least half of the state Assemblies will have to pass the Bill.
Another significant hurdle in introducing this new tax structure has been the ongoing struggle between the states and the Centre on the loss of revenue. It’s taken years to resolve, but even now it is an issue that isn’t anywhere close to being completely fixed. This implies that both the structure and administration of the levy will have to emerge after detailed negotiations and bargaining between the Centre, 29 states and the two Union Territories with legislatures. Implementation of GST can happen only after it is cleared by both houses of Parliament, each with a two-thirds majority and, ratified by at least half the states. After that, the separate GST Bills would have to be passed in Parliament and the respective state assemblies.
There are several tasks that need to be executed ahead of implementing GST. The Centre and states have to frame and pass GST laws—Central GST and State GST—which will provide the framework for the new tax. The IT infrastructure has to be ready before April 1, 2016, the scheduled date for implementation of the new tax. The main task before the actual GST rollout will be to computerize the commercial tax departments in all states. A GST Council will have to be formed, which will decide on important issues including tax rates, exemption list and threshold limit etc. According to Vijay Kelkar, “The growth in GDP can be between 2-2.5 per cent with the implementation of a well-designed GST. The increase in exports can be between 10-14 per cent.” However in Indian democratic federal system, even a watered-down GST to start with would spur manufacturing and create jobs. It will at least boost the GDP growth by 1-1.5 per cent at the beginning. Therefore, it is important to consider the GST reform as a process rather than an event. Once the basic features of the tax are implemented, it would be necessary to improve the structure and operational aspects of the tax over time. Various analyses indicate that indirect tax incidence in India is around 28-30 per cent. Even if the proposed GST rate settles between 20 per cent and 22 per cent, the tax incidence to the end customer will be considerably low. Moreover, as and when petroleum is included in the GST ambit, the tax base will substantially widen. This will reduce the tax rate considerably and the ultimate tax bearer will benefit. Initially, two factors should be meticulously considered, the rate and the threshold level of GST, while structuring GST. However, unless ultimately if we cannot bring down the GST rate to an internationally competitive level, India will not be a preferred destination for global players.
GST is clearly a long-term strategy; and it would lead to higher output, more employment opportunities, and economic inclusion. Initially however, it is likely to cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy. However, under the able Finance Minister with the full support of the Prime minister nothing is impossible. It will be a tremendous achievement for the NDA Government, even if, to start with a diluted GST is implemented. This will help Prime Minister Namenda Modi to fulfill his much-cherished dream ‘Make in India’.
While going ahead with the GST we should turn towards the ageless wisdom of our country. The golden rule of Chanakya’s ‘Arth-Shastra’—”to collect taxes from citizens the way a Bee collects Honey from the flowers—quietly without inflicting pain” should be the guiding principle while formulating GST. And while administering the tax revenue one should remember Kalidas’s words for King Dilipa—’It was only for the good of his subjects that he collected taxes from them, just as the sun draws moisture from the earth to give it back a thousand fold.’
(The author has worked in senior positions in many multinationals.)
By Madhumanti SenGupta