GST in India : whether a distant reality
Expected GST model in India:
Dual GST model: The proposed Goods and Services Tax will be a destination based tax measure, with tax set offs available across the production value-chain. GST structure is expected to have two components: one levied by the Centre, Central GST (CGST) and the other levied by the State, State GST (SGST). Both components would be applicable on all taxable transactions of goods and services. The Centre and the States would have concurrent jurisdiction for the entire value chain for all tax-payers on the basis of thresholds for goods and services prescribed for the States and the Centre. There would be separate statutes for Centre GST and States GST.
Taxability: A person will be liable to GST if his annual gross turnover is beyond a prescribed threshold level. Two tier rates on goods at both CGST and the SGST – standard rates and lower rate for essential commodities. In addition to these, it is expected that there would be a special rate for precious metals and a common exemption list.
Set-off of tax credit: Input taxes paid against the CGST would be allowed to be taken as Input tax credit (ITC) for the CGST only and similarly, input taxes paid against the SGST would be allowed to be taken as ITC for the SGST only.
Taxes to be subsumed: It is proposed that the taxes to be subsumed under CGST will include Central Excise Duty, Additional Excise Duty, Service Tax and Additional/Special Customs Duties (CVD/SAD) and the taxes to be subsumed under SGST will include VAT, Entry Tax, Entertainment Tax, Luxury Tax, Purchase Tax and Lottery Tax.
Exceptions: Basic Customs Duty, Octroi, Stamp Duty and Electricity duty may be kept outside the GST. Levies like the toll tax, environment tax and road tax will be outside the GST ambit, as these are user charges. A basket of petroleum products and natural gas likely to be charged GST and an additional levy by both the Central and States. No input credit would be available against on the additional levy. A similar treatment might be provided to alcohol and tobacco.
Inter-State trade: Centre would levy Integrated GST (IGST) which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provisions for consignment or stock transfers. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. There will be a Central IGST authority for facilitating this. The existing CST will be abrogated.
Compounding Scheme: There would be a compounding/composition scheme for the small tax payers similar to the one under VAT system. As per the First Discussion Paper, there would be a compounding cut-off at Rs. 50 lakh of gross annual turn over and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for persons with turnover below the compounding cut-off.
Assessment: Assessment, enforcement, scrutiny and audit would be undertaken by the same authority which is collecting the tax. The Central Board of Excise & Customs (CBEC) will be responsible for implementing the CGST and the State Tax administrations will be separately responsible for implementing the SGST. How IGST would be administered is still open.
Imports & Exports: The Centre will collect GST on imports and pass on the SGST component of it to concerned State on destination principle. Import of services will be subject to GST on a reverse charge mechanism. Taxes so paid will be available as Input Tax Credit. Exports will be zero rated.
Special Industrial Schemes: Industrial schemes, exemptions, remissions etc. would continue up to legitimate expiry time or converted into cash refunds schemes both for the Centre and the States. It is expected that the benefits presently availed by the EOUs and SEZ would continue to be available in the GST regime as well.
Compensation and Dispute mechanism: GST structure would include a compensation package for states in lieu of any possible revenue loss. Also there would a mechanism for dispute resolution and advance ruling.
Open Issues:
In a federal country like India, where each State, in terms of Constitutional provision, is sovereign in levying and collecting State taxes, introduction of a harmonized tax system for all the States is a big challenge.
1. GST Rates: First discussion paper on GST did not specify any GST rate. Currently, the standard CenVAT, VAT, CST and Service Tax rates are 8%, 12.5 %, 2% and 10% respectively. The Task Force on GST of Thirteenth Finance Commission (TFC) has worked out a Revenue-Neutral Rate (RNR) of 12% (5% CGST and 7% SGST) assuming there is a single GST rate and stamp duty & electricity duty are also subsumed in the GST. With dual GST in place, this RNR is going to change. The applicable GST rates still need to be decided depending upon the finalized tax base.
2. Tax Base and Threshold limits: A dual threshold is proposed by EC for CGST and SGST. For CGST, the basic exemption for goods would remain at rupees 1.5 crores and for services a similar exemption would be provided later. For SGST, the basic exemption for goods and services would be rupees 10 lakhs. Department of Revenue has expressed concerns in having two different thresholds and has proposed a uniform threshold for goods and services for both SGST and CGST. Also, a threshold of rupees 50 lakhs has been proposed under the composition scheme for small taxpayers. The threshold exemption might not apply to persons engaged in inter-State business.
