The Next Big Reform – GST

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The Next Big Reform – GST

Anuj Arora, ACS, Group Addl. General Manager, AL, Nafees Group, New Delhi and

Saurabh Gupta, Sr. Manager, Finance, PVR Ltd., New Delhi.

The laws relating to levy of indirect taxes are proposed to be comprehensively reformed

and restructured with a view to usher in the goods and services tax in place of the

e-mail : different levies as at present. How it is proposed is briefly portrayed in this brief article.

anuj.arora30@gmail.com

sgupta7@gmail.com

Goods and Services Tax (GST) is a part of the proposed tax

reforms that center round evolving an efficient and harmonized

consumption tax system in the country. Presently, there are

parallel systems of indirect taxation at the central and state levels.

Each of the systems needs to be reformed to eventually harmonize

them. The goods and service tax (GST) is proposed to be a

comprehensive indirect tax levy on manufacture, sale and

consumption of goods as well as services at a national level.

Integration of goods and services taxation would give India a

world class tax system and improve tax collections.

WHAT IS GST

GST is a broad based and a single comprehensive tax levied

on goods and services consumed in an economy. GST is levied

at every stage of the production-distribution chain with

applicable set offs in respect of the tax remitted at previous

stages. It is basically a destination based tax on consumption

of goods and services with an input credit mechanism across

the value chain. To put at a single place, GST may be defined

as a tax on goods and services, which is leviable at each point

of sale or provision of service, in which at the time of sale of

goods or providing the services the seller or service provider

may claim the input credit of tax which he has paid while

purchasing the goods or procuring the service. It will subsume

most indirect taxes (currently levied on both goods and

services) under a single umbrella.

It is seen as the panacea for removing the ill-effects of the

current indirect tax regime, prevalent in the country. If adopted

and implemented, GST may neutralise the existing problem

of taxes being levied on top of taxes. For instance, when a

shoe company produces a pair of shoes, the Central Government

charges an excise duty on them as they leave the factory. At

the retail level, the state where the outlet is located, charges

VAT (different states charge different rates of VAT) without

giving credit on the excise duty levied earlier (the state tax is

levied on top of a Central tax). In the GST system, both Central

and state taxes may be collected at the point of sale. Both

components (the Central and state GST) may be charged on

the manufacturing cost.

This system is basically designed to simplify current level

indirect tax system. It integrates the union excise duties, customs

duties, service tax and state VAT into a single levy known as

GST. GST may be rightly termed as national level VAT on

goods and services with only one difference that in this system

not only goods but also services are involved and the rate of

tax on goods and services are generally the same.

PRIMARY OBJECTIVES OF GST

Some of the primary objectives of the GST based taxation are:

1. Ensuring availability of input credit across the value

chain.

2. Minimising cascading effects of taxation.

3. Simplification of tax administration and compliance.

4. Harmonisation of tax base, laws and administration

procedure across the country.

5. Minimising tax rate slabs to avoid classification issues.

6. Prevention of unhealthy competition among states.

7. Increasing the tax base and raising compliance.

8. Minimum Floor rates of tax, generally not exceeding

two rates.

9. Zero rating of exports and interstate sales of goods and

supply of services.

10. Taxing of capital Goods and Inputs whether goods or

services relatable to manufacture at lower rate, so as to

reduce inventory carrying cost and cost of production.

11. A common law and procedure throughout the country

under one single administration.

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GLOBAL PERSPECTIVE

GST is one of the widely accepted indirect taxation system

prevalent in more than 150 countries across the globe.

Globally, GST has been structured as a destination based

comprehensive tax levied at a specified rate on sale and

consumption of goods and services within a country. It

facilitates creation of national tax standards with consumers

paying uniform rates of GST, thereby enabling flow of seamless

credit across the supply chain. In Countries where GST has

been adopted, producers (Manufacturers, wholesalers, retailers

and service providers) charge GST at the specified rate on

price of the goods and services and claims input credits for

GST included in the price paid by them on procurement of

goods and services (raw material). Technically, sellers or

service providers collect GST from their customer (who may

or may not be their final consumer) and prior to depositing

this with the exchequer, deduct the tax (GST) paid by them.

The ultimate cost is borne by the final consumer who cannot

claim GST credit. In the sense, it is and indirect tax – not

borne by manufacturers and service providers. The net effect

is that the seller or service provider charges GST but does not

retain it and pays GST but receives a credit for it, making him

a pseudo collecting agent for the government. On most of the

goods and services, the tax rate is uniform, but depending

upon the circumstances in a country, certain goods and services

can be declared ‘exempted’ or charged at lower rate.

