Start with dual, but move to a unified GST     

Today, Indian companies are globalising. They need a flexible and progressive economic environment, similar to that available to their counterparts in other parts of the world. The Indian government has announced a series of big-ticket reforms in this direction. Let us look at the two big ones: the goods & services tax (GST) and Direct Taxes Code (DTC).

Implementation of a nationwide GST is one of the biggest indirect tax reforms, and will radically change the Indian tax system. GST will allow seamless flow of credit, eliminating or reducing the effect of cascading, and seeks to do away with a plethora of taxes in the supply chain.

However, reform of indirect taxes is far more complicated than that of direct taxes. This is because taxation powers under the Constitution relating to indirect taxes are shared between both the Centre and states. This results in fragmented and distorted markets. Ideally, a single rate of taxation at the central government level is the right one to adopt. This will create a single market enhance efficiency in compliance and administration. But it requires major changes to the Constitution and may not be agreeable to the states.

So, to start with, a dual GST—one at the central level and another at the state level—is preferable. This will result in least resistance from state governments and can be implemented easily. Over a period of time, once the system stabilises, the country can move to a unified GST at the central level. However, we have to make sure that all the levies at the state level are subsumed under this and nothing is kept out.

The DTC is aimed at establishing an economically efficient, effective and equitable direct tax system that will facilitate voluntary compliance and reduce the scope for disputes and litigation. In an emerging country like India, the government requires enormous resources to fund social programmes, which are essential for equitable growth.

The government estimates it has foregone Rs 58,655 crore in taxes in 2007-08 due to various tax incentives given to corporates, which includes Rs 11,880 crore as tax exemption to STP units. The government should remove all subsidies and reduce tax rates, which will enhance compliance and improve collections. DTC is aimed at doing exactly that. While the intention of DTC is laudable, it requires certain changes for its effective implementation.

The DTC requires the levy of a minimum alternate tax on the value of gross assets, thereby making it the final tax. Currently, MAT is levied on income (book profits) and not assets. There is a view that MAT on gross assets will result in a reduction in capital investment by corporates, thereby impacting the growth and velocity of business in the country. They argue that the government should support capital formation and not curtail it by bringing in a tax on asset formation.

The counter view is that 80% of companies in this country do not report profits, and thereby do not pay any taxes. They argue that it is mainly because they don’t use their assets efficiently. MAT on gross assets will force them to better utilise their assets and make more profits.

Both the arguments are valid. So, we should not be overly concerned about the applicability of MAT on gross assets. But there should be clarity on the ability of corporates to set off taxes paid outside India against MAT paid in India. If that is not available, then it will result in double taxation.

Source: Financial Express, India, dated 12/02/2010