Sectoral coverage of GST: issues and challenges     

Internationally, the application of GST on a vast majority of sectors has been without any substantive hurdles. But, applying GST to a few sectors such as real estate, financial services, non-profit organisations and public bodies has been complex. Additionally in India, treatment of sectors like petroleum as well as alcohol under GST is controversial.

Traditionally, real property transactions have been exempted from VAT (as under the European Union) on the grounds that land did not constitute value added and real property are already subject to stamp duties and/or registration charges. However, under modern VAT/GST systems (such as that in Canada, Australia, New Zealand and South Africa), real estate transactions are within the purview of GST.

The Report of the Task Force of the Thirteenth Finance Commission (Task Force) proposes integration of the real estate sector into the GST framework. This is planned to be done by subsuming the stamp duty levied by the states to facilitate input credit and eliminate cascading. However, the report released by the Empowered Committee of State Finance Ministers (EC) is silent on the inclusion of real property within the ambit of GST. It would be wise to follow the modern VAT approach, as exclusion of real estate leads to tax cascading through blockage of input taxes on construction materials and services.

Similarly, financial services in the European Union have been conventionally exempted from VAT. The exemption is mainly because of the difficulties in taxing transactions where the consideration for service is not an explicit amount but a margin. As there are no compelling economic or social policy reasons for exempting financial services, it would be appropriate to continue this approach under GST.

Another sector that is knotty is the petroleum sector. Currently, taxation of this sector is complicated as certain products enjoy subsidies, while others are subject to multiple taxes at both the Central and the state level. Further, there are restrictions on availing credit of taxes paid on fuels. It has been proposed by the EC that the basket of petroleum products, i.e., crude, motor spirit (including aviation turbine fuel) and high speed diesel should be kept outside GST as is the prevailing practice. Such a move is likely to result in cascading of taxes, which is avoidable.

In countries like Australia, Canada and Singapore, GST / VAT applies generally to all supplies of crude oil and other petroleum products barring a few deviations. As a result input tax credit is available for set off against the output GST liability. The Task Force has recommended that emission fuels, products may be levied to dual levy of GST and excise duty with restricted credit and GST on industrial fuels with the benefit of input credit like any other good. It is imperative that the Centre and State governments develop consensus on coverage of petroleum under GST.

The Task Force has recommended a dual levy of GST and excise on tobacco and alcohol with restrictions on credit. The EC is aligned with the Task Force on tobacco, however, in case of alcohol they suggested that it should be out of the ambit of GST, while VAT and excise duty should be continued.

On the aspect of determination of taxable goods and services under GST, internationally the practice has been to maintain a negative list of goods and services, so that it is easier to monitor and administer. However, the GST regime in India may have a positive list for services and a negative list for goods. Such a move would perpetuate existing complexities regarding classification.

While the government treads towards implementation of GST by April 2011, it is bound to experience various challenges. In an ideal world, GST should be levied on all goods and services at a single rate to achieve simplicity and neutrality. However, deviations occur as there are concerns regarding the distribution of tax burden. We trust the Government shall consider various pros and cons, while deciding upon the taxation of the diverse sectors under the GST system.

Source: Financial Express, India, dated 09/04/2010