3. Constitutional Amendment: ‘Taxes on sale of goods' is a State Subject (entry 54 under List-II State List, 7th Schedule of the Constitution of India), whereas, ‘taxes on inter-State sale of goods', ‘taxes on services' and ‘duty on goods manufactured' are Union Subjects (entry 92A, entry 92C and entry 84 respectively, under Union List). Bringing these all together requires broad consensus leading to constitutional amendment which is a prerequisite to introduction of GST and the government is considering various options to deal with the issue. In this context, the Thirteenth Finance Commission (TFC) has suggested the possibility of levying the GST pursuant to a tax agreement among the Centre and the states akin to the erstwhile Article 278 of the Constitution. The power of the states and the Union to make laws to impose the tax shall be subject to the terms of this agreement. Other alternatives under consideration are -amending the Constitution to bring in a Fourth List, which would grant concurrent powers to the Centre and the states for levy and collection of GST or changing the existing Article 246, which empowers the three lists, or introducing a new article in Chapter 11 of the Constitution.
4. IGST model: For inter-State trade, an integrated model has been proposed by EC. The shortcoming of this model is that this will require creation of another Central IGST Authority which would add pain to the taxpayers. The Task Force for GST constituted by TFC has recommended another modified bank model. A final workable model still needs to be decided. Also, in the existing tax regime, place of supply is not a big issue because service is taxed by the Centre and the place of levy does not affect revenue receipts. In GST, however, the place of supply will have to be clearly defined to avoid disputes among states. There is need to clarify intra-State and inter-State service transactions.
5. Fiscal autonomy of States: The GST requires a commitment to a stable rate structure. This will compromise the fiscal autonomy of States and deprive them of the only lever of macro-economic policy available to them. Also, it is apprehended that the GST would accentuate the vertical imbalance towards Centre through larger tax revenues by allowing access to huge consumption base, hitherto, unavailable to the Centre.
Remarks:
1. The primarily objective of GST is
a) bringing together goods and services under same enactment
b) availability of set-off of tax credit in the whole supply chain
c) introducing destination principle at all levels. If all these primary objectives are met and there is agreement of dual GST floor rates with a provision of States levying supplementary tax, if the need arises - that should be taken as a good GST beginning in India. Even in Canada, which has very recently introduced GST (known as Harmonized Sales Tax, HST), the rates of GST are not same among its various States.
2. It seems there are going to be three Tax Administrators as against one currently for most of the cases –
1) State SGST Authority,
2) Central CGST Authority, and
3) Central IGST Authority. It seems clearly that Government is in no mood for simplification, rather, wants to impose additional burden on tax-payers and to encourage Inspector Raj. It is suggested that the jurisdiction between the CBEC and the State Administration may be divided (between the two only) in such manner that the interface of the taxpayer is confined to one tax administration only. The basis for division could be turnover or any other reasonable criteria. Otherwise, bureaucratic nightmare is going to increase for the tax payers.
3. It's not the first time when a Central Tax is to be administered by the States on behalf of the Centre. For instance, the Central Sales Tax (CST), a central levy, is being successfully administered by the States of India for the last fifty years.
4. A very strong infrastructure network backed by IT would be required for effective GST administration. This is to be backed by intensive GST awareness drivel.
5. VAT implementation is just been completed in whole of the country in 2008 and still not fully stabilized. Malaysia is trying to implement GST for the last three years. Going by the public pulse, Malaysian government has deferred GST introduction bill by another year. Adequate preparation for the changeover, rather than an arbitrary fixed schedule, should be the sole criterion for deciding the timing for introduction of GST.
6. Whatever is the final GST model, it should manifest what it has in its kitty to address problems of less privileged States of India. In the long run, what will differentiate one State from another is the quality of governance.
7. Its time for the Centre to act as a big Brother and a Facilitator to its States and to give to the Country – a comprehensive GST, the most innovative indirect reform of independent India. There is no doubt, GST can make the country as one market and can offer to its citizens an era of lower taxes, more revenues and lower prices.
02/08/2010 |