MODELS

There are several models of GST, each with its own merit and

demerit. A look at some of the models in circulation:

(1) Australian Model: In Australia GST is a federal tax,

collected by the Centre and distributed to the states. But

India is a heterogeneous country and there is no chance

that states may allow the Centre to collect all the taxes

while they become just spending institutions;

(2) Canadian Model: The GST in Canada is dual between

the Centre and the states and has three varieties:

(i) Federal GST and provincial retail sales taxes (PST)

administered separately - followed by the largest

majority;

(ii) Joint federal and provincial VATs administered

federally (Harmonious Sales Tax - HST); and

(iii) Separate federal and provincial VAT administered

provincially (QST) – only for Quebec as it is like a

breakaway province. The first variety is

fundamentally the Canadian model, which is similar

(though not the same) to the existing situation in

India.

(3) Kelkar-Shah Model: This model of a unified GST, is

based on a grand bargain to merge central excise, service

tax and state VAT into one common base. Two different

rates of tax are to be levied by the Centre and the states.

The collection may be by the Centre. This is like the

HST model in Canada;

(4) Bagchi-Poddar Model: This model, just like Kelker-

Shahs, envisages a combination of central excise, service

tax and VAT to make it a common base of GST to be

levied both by the Centre and the states separately. This

means that the Central Excise Act 1944 may be abolished

and the goods tax may be only on the sale of goods. It

may merge in it the service tax.

To put this in legal lingo, the taxable event for the GST may

be the act of sale of goods and services. The concept of

manufacture may simply vanish. The difference between the

Bagchi-Poddar and Kelker-Shah models is that in the former,

the collection is at two levels, by the Centre and the states,

while in the latter the collection is only by the Centre. So

while the Kelkar-Shah model is like the Canadian HST, the

Bagchi-Poddar one is like the Quebec model. Although the

model says that it is based on the Quebec model, it is actually

not fully so as this model envisages collection both by the

Centre as well as the states, whereas the Quebec model

envisages collection only by the state of Quebec.

The Bagchi-Poddar model also clearly envisages that a

Constitutional amendment is necessary to bring the taxing

powers on goods and services under the concurrent list and to

abolish the present division of taxing powers between the Centre

and the states.

ADVANTAGES

􀂄 Speeds up economic union of India;

􀂄 Better compliance and revenue buoyancy;

􀂄 Replacing the cascading effect [tax on tax] created by

existing indirect taxes;

􀂄 Tax incidence for consumers may fall;

􀂄 Lower transaction cost for final consumers;

􀂄 By merging all levies on goods and services into one,

GST acquires a very simple and transparent character;

􀂄 Uniformity in tax regime with only one or two tax rates

across the supply chain as against multiple tax structure

as of present;

􀂄 Efficiency in tax administration;

􀂄 Will result in widening tax base and increased revenue

to the Centre and State;

The Next Big Reform – GST

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􀂄 Increased tax collections due to wide coverage of goods

and services; and

􀂄 Improvement in cost competitiveness of goods and

services in the international market.

ROADMAP FOR GST IN INDIA

Last year the Union Finance Minister had proposed that India

should move towards a national level GST in the Union Budget

2006-07, with the Centre and states sharing revenue. He had

further proposed to set April 1, 2010 as the date for introducing

GST. The replacement of the cascading and narrowly-based

local sales tax with state VAT is the most important tax reform

in Independent India. VAT had been introduced on April 1,

2005. Although the dual system of VAT is a good beginning

in the reform of commodity taxes in India, in a modern

economy, separate taxation of goods and services is not viable.

Though the dual VAT (CENVAT and state VAT) removes

some of the weaknesses in the Union excise duties and local

sales tax (at the state level), it cannot be the last stage of reforms

in commodity taxes in India, as dual VAT in a federal structure

will continue to have some cascading effect. To avoid such

cascading effect as well as reduce the transaction cost for

manufacturers, it is important that taxes on commodities and

services are reassigned in such a way that the powers to levy

both these taxes are assigned to the states.

This requires the Centre to withdraw from the field of these

taxes for revenue purposes to allow the states levy a

comprehensive state GST covering all goods and services. The

levy of dual VAT causes vertical tax externality due to taxation

of the same base by the two tiers of government. It is important

to note the vertical imbalance in the assigned taxation powers

under the Indian Constitution. In the sharing of revenues

between the Centre and states, states get only 35%. To remove

this imbalance, it is important to rethink about the taxation

powers, especially those related to GST. For this reason, the

dual VAT cannot be adopted as a long-term reform measure

for domestic trade taxes in a federal structure in India. Thus a

comprehensive state GST would be the most appropriate

reform. In India, there are governments at different levels

with constitutionally assigned fiscal responsibilities. Fiscal

responsibilities are shared by three levels of government –

central, state and local. Thus a tax reform by governments at

one level can have fiscal consequences for the governments at

another level.

