One of the major endeavour by Government of India was to plan Goods and Services Tax (GST) in the country(still pending) . GST is the only indirect tax that directly affects all sectors and sections of our economy. Therefore, we all need to learn it.
By Vineet Jain
Abstract: Since independence,
India has followed the path of planned economic development. Initially, the
basic objective of Indian fiscal policy was to ensure acceleration in the
growth rate with social justice. Given this objective, the fiscal policy had a
significant impact on the overall growth rate of the economy during the period
of planned economic development. However, the overall growth rate of the
economy was not up to the mark and the results on many fronts did not meet with
the expectations One of the major endeavor by Government of India was to plan
Goods and Services Tax (GST) in the country(still pending) . GST is the only indirect
tax that directly affects all sectors and sections of our economy. Therefore,
we all need to learn it. The GST is aimed at creating
a single, unified market that will benefit both corporate and the economy. The
changed indirect tax system GST–Goods and service tax is planned to execute in
India. Goods and service tax is a new story of Value Added Tax (VAT) which gives a widespread
set off for input tax credit and subsuming many indirect taxes from state and
national level.
Since 1991,
the major thrust in fiscal policy was on overall reforms in tax policy and
administration. Initially, the reforms in direct taxes focused on
simplification and rationalization of the rate structure; reduction in the high
marginal rates and the rate categories; reducing the dispersion and lowering of
tax rates. However, owing to the plethora of changes in the original enactment
of all the taxes on income and property, the tax structure has now become very
complex. Consequently, efforts were made to redraft the overall Income Tax Act.
The revised enactment, known as Direct Taxes Code (DTC), consolidates all the
laws relating to direct taxes, viz. income-tax, dividend distribution tax,
fringe benefit tax and wealth-tax, so as to establish an economically
efficient, effective and equitable direct tax system.
In the case of
indirect taxes, steps have been taken to reduce multiplicity of rates,
rationalize the rate structure, and facilitate the adoption of VAT in union
excise duty and sales tax. The introduction of dual-VAT has been a remarkable
achievement. It helped in removing the cascading effect from taxes and in
making business more competitive. However, this was only a short-term reform.
The dual-of changes in the original enactment of all the taxes on income and
property, the tax structure has now become very complex. Consequently, efforts
were made to redraft the overall Income Tax Act. The revised enactment, known
as Direct Taxes Code (DTC), consolidates all the laws relating to direct taxes,
viz. income-tax, dividend distribution tax, fringe benefit tax and wealth-tax,
so as to establish an economically efficient, effective and equitable direct
tax system.
In the case of indirect taxes, steps have been
taken to reduce multiplicity of rates, rationalize the rate structure, and
facilitate die adoption of VAT in union excise duty and sales tax. The
introduction of dual-VAT has been a remarkable achievement. It helped in
removing the cascading effect from taxes and in making business more competitive.
However, this was only a short-term reform. The dual- VAT did not take into
account all the deficiencies in the tax system. Dual-VAT still suffers from the
following weaknesses:
- The CenVAT generates definitional issues relating to a commodity whether it falls in a particular rate group and causes valuation problems leading to large number of litigations.
- It has a narrow base due to which the tax system lacks neutrality and continues to be inefficient.
- The services are taxed by the Centre only and these are taxed independent of commodity taxes. This causes difficulties in taxation of goods supplied as a part of a composite works contract or leasing contract.
- The cascading of CenVAT under sales tax and of sales tax under CenVAT continues. This applies to central sales tax (CST) as well.
- The existing system is creating a bias in favour of imports which do not bear the hidden cost of taxes on inputs.
- The tax administration at both the Centre and the State levels is still very complicated and complex. Recognizing the above weaknesses, it is now proposed that a Goods and Services Tax (GST) be introduced to replace the existing dual-VAT, service tax and some other commodity taxes levied by both the Centre and State Governments.
Design of GST:
In 2009, the
Empowered Committee of State Finance Ministers (EC) constituted a Joint Working
Group (JWG) to give a detailed framework for GST. According to the JWG, the GST
for Central Government would cover Cen VAT (including union excise duty); the
additional excise duty countervailing duties (CVD) and other domestic taxes
imposed on imports to achieve a level playing field between domestic and
imported goods (which are currently classified as customs duty): cesses and
surcharges levied by the Union; and special additional duty of excise on motor
spirit and high speed diesel. Among the State taxes, the GST will cover
state-VAT, purchase tax, entertainment tax, luxury tax, and entry tax not
levied in lieu of octroi. The coverage of GST would, however, exclude the taxes
on petroleum crude and its products.
