After the goods and services tax (GST) missed the deadline of April 2010, businesses had been optimistic about its introduction in April this year. Now, here we are, a few days ahead of Budget 2011, and the introduction of GST has again been deferred.
The introduction of GST in April 2011 was primarily hit by various states resenting the veto power of the Union finance minister on state matters, as proposed in the first draft of the constitutional amendment Bill.
The states were against the idea of losing their financial autonomy, and the proposed Bill’s provision for a GST council and a GST disputes authority. The finance minister decided to give up his veto power, and it stood withdrawn in the revised draft constitutional Bill. However, many more areas of divergence between the Centre and the states have arisen—clearly, politics is overshadowing the economics of GST implementation.
Having said that, the speculation over when GST will be implemented may not be that relevant, given the fact that sooner or later it will find its place as India’s biggest tax revolution.
At this juncture, the central government, apart from focusing on constitutional amendments, should also consider certain changes to the current tax regime, which can be effective steps towards the smooth implementation of GST.
Among them, the Central government should reduce the central sales tax (CST) rate to nil against Form C to bring parity between inter- and intra-state procurement of goods, which is one of the principal objectives of GST.
Under the GST regime, most exemptions will either be withdrawn or be converted into a refund mechanism. The central government can re-examine and rationalize the current exemption notifications under excise to help businesses prepare themselves for a transformation and don’t feel burdened, if such exemptions are withdrawn or converted into a refund mechanism when GST is introduced.
The government may also look at the withdrawal of various cesses, which not only complicate the current tax regime, but are also inconsistent with the proposed structure of GST.
Under the GST regime, excess input tax credits are likely to be available as refunds to assessees. However, under the current regime, excess input tax credits under excise and service tax (other than in the case of exports) become costs for the business. In line with the proposed implementation of GST, the Central government should allow the refund of excess input tax credit under excise and service tax as under the current regime.
GST is expected to be levied on all services, broadening the scope, while excluding a few such as education and health. The change can be brought about in this budget itself by levying a service tax on all services except those on a negative list.
The Central government should also consider the realignment of the threshold under excise in line with the one proposed under GST. This would not only prepare the new assessees to gradually get used to the regime, but will also enable the government to test its preparedness to deal with several more new assessees.
Last but not the least, implementing GST requires a robust information technology (IT) infrastructure at both Central and state levels. Hence, the IT infrastructure required for the GST implementation should be developed and put in place before the introduction of GST.
Worldwide, experience shows that if structured and implemented uniformly on a pan-national basis, GST is likely to emerge as an efficient system of taxation that works to the benefit of industry, consumers and the government. It is, therefore, imperative for all states to reach a consensus and implement GST in a coordinated and timely manner.
Further, the Central government, by taking some small steps, that is, by making some amendments in the current regime, can make the GST transition smooth.
The author is a partner and leader of indirect tax practice at BMR Advisors.
Anhsul Aggarwal, manager, BMR Advisors, contributed to this column
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