Therefore, a tax reform requiring the introduction of VAT in

a federation should have the following objectives: it should

be revenue neutral between the governments;

􀂄 the tax base should be uniform across the country; the

provincial and local governments should have the

autonomy to set tax rates;

􀂄 the tax should be relatively simple to administer and to

achieve complete compliance; and

􀂄 taxes on the international flows of goods should be based

on uniform rules across the country.

The aim of commodity tax reform in India should be a

comprehensive VAT covering value added by all business

enterprises from the manufacturing to the retailing activities.

The tax should be consumption based and follow the tax credit

method to compute the net tax liability of a business firm.

The tax liability of international and inter-state flows has to

be computed by using the destination principle. A more

appropriate reform in India would be to impose a

comprehensive state GST like in European Union (EU). That

would require the Centre to withdraw from the field of VAT.

The power to levy VAT rests only with the states. This scheme

will avoid duplication by taxing authorities. Since state GST

is a comprehensive VAT, including all goods and services

(replacing both CENVAT and state VAT), its rate will be

adjusted. The Centre would be compensated of this loss arising

giving up collecting VAT by authorising the levy of sumptuary

excises on a few select commodities.

HURDLES IN IMPLEMENTATION OF GST IN

INDIA

Bringing about an integration of all taxes levied on goods and

services in a federal polity with sharp distribution of legislative

powers is a herculean task to say the least. The Constitution of

India, 1950 demarcates taxing powers in a two-tier structure

wherein levies on production and international imports are

with the Union and post- production levies rest with the states.

The Centre levies duties of excise on manufactures and import/

countervailing duties on international imports apart from

levying a tax on services under various taxing and the residuary

entry in the Union List. The states levy VAT on goods sold or

entering in the state under various entries of the state list.

Even if all Union-level levies are integrated into a single levy

and all state level levies culminate in a single State level levy;

this may still have two levies and the resultant cascading and

administrative burdens may nevertheless remain to an extent,

though this may go a long way in harmonising levies. A

harmonised, integrated and full fledged GST calls for the

following :

(1) Implementation of GST calls for effecting widespread

amendments in the Constitution and the various

The Next Big Reform – GST

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constitutional entries relating to taxation. Such

amendments may virtually transform the Indian federation

into an economic Union much along the lines of the

European Union. The various levies of the Union and the

states are also to be harmonised. In the current scenario it

is difficult to visualise constitutional amendments of such

far reaching implications going through, more so in view

of the fact that sharing of legislative powers is such an

essential element of our federal polity and it may be

perceived to be a basic feature of the Constitution;

(2) Services have to be appropriately integrated in the tax

network;

(3) Constitutional amendments required for implementing

GST is just one of the major road blocks. No less

significant is the issue of an appropriate design and

structure of GST. For instance, how the issue of interstate

movement of goods and services may be addressed.

The phasing out of CST may go a long way in addressing

the issue of inter-state trade and commerce in goods but

the crucial issue regarding services originating in one

state and being consumed in other state still remains;

(4) Another contentious issue that is bound to crop up in

this regard is the manner of sharing of resources between

the Centre and the states and among the states inter se as

also the basis of their devolution;

(5) Apart from all these, there has to be a robust and

integrated MIS dedicated to the task of tracking flow of

goods and services across the country and rendering

accurate accounting of levies associated with such flow

of goods and services; and

(6) Finally, the contentious issue of taxing financial services

and e-commerce is to be appropriately addressed and

integrated.

CONCLUSION

From the above discussions, the advantages may be evidently

laid out that is the increasing proximity of our tax system to the

global tax system. In a way, it may boost our economy and

enable us to compete at the global front. As a result, even our

system may match the international phenomenon. This is the

biggest advantage of such a system. But every system has its

own intricacies embedded at the initial stages. Lower incidence

of tax, reduced prices, a move towards the global concept,

reducing cost of tax compliance, better revenue collection, an

efficient and harmonised consumption tax system in the country

all this looks good on the card, but is it really so easy to

implement? It does seem increasingly a big challenge but it is

still a very real goal in the eyes of both the Central and State

Government circles, regardless of the political persuasion of

the parties in power. This is very positive thing in itself but the

point is whether there is enough time to get the job done. There

really now needs to be a strong and focused push so that the

April 2010 deadline on the introduction of GST is met. Keeping

the various constitutional, technological, procedural and political

barriers, the job seems easier said than done.

Few critics do not even hesitate in remarking that such a system

is the old wine served in a new bottle. Thus, the careful

appraisal of the recommendation is needed. Various scholars

must roll their think tank towards the future system, as it may

play a crucial role. 􀂉

The Next Big Reform – GST

 

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