The exclusion
of petroleum crude and its products from GST is based on the premise of raising
larger resources through cascade type taxes. This would in fact cause higher
incidence of tax on inputs including capital goods and would ultimately affect
the efficiency of the overall petroleum sector. It is, therefore, suggested
that the overall petroleum sector should be brought under the GST regime with
additional levy of excise and sales tax, if necessary for raising more revenue.
In the case of
tobacco it has been proposed that it would be a part of the base of GST.
However, the Centre will levy a special excise duty to yield larger tax
resources for its activities; the States would not levy any additional tax on
it. This raises the question: Why should there be an unequal base for the
Centre and the States?
Whatever the
base finally accepted by both, the proposed GST will have two components -
CGST(levied by the Centre) and SGST (levied by the States). The rates of these
two components will be determined keeping in view the revenue implications for
the Centre and the States, total tax burden and the general acceptability of
the tax.
In this
context, the EC initially suggested that die rate should be in the vicinity of
15 per cent, a 7 per cent rate to be levied by the CGST and 8 per cent by the
SGST. This is based on the premise that currently the effective tax rate is
13.5 per cent (with some lower rate categories of 5 per cent and some more than
13.5 per cent) for state-VAT, 10 per cent for CenVAT and 12 per cent for service
tax.
The Central
Government on the other hand, has proposed that in the first year of the
introduction of GST there would be a three tier rate category,viz. 6 per cent
on essentials, 8 per cent on services and 10 per cent as standard rate. The
standard rate would come down to 9 per cent in the second year and will be 8
per cent in the subsequent years. Similarly, the 6 per cent rate on essentials
would increase to 8 per cent in the third year. Thus, in the third year GST would
have a single rate.
The States,
however, differ on this aspect. In fact, after a recent visit of some foreign
countries by State Finance Ministers, the EC has opined that when the European
countries have more than one rate in their VAT regime, why should it be so
difficult to have similar system in our country exports would be zero-rated.
While there has been some sort of agreement on this issue in the past, it seems
that the "Pandora's box of different models of inter-State taxation” has
been reopened.
Tax on
inter-state trade under the current system of dual- VAT is origin-based and is
collected by the exporting State under the provisions of the Central Sales Tax
(CST) Act of 1956. The origin-based CST being inconsistent with the GST, the
current system of CST is proposed to be replaced by a destination based
"Integrated GST". Therefore, there would be no 'tax- exporting' to
the importing States. All inputs including capital goods would be given a
set-off. Also, exports would be zero-rated. While there has been some sort of
agreement on this issue in the past, it seems that the "Pandora's box of
different models of inter-State taxation" has been reopened. This is
unfortunate and must be treated as settled.
Constitutional
Amendment and Major Outcome of Select Committee Report
Under the
present provisions of the Constitution, the Centre is not empowered to levy tax
beyond manufacture and the States do not have the power to levy tax on
services: therefore, an amendment to the Constitution is a pre-requisite for
the levy of GST. Keeping in view this fact, the Finance Ministry, had tabled
the 115", Amendment Bill 2011 in the Lok Sabha on 22" March 2011. It
is pertinent to note that prior to this Bill, the EC had considered three
drafts of the Constitutional Bill sent by the Union Government to three
different meetings of the EC held in August- October 2010 and one held in
February 2011. The States had some serious objections on the provisions of the
Bill and these are given below:
First, the
proposed amendment to the Constitution envisages the setting up of a GST
Council to make recommendations on issues like rates of tax, exemptions and
threshold limits. The Bill empowers the President to set up the Council with
the Union Finance Minister as Chairperson, and the Union Minister of State for
Revenue and Finance Ministers of all the States as Members. The States,
however, feel that they should have equal authority with regard to all the
aspects related to the Council. Keeping in mind these objections raised by the
States, we propose that the GST Council should be constituted on the pattern of
the present EC which has had an excellent track record of reforming the tax
system for more than a decade. Accordingly the proposed Council should comprise
of the Union Finance Minister and the Finance Ministers of all the States and
the Union Territories as its members. The revenue interest of the Centre would
automatically be taken care of due to the fact that any change would affect the
Centre and the States in a similar fashion.
Second, the
bill provides for the setting up of a GST Dispute Settlement Authority. This
will have a Chairperson and two members to resolve disputes arising out of
deviations from the recommendations of the GST Council either by the Centre or
the State Governments. The States have serious concern about the need of having
such a body.
