Indian Goods and Service Tax

                               

Indian Goods and Service Tax

Goods and Service Tax (‘GST’) is an efficient, effective and modern mode of taxation which facilitates effective tax administration with minimum tax collection cost. The globe is having around 195 countries and out of that, around 140 countries are working on the GST model. Few developed countries like Australia (10%), Canada (5%) New Zealand (12.5%), Singapore (7%) etc. are among the first runners who adopted the efficient tax model. Even, our neighbor country Pakistan is also having GST but only the abbreviation convey the right expression, full form of GST in Pakistan stand for General Sales Tax!!

Now a day’s lot discussion on GST is going on among the Government authorities and trade. Expectations of Trade are on high spirits for the GST model. The objective of this article is to discuss expectations of Indian Inc. from proposed GST.

Multistage taxation on the manufacture i.e. Customs duty on imports, Central excise duty on manufacture, Central Sales Tax (CST) / Value Added Tax (VAT) on sale of goods, Service Tax on provision of services, Further levies such as Entry Tax, Octro Cess by the State or local municipal corporations/municipalities are the major block in the progress of trade. Above this Entertainment tax, Luxury Tax etc. are also playing an extra toping role to distaste the trade.

Even a common man can understand the plight of the trade who is bound to comply, pay, administer and then assessment which is also a time and energy consuming exercise. The present tax base may be lucrative in volume but not in value terms.

Tax model, devoid of multiple taxes and manifold compliance requirements which allow seamless credit mechanism, has been the dream of the industry for long. To lessen the plight of trade and to facilitate the easy administration of tax are two main causes which are pushing revenue authorities to change the present multi tax model into GST model.

Introduction of GST in India has started with the concept of CENVAT (merging the service tax input tax credit with Central Excise Input Tax credit). The concept of GST was recognized by the Indian revenue authority long back, but the first step was taken on 10^th September 2004, when the cross input tax credit of Service Tax and Central Excise was allowed. Unified GST is the most appropriate model of GST, but whether the said model is workable in the Indian context, it is a big question to answer.

In India the power to collect tax is bifurcated between Centre and State. Unified GST model require collecting of taxes by Centre and then sharing with States. The requisites of said model would affect the basis fabric of the federal structure of the India. The state power of revenue rising would be exercised by the Centre which will create problems of dependency of states on centre. Further, managing unified GST by the Centre would not be easy task with the available resources. Further, bifurcation of Centre GST and State GST into goods tax and service tax would not fulfill the purpose of GST.

Press reports are confirming the dual GST which would jointly governed by state and centre. There is still a veil on the picture how dual GST will be different with the present multi level tax model.  But it is almost final that unified GST would not be the future model of tax.

As per the one of the big four consultancy firm’s poll, “More than two thirds of respondents are not in favors of dual GST. Further, About 75% of respondents of specific sector like telecom, transport and logistics segments are not in favor of dual GST,” (Deloitte: a pre-GST survey).

Revenue Neutral Rate (RNR) is another centre of confusion. Presently Trade is paying around 20.74% (12.5% +8.24% = 20.74%) as Central Excise Duty, VAT (4% to 20%) along with the service tax @ 10.30%. Indian Inc. is expecting the consolidated RNR at the present level.

Subsuming of all Indirect Taxes is another fair expectation of the trade. However, trade is not convinced on the authorities promise to merge all indirect taxes due to the past experience on the VAT.

Exemption limit is like a weighing machine which needs to be balanced by revenue authorities to justify the administration cost as well as tax base. The threshold limit for present tax base is on a very conservative approach. The threshold limit should be on higher side so that tax collection cost and administration cost can be maintained at reasonable levels. Trade is expecting higher threshold limit so that transaction cost of the small trades may be justified.

Further the fate of general exemptions on the essential commodities and location based exemptions is not yet clear. However, it can be predictable that these exemptions may be prevailed in the form of payment of tax and then refund method. The experience of trade to get the refund is not very appreciative despite of genuine efforts of the revenue authorities. Trade is expecting clear cut exemptions on the product or location. However, exemptions would not fulfill the purpose of providing benefit to the deprived consumers. GST is consumption tax and exemptions can distort the basis objective. Consumer with high consumption power would avail the benefit of exemption.

The fate of stamp duty on transfer of immovable property is not clear. Trade is expecting subsume of stamp duty with GST. Further, it is also expected that subsumed stamp duty on the immovable property should be levied on the value added not on the full consideration.

At the last but not the least, trade expects a reasonable time to realign business transaction as per the proposed GST model. In case of Direct Tax, the draft is available among the public, proposed to be implemented from 2012. GST draft which is proposed to be implemented from April 2010 (five months to go) is yet to take time to come into public!! The recent statement of Honorable Finance Minister surprised the trade that delays of few months would not a surprise for him, this delay can provide few more hours to plan for re-adjustment of business process.