JULY 06, 2009

By Sonia Gupta & Smita Singh

Sonia Gupta	Smita Singh

THE Goods and Service tax (GST) is a significant milestone in India’s tax reforms. GST is a multi stage tax based on consumption imposed on broad range of goods and services. Many developed countries including Australia, Canada, China, Austria, Germany, etc. have adopted GST structure replacing inefficient tax structure. Thus, India being on the final push to tax reforms and bringing in structural changes in taxation, GST is the option that India has chosen keeping in view its inherent advantages.

While presenting annual budget for FY 2006 – 07, the then finance minister Mr. P. Chidambaram proposed to implement GST w.e.f April 1, 2010. Adoption of GST is a structural change in tax after initial burst of economic reforms introduced by Dr. Manmohan Singh in 1991-96 and moving to VAT in the year 2003. GST like VAT is consumption based tax wherein tax is levied at each stage of sale/ purchase on value addition made in the supply chain by allowing input credit of tax paid on procurement of such goods or services.

Indirect tax reform is one of the important constituent to accentuate faster economic growth in the dynamic global economic environment. It is all the more important in the current economic slowdown for any country to have a robust and efficient tax structure in place. However, the existing indirect tax structure in India is not able to meet the current competitive environment due to multiple taxes and not being tax payer friendly.  Cascading effect of taxes increases the cost of transactions by approx 10-20% as a result of which Indian products are not competitive internationally. Multiple taxes, fragmented market, increased litigation and complexity has necessitated for a tax structure which is transparent, user friendly, simple to administer and reduces compliance costs.

Introduction of GST would benefit by way of lowering of tax rates and widening of tax base, fostering a common market across the country, reduce costs of compliance, facilitate investment decisions made purely on economic concerns independent of tax considerations, providing a fiscal base for local bodies to enable them to fulfill their obligations, promote employment and exports, spur growth.

On account of federal structure and to meet constitutional obligations India is adopting two tier GST structure i.e. central and State GST. Thus both Central and State Governments will legislate GST under respective legislations.

The central taxes to be subsumed under GST are central excise duty, additional excise duty, central sales tax and service tax. State taxes to be subsumed under GST are VAT, luxury tax, octroi, entry tax, tax on lotteries, betting, gambling and purchase tax, etc. However, there is a proposal that taxes levied by the urban local authorities and rural panchayats should not be subsumed for lack of consensus between the Centre and the States.

In the budget speech, the Finance Minister has further confirmed commitment of the Government to implement GST by April 1, 2010.  However the budget proposal very vaguely talked about the proposed structure for GST, which as of now is a dual structure i.e. central and State GST. The Finance Minister has only mentioned that an agreement has been arrived at on the basic structure of the proposed GST in accordance with the principles of fiscal federalism enshrined in the Constitution of India. However the rate of tax, continuation of the current tax incentives given by States or excise duty free zones, local considerations on which exemptions are given have not been outlined. Further as first step towards that direction, the Central Government has taken a stride towards convergence of central excise duty rates to a mean rate i.e. 8%. 

However, while the intent is laudable, the implementation of the GST model by April 1, 2010 is difficult and may not be as smooth as mentioned by the Hon’ble Finance Minister. One of the prime reasons that may accentuate delay is quasi-federal structure of our constitution. Considering our political system and recent experience with VAT, the successful implementation of GST would depend upon national consensus on the same. The recent hue and cry over GST by states like Tamil Nadu, which is an ally of the ruling alliance, may become a stumbling block in the road ahead. Further, GST replacing legislations like the Central Excise Act, 1944, the Finance Act, 1994 and various state VAT Acts needs to be well in place before substituting the same.

Further the proposals have failed to give directional clarity on GST with appropriate time lines for its implementation and lack of consensus on key issues by the stakeholders. The main grievance of the Indian industry is that roadmap to GST is ambiguous and most importantly the industry has been kept aloof from the whole process of conceptualization and formulation of GST structure. Additionally the proposals are silent on CST phase out which was expected to be reduced to 1% from the current rate of 2%.

It would not be wrong to say that the implementation of GST would be the culmination of fiscal reforms, a journey which was started in the year 1991 by the then Finance Minister who is the present prime minister.  Once implemented, GST would provide a quantum leap for Indian economy’s third generation of fiscal reform and also bring India at par with developed nations in terms of robust and efficient tax structure.

While past experience has not been good, latest example being introduction of VAT, which got entangled in party politics, we hope that GST would see light of the day as per the declared schedule of the Government.

(The authors are associated with J Sagar Associates)