The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. Its stated objective is to converge all indirect tax levies into a single tax, replacing multiple tax levies, overcoming the limitation of current indirect tax structure that often leads to a cascade effect, and creating efficiencies in tax administration.
One of the compelling reasons to go the GST way is to facilitate seamless credit across the entire supply chain and across all states under a common tax base. The current framework allows limited inter-levy credits between excise (tax on manufacture) and service tax (tax on specified services). However, no cross credits are available across these taxes and the sales tax paid (on input) or payable (on output). The sales tax framework is also fraught with inefficiencies as taxes paid in one state are not allowed as credits in another. Introduction of GST should thus rationalize tax content in product price, enhance the ability of companies to compete globally, and possibly trickle down to benefit the ultimate consumer.
Internationally, GST is a single levy for all transactions related to goods and services. In India, however, currently the power to prescribe the taxation framework, and levy and collect taxes has been segregated between the Centre and states under the Constitution. Given this uniqueness, learnings of other countries cannot be directly implemented in India. Folding all rights of taxation into the hands of the Centre may also not be an option as it would impact the sovereignty of the states. Given this, alternative models are being looked at. One option is to grant concurrent jurisdiction to both the Centre and the states similar to the current sectoral division. The other is that both Centre and state tax a common base by splitting the tax rate in two parts. The joint working group on GST is working in consultation with the empowered committee of state finance ministers to explore all possible models, and try and achieve consensus on the most acceptable way forward. Meanwhile, the fact that the Constitution prevents states from taxing services will necessitate a constitutional amendment before GST is implemented.
Another aspect related to GST is the scope of the levy from the point of view of whether it would subsume all indirect tax es. There are already talks that local levies such as property tax, octroi, etc., may not be rolled into GST at this stage. Ideally, such an exclusion list should not exist, and if unavoidable, should be kept to the minimum. Else, we would still be some distance from a true GST.
There are also concerns around allowing credits across states, as it would impact the current revenue collections of individual states. This will probably require drawing up of an acceptable compensation formula (as drawn up when value- added tax, or VAT, was proposed to be implemented). How would these compensations work? Would this result in the states being allowed to levy special taxes (such as additional tax, turnover tax, surcharge, etc.) in addition to GST?
Another aspect is that with the phase out of CST, how interstate transactions would be treated. Will CST (central sales tax) be replaced by the uniform entry tax in all states? We will have to wait to see how this unfolds.
Concerns are also being expressed that the implementation of GST should not be in a phased manner like such as VAT (which started in 2003 with only Haryana implementing it and ended only in 2008 with Uttar Pradesh going live).
Besides policy matters, what is important is the question: How much time will businesses get to align themselves to this new piece of legislation?
While measures such as finalizing policy matters, amending the Constitution, and rolling out regulations are important, these are only a starting point for businesses to structure/re-examine their supply chains, system of accounting and invoicing and the entire framework of meeting ongoing compliance requirements.
Indirect taxes impact day-to-day operations of businesses as they apply almost on all transactions. Moreover, GST would be the most significant change in the indirect tax landscape of India. Therefore, business would need sufficient lead time to gear up for change-over date. The experience in VAT implementation suggests that governments would have to be much better prepared to provide business an opportunity to tune itself to the new law.
Rajeev Dimri is leader of the indirect tax practice at BMR & Associates.
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