Third, the
decision to exclude petroleum products from the coverage of GST needs
reconsideration. It is proposed that the petroleum products should be included
in the definition of GST to have a broader base for the tax. Even if the GST is
presently not levied on these items, excluding these items from the definition
and coverage of GST in the Constitution Amendment Bill will make the system
inflexible. In future, if the States or the Centre decided to levy GST on these
items, it would require another Constitutional Amendment. From a futuristic
point of view, it would be prudent not to confine the scope of the tax under
the bindings of the Constitution. The Select Committee constituted to examine
the Constitution (122nd Amendment) Bill, 2014 submitted its report to Rajya
Sabha on July 22, 2015. The Bill was passed in Lok Sabha on May 6, 2015, and
referred to the Select Committee of Rajya Sabha for examination.
The Committee
recommended that compensation would be provided to states for a period of five
years. Earlier there was an option in the bill for compensation for less than 5
years.
The Committee
recommended that the GST rate for the banking industry should be minimum, to
ensure international competitiveness. If possible, banking services could be
outside the purview of GST. The Banks argued that some of the services of banking
industry are to common man hence the services will become expensive if GSTis
levied more than 14% i.e. the present rate of service tax.
The Committee
stated that the provision of 1% additional tax is likely to lead to cascading
of taxes. Hence, it recommended that the term supply be explained to mean all
forms of supply made for a consideration. Earlier the bill empowered exporting
States to levy 1% additional tax to promote manufacturing States but there was
no likely exemption in stock transfer made to other Branches of same
organization in other States.
The Committee
recommended that the term “bands” must be defined to include the range of GST
rates, over the floor rate, within which CGST and SGST may be levied on
specific goods or services or classes of goods or services. Earlier the bill
did not contain any specific rate up to which GST can be levied over and above
the floor rate.
The Committee
recommended that in drafting of state GST laws, revenue sources of Panchayats,
Municipalities etc. must be protected. Entry tax, Entertainment taxes are being
subsumed in GST hence it is necessary to protect the revenue source of these
civic bodies.
Notes of
Dissent were submitted by Members of Parliaments and in my personal view the
dissent notes were political motivated and took a different stand than the view
taken by Empowered Group of State Finance Ministers in its various meetings.
The Empowered Group is a body of State Finance Ministers which has done a
tremendous job in bringing GST to this stage.
Administration
of GST
The authority
for administering GST has become a perplexing issue. The Joint Working Group
(JWG) on GST, appointed by the EC has suggested that the taxpayers below a
defined threshold limit would be accountable for the day-to-day administrative
matters (including registration, collection, and the ITC issues for both CGST
and SGST) to the State authorities and the taxpayers above the prescribed
turnover would be accountable to both the Central and the State authorities.
The EC further considered these recommendations and put forth its view in 4
Model and Road Map for GST in India. Accordingly, the assignment of the
administrative tasks will be based on the threshold limits for gross turnover
of goods or services as given below:
- Gross turnover of goods up to Rs1.5crore he assigned exclusively to the States:
- Gross turnover of services up to Rs 15 crore he assigned exclusively to the Centre; and
- Gross turnover of above Rs 15 crore be assigned to both the Governments: for the administration of CGST to the Centre and for the administration of SGST to the States.
The above
design for the administration of GST would not only involve both the tiers of
Government but also require interaction between dealers and the officers of tax
administration at the Centre, as well as in the states. In future, if the
states or the centre decided to levy GST on these items, it would require
another Constitutional Amendment. From a futuristic point of view it would be
prudent not to confine the scope of the tax under the bindings of the
Constitution. However, keeping in view the tenets of taxpayer convenience and
least compliance cost, it is suggested that instead of involving both the
Governments in all the administrative procedures it would be more rational to
assign specific tasks to the Centre and the States.
Justification
in Implementation of GST
Inspite of the
success of VAT at large there are still some shortcomings both in the Central
and State level. In the existing State-level VAT Structure there are also
certain shortcomings . There are, for instance, even now several taxes which
are in the nature of indirect tax on goods and services, such as Entry Tax ,
luxury tax, entertainment tax etc., are yet not subsumed in the VAT scheme . At
present the Central Government is charging Central Excise Duty at the point of
removable of goods from the place of manufacture. The Central Excise Duty is to
be deposited irrespective of payment against goods removed from the place of
manufacture. Service tax is charged on the date of rendition of services or the
date of receipt of payment whichever is earlier. The State VAT if chargeable at
the time of sale of goods irrespective of receipt of payment against such sale.
