Goods and services tax (GST) is a transformative tax reform. The passing of the Constitutional Amendment Bill set the ball rolling by putting in place a dual GST—both the centre and the state will concurrently tax the whole value chain from raw material to retail.
There is, however, still some work that needs to be done to ensure that the GST creates a world class ecosphere for business to flourish. These are outlined below.
1. Creation of state-level GST secretariat.
The implementation of GST will fundamentally transform the way tax policy is formulated in India. Hitherto, while central indirect tax policy formulation was in the domain of the ministry of finance, each state government through its own commercial tax department formulated the state VAT policy. With the introduction of GST, both centre and state will jointly formulate tax policies with respect to indirect taxes.
The Constitutional Amendment Bill provides that the GST council at the centre comprising the Union finance minister and the state finance ministers would jointly take decisions on the various issues including rates of duty. These arrangements still leave an institutional void at the state level.
A GST secretariat must be constituted in each of the states where senior Central Board of Excise and Customs (CBEC) officers administering the CGST could be brought together with the senior state VAT officers. This body could be registered under the Societies Registration Act, 1860 (the Societies Act), much like the present Empowered Committee of State Finance ministers. This body could be provided with a dedicated secretariat and funding from both the state government and the Union government.
A large number of day-to-day implementation issues could be sorted out, including issues of compliance verification. Importantly, trade and industry in the states could approach this body and meet both centre and state officials in a common forum to sort out various issues.
1. Centralized registration for some specified pan-India services like banking, insurance, telecom and IT enabled software services.
Under the present fiscal arrangement, the centre has exclusive power for taxation of services. After the passing of the Constitutional Amendment Bill, the states have also acquired the power concurrently with the centre to tax services. The concurrent power to tax services has created some procedural problems which needs resolution. One is the requirement of state-wise registration and the other is transfer of input credit pools between the states.
One solution could be to use the large taxpayer units set up for providing centralized registration to select pan-India services as the centre would initially be dealing with all the service tax assesses, this could be thought of initially and could be reviewed later.
Changes in the law
1. Creation of a centralized technical secretariat both at the centre and state level for binding clarifications on assessment matters.
One of the main grievances of trade and industry is that the present taxation system entails complex dispute resolution systems. This is compounded by non-uniformity of assessment decisions by field officers. There is merit in this perception.
The way out of this lies in making a conceptual distinction between “offence cases” and “assessment cases” in the domain of “disputes”. While offence cases which are factual in nature could be decided by the field officers, clarifications relating to assessment matters which have recurring implications must be vested with a centralized technical secretariat.
For the centre, this could be located in the tax research unit through creation of a technical secretariat.
2. Moving from transaction value to invoice value for the purpose of valuation.
One of the most retrograde features of the model GST law are the provisions relating to valuation. The concept of transaction value has its roots in central excise taxation where the taxable event is “manufacture” and the centre’s taxation powers are confined to collecting the tax up to the manufacturing stage. Unfortunately, the drafting committee has imported the transaction value concept which is a throwback to the central excise tax and applied it to a value added tax scenario which covers both goods and services and extends right across the value chain.
The transaction value concept creates problems in valuation especially for self-supplies and transfer of services (like leasing of equipment). The solution lies in moving away from the concept of transaction value to the concept of an invoice value reflecting the amount of tax paid or payable. This is a concept which has been followed by all the countries like Canada and Australia which have implemented a value added tax.
These countries, like India, have a federal structure and are therefore comparable. In the case of self-supplies for transfers between the same legal entity, the taxability itself could be based on the principal of whether s uch transfers are for resupply or not. This would ensure non-taxability of inputs for captive consumption and also ensure non taxability of self-supplies of services maintaining the current status quo position.
To sum up, the changes suggested above will usher in a world-class GST system. Also, in the process, strengthen the fiscal bonds between the centre and the state and bring alive the vision of cooperative federalism enshrined in our Constitution.
V.S. Krishnan is adviser, tax policy group, EY, and a former member of the Central Board of Excise and Customs.
Views expressed are personal.