APRIL 01, 2013

By Ankit Gulgulia (Jain), CA

GOODS and Service Tax (GST) has been one of the most awaited and talked about piece of tax reforms that the country expects. The Union Finance Minister in his Budget '12 speech on the floor of the House expressed that the GST network is scheduled to be made operational by Oct, 2012. The same and erstwhile April, 2010 deadline went for a toss due to several hurdles. The Constitutional Amendment Bill was introduced in Lok Sabha on 22nd March, 2011. It lays necessary foundation for implementation of GST. There are several hurdles that are being faced and resistance that prevents GST to take the centre-stage. Due to this, GST still hangs on the hinges!

Undoubtedly, it is the need of the times to streamline the multi-scattered indirect tax structure in India. Several in-consistent & too-complex indirect tax legislation act as a barrier for the trade and FDI in India. Excise on manufacturing, Service tax on Services, VAT on Sales, CST on inter-state transactions, State Excise on Alcohol , Entry Tax, Luxury Tax, Entertainment tax, Customs of Import, CVD's & SAD's etc are all intended to be merged in one single GST (easier said than done) model. The model can be dual, single etc, though Dual model i.e. CGST (Central), SGST (State) with IGST (Inter-state) is recommended by most experts (for reasons as discussed below !).

Certain items like alcoholic products, petroleum products and tobacco products might be kept outside GST for reasons well known . Also, as per initial discussion paper, even the purchase tax leviable shall be outside the ambit of GST. The discussion paper is painfully silent on several aspects including transaction related to Real estate etc and is full of compromises and discriminations.

If implemented, it will have several benefits. The benefits will outscore the problems and discomforts if implemented in true spirit and with transparency.

• Widening of tax base.

• Avoiding the multifarious indirect tax structure.

• Low cost of collection of taxation.

• Simplified compliances for tax payer and tax administrators.

• Effective addressable to cascading effect by allowing larger spectrum of utilisable input tax credit.

• Anti-evasion check

• Attracting foreign FDI because of more certainty in tax structure.

The Model

The dual GST model is most well accepted. The GST shall have two components: one levied by the Centre i.e. CGST , and the other levied by the States i.e. SGST . Rates for Central GST and State GST are worked out at initial level can be 20% (12 % - CGST & 8% - SGST) as standard rate along with floor rates and premium rates. Lower and higher rates can be prescribed for differential commodity/class tax grading. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.

Since the CGST and SGST are to be treated separately, taxes paid against the CGST shall be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized only against the payment of CGST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

The Hurdles

The Constitutional Amendment bill was introduced in Lok Sabha on 22 nd March, 2011. It lays necessary foundation to implementation of GST. The bill is yet in its initial stages and faces several hurdles and addressals before the amendment envisaged can be made the law of the land.

• The dual GST model requires fiscal autonomy of Centre and the States. Whether this variant can strike a good balance and whether it can bring harmonisation between the two is a million dollar question. With the growing dominance of regional party politics in India and coalitions governments, this shall be undoubtedly the most daunting job. Both the Centre and States would want autonomy is respect to power to enact, enjoy and administer the tax laws & system. It is imperative to ensure mechanism transparent and clear enough to avoid tug-of-war.

• For GST to be implementable the task of addressing to interstate transactions remains another important task. The rules in respect to place of provision or supply are to be uniformly structured to identify the taxing states and tax revenue sharing.

• Several types of transactions due to their nature are always complex with their tax treatments. Works contract, financial transactions, real estate transactions have not been specifically dealt by the discussion papers. Since the real estate sector forms major bulk of economy, keeping it out of the GST ambit would be a crucial decision making.

• Two separate laws would be required to be enacted which are well supported under constitutional amendments. All the old rules, regulations, manuals, systems, procedures, returns, circulars & notifications shall have to be rescinded/re-set.

• Constitutional amendments shall require 2/3 rd Majority in Parliament and 51% approval of states. This seems a tedious job in present political scenario unless equitable interest of all the states with varied political reigns is maintained.

• The states levy VAT on products at the rates of 0%, 1%, 4%, 12.5%, 20% etc. While the centre levies the rate of 12% on Excise/Service tax. The average rate of VAT for States comes out be approximately 16-17% while for the centre it is 12%. The combined rates go up to 27-28%. It is proposed that the standard rates shall be 20% (CGST – 12% and SGST – 8%). States would like to maintain their rates @ 16% neutrality ( post service tax being a state item ) as promised to them on 1 st April, 2005. To provide the same to the states, it would be big task for the centre and might require compensatory grants from the centre.

• The stakeholders like pure service providers who are currently paying taxes at the rates of 12% might be subjected to RNR (Revenue neutral Rate's) standard rates of 20%.

• Threshold exemptions would have to be reduced since it would break the flow of input tax credit in the all integrated supply chain and shall not suit the model functioning of GST.

• Goods out of the scope of GST as discussed above may dampen the implementation of GST and result in cascading effect.

• It is proposed that the VAT in case of interstate sale would be collected by selling dealer as IGST and deposited in the kitty of destination state government by such dealer. In such a scenario it is understood that the TIN-SYS needs to be nationalised and its maintenance shall require some efforts.

• Emulating the GST setup by other countries would be disastrous in our country due to its sheer diversity and political scenario. Australian Single GST model or Canada's three provincial HST/GST system has several issues making it difficult to be adopted in India. The lawmakers should, therefore, ensure that they come up with a well framed draft because once implemented there would be ‘no exit routes'.

• Non-participating states shall be subjected to higher rates of taxes and the input tax credits shall not be allowed in such states adding further to the row of cascading effect.

Despite all the odds, GST has benefits of streamlining Indian Indirect tax structure and simplification of the procedures that outweighs ‘n' number of hurdles faced for its implementation. The governments at the Centre and States should move forward to make it an expeditious affair.