The introduction of GST will be a solution to it. GST would be chargeable on
each transaction like sale of goods, incorporation of goods in a individual
contract, hiring equipment, lease paid , consultation fee paid ,rendition of
any service or may be a transfer of immovable property etc. The introduction of
unified GST would bring VAT in its true sense. Presently the VAT system,
basically can be called non-integrated GST, in the sense that at present goods
and services are taxed separately . The taxable event under GST system will
manufacture”, “sale of goods” “render of services” will not be relevant under
GST system. The prices of commodities are expected to come down in the long run
as dealers pass on the benefits of reduced tax incidence to consumers by
slashing the prices of goods. Being consumption based tax, dual GST will result
in better revenue collection for states with higher consumption of goods and
services.
Recommended
Road-map for Rational Administration of GST in India:
First, there
should be a thorough re-engineering of the department of GST (i.e. the
departments of SGST and of the CGST) at both the levels. This must be done in
such a way that the responsibility, accountability and authority of each tax
department at the Central and the State level could be established.
Second, given
the limited number of officials at the Central level, it is proposed that these
officers be assigned special tasks to monitor the operations of a large number
of dealers under 0(CST and SGST. The day-to-day operations related to
registration, payment of tax, and submission of return for all the dealers
(irrespective of their size) should be assigned to the States. In other words,
the dealers will register and submit their return to the State Department where
the dealer is located. In general, the dealers will interact with one tax
authority only.
Third, payment
of tax by the registered dealer will be made into the bank account of the
concerned Government, viz. the tax receipts from SGST would be paid into the
account of the State Government and the tax receipts from CGST paid into the
bank account of the Central Government.
Fourth,
cross-verification of documents must be strengthened under the new regime. In
the absence of proper cross verification, the dealers avoid the payment of tax
and claim undue credit for taxable sales. Tax evasion can be prevented by
setting up departments similar to the centralized, as well as regional,
anti-evasion organization in France. Drawing upon the experiences of countries
like France, it is proposed that this role be bifurcated between the officials
of the SGST and those of CGST. The former should look into the issues of
cross-verification within the State boundaries and the latter should deal with
tax cases having inter-State and inter-country ramifications. Fifth, auditing
is essential to minimise the gap between the reported tax and the actual
statutory tax liability of the taxpayer. Therefore, there is need for a proper
audit plan to cover.
About The Author:
Vineet Jain, Associate
Professor in Commerce , S.A.Jain College, Ambala City.
References:
1.Competitiveness
Kelkar, Vijay (2009b): Special Address at 3rd National Conference on “GST for
Accelerated Economic growth and”, Special Address, New Delhi, 29 June.
2.Ministry of
Commerce and Industry, Department of Commerce (2008): Office Memorandum: Inputs
for 13th Finance Commission, F. No. 19/4/2007 – FT (ST), July 1, 2009. Ministry
of Finance (2008-09): “Indian Public Finance Statistics”, Department of
Economic Affairs, Economic Division, GOI. Ministry of Finance and Company
Affairs, GOI (2002): “Report of the Task Force on Indirect Taxes”. Ministry of
Finance, GOI (2004): “Implementation of the Fiscal Responsibility and Budget
Management Act, 2003”.
3.Poddar,
Satya and Ehtisham Ahmad (2009): “GST Reforms and Intergovernmental
Considerations in India”, Ministry of Finance, Government of India.
4.Rao, M.
Govinda and R. Kavita Rao (2006): “Trends and Issues in Tax Policy and Reform
in India”, India Policy Forum – 2005-06, NCAER-Brookings Institution.
5.Sharma,
Chanchal Kumar (2005), “Implementing VAT in India: Implications for Federal
Polity”, The Indian Journal of Political Science, Vol. LXVI, No. 4, Oct.-Dec.
Srivastava, D.K. (2005), Issues in Indian Public Finance, New Century
Publications, New Delhi.
Terms to be Interpreted:
Panchayat : Village Adminstration
Rajya Sabha : Council of States / Upper House of Indian Parliament
Lok Sabha : Lower House of Indian Parliament
Centre: Union Government of India
CenVAT: Central Government levied Value Added Tax
CGST : Central Government levied Goods and Services Tax
SGST: State Government levied Goods and Services Tax
1 USD = INR 66.69 (as of December 4, 2015)
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Publication Details:
This policy brief was originally published at Indian Streams Research Journal, ISSN 2230-7850 , Volume-5 | Issue-1 | Feb-2015 under Creative Commons License 3.0
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