NOVEMBER 25, 2009 

By Ashish Khungar and Akhil Arora, Amicus Rarus Consults

THE whitepaper on GST has been brought out with much fanfare assuming that it is panacea of all ills that have been faced by the indirect tax regime in India . The reform process on indirect taxes, which started in right earnest in 1986 with introduction of MODVAT is now seeing its culmination with GST, with removal of all the cascades, considerable simplification and broad basing of tax coverage. Let us not forget, that while Income-tax now holds numero uno position as far as Central Revenue is concerned, the share of tax revenue that indirect tax garners from goods is considerably high if both Central and State domains are included. So, at stake in this reform is revenue of more than a million crores. Therefore, it will be no exaggeration to term the GST- as the mother of all tax reforms in India.

The introduction of GST at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased Compliance. Further the introduction of Inter-State Goods & Service tax (IGST) will lead to removal of cascading effect. Another major benefit of GST will be that there will be immense reduction in time for dealers/manufactures to avail credit from central or state government and hence interest cost will lessen to a major extent.

What lies in store for all stakeholders?

i) There will be a system of comprehensive set-off relief, including set-off for cascading burden of present CENVAT and service taxes. It will lead to reduction in tax burden for consumers.

ii) Subsuming of several taxes in the GST will be possible.

iii) The tax chain of Central Excise, which is now confined to clearance of goods from factory, will become broader based to include in its ambit even wholesale and retail transactions, right up to the ultimate consumer under the new nomenclature of Central G.S.T.

iv) Under the mechanism of I.G.S.T, set off of G.S.T. (state or central) will be available across the states within the territory of India .

v) Simplified tax structure for all stake holders : The recommendations that following central and state taxes should be subsumed under Goods and Services Tax will lead to a very simplified structure of all stakeholders.

To begin with, following Central taxes are recommended to be subsumed in GST:

- Central Excise Duty

- Additional Excise Duties

- The Excise Duty levied under the Medicinal and

-Toiletries Preparation Act

- Service Tax

- Additional Customs Duty, commonly known as Countervailing Duty (CVD)

- Special Additional Duty of Customs - 4% (SAD)

- Surcharges, and

-Cesses.

Following State taxes and levies would be, to begin with, subsumed under GST:

- VAT / Sales tax

- Entertainment tax (unless it is levied by the local bodies).

- Luxury tax

- Taxes on lottery, betting and gambling.

- State Cesses and Surcharges in so far as they relate to supply of goods and services.

- Entry tax not in lieu of Octroi.

vi) Positives for small traders/tax payers : IGST model which is integrated GST model for inter-state transactions cuts across borders in providing set offs. The proposed GST also talks about a threshold of Rs 1.5 crore at a central level and Rs 10 lakh at the state level. It is a positive move because many of these small tax payers or small traders will get excluded at least at the central level.

vii How will consumers benefit? : With the introduction of GST, all the cascading effects of CENVAT and service tax will be more comprehensively removed with a continuous chain of set-off from the producer's point to the retailer's point than what was possible under the prevailing CENVAT and VAT regime. Certain major Central and State taxes will also be subsumed in GST and CST will be phased out. Other things remaining the same, the burden of tax on goods would, in general, fall under GST and that would benefit the consumers.

viii) What it means for small entrepreneurs and traders? : The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. The existing threshold of goods under State VAT is Rs. 5 Lakhs for a majority of bigger States and a lower threshold for North Eastern States and Special Category States . A uniform State GST threshold across States is desirable and, therefore, the Empowered Committee has recommended that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories may be adopted. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the threshold for Central GST for goods may be kept at Rs.1.5 crores and the threshold for services should also be appropriately high. This raising of threshold will protect the interest of small Traders. Both these features of GST will adequately protect the interests of small traders and small scale industries.

ix) Export to remain zero rated : Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs and not to non-processing zones.

x) Import intermediaries to benefit: Though GST will be levied on imports with necessary constitutional amendments, full and complete set-off will be available on the GST, paid on goods and services.

xi) New dispensation under special Industrial Area scheme: After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives will be converted, into cash refund schemes which will be more beneficial for these industries after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. However, this may entail more paper work as well as transactions costs in getting the refunds sanctioned.

All this may sound too good to the ears. But have there been any tax reforms without stings? Tax authorities will never be happy with any reform process that does not bring about greater revenues in their coffers ultimately. Therefore, despite all the big talk about removing cascades to make goods and services cheaper, eventually the product and services costs are going to end up higher. While the direct tax reforms bring down the tax rate by covering more individuals and business enterprise. In indirect taxes this is going to be achieved by bringing in the tax ambit more services (or taxing services at higher rate) or by bringing more transactions in relation to goods under the tax network.

Consider that Excise was being levied on goods produced in the Central domain, but now it will be Central GST covering transactions right up to ultimate consumer. Further, there was no tax on services by the state, but now these will be taxed at the state level. Area wise exemptions will become hard to get with pay and get refund scheme, which eventually means no simplification, but further complication. Given that set off chains in any case have the scope of reducing the number of tax evaders as well as the quantum of it, there exists quite a wide scope to increase coverage of goods and services under GST and if this potential can be realized, there exists a justification to keep the GST rate at a reasonable levels of 14% to 16%. Anything above this may only indicate that the tax authorities lack in confidence to make evasion difficult and therefore are continuing to rely on age old approach of extracting more from those who are more tax compliant. Therefore, when it comes to the crunch the ultimate figure of GST will be the decider as to whether or not it is beneficial to all stake holders.