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Exemptions under dual GST are key challenges
One of the key challenges in the
implementation of a Goods and Services Tax (GST) is with regard to exemptions
from the tax for specified goods and services. In the Indian context, given the
plethora of exemptions that currently exist in regard to numerous goods and
services, under the respective Central and state laws, the challenge is a larger
one. The matter gets complicated if one were to consider that in addition to the
exemptions, there exist exemptions from the tax, both Central and State, that
are based on the geographic locations of the manufacturing units. These are
commonly known as area based exemptions. |
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Since the
GST proposed to be introduced in India April 1, 2010 is
a dual one, comprising both a Central and State GST
applying uniformly to all taxable goods and services,
the aforesaid challenges in relation to exemptions are
doubly relevant. Consequently, the Empowered Committee
of State Finance Ministers (EC), with the mandate to
roll out the dual GST, is significantly preoccupied with
the matter of exemptions from the GST for specified
goods and services.
If one were to consider the premise of the GST as a
‘win-win’ model between the government and the taxpayers
i.e. the business community, and also as a ‘grand
bargain’, to use Kelkar’s words, between the Centre and
the States, the fundamental building block of the GST
would be a significant broadening of the tax base both
for goods and for services. It is only with such
broadbasing can a lowered aggregate indirect tax
incidence on consumption of goods and services be
realised. If this were to be true, it then follows from
a GST design standpoint there ought not to be any
exemptions. The reality however is that there will
always be goods and services which will continue to be
exempt from the ambit of the GST. These exemptions,
which are inevitable if the GST were to be politically
acceptable and hence capable of being implemented, would
be typically based on the following considerations:
* To ensure items of mass consumption are not unduly
taxed. Food and other staples would typically be exempt.
* Considerations of social policy. Thus, public health,
education and such services would be out of the tax net.
* Difficult to tax areas. Financial services is a good
example.
As a result, it is undoubtedly the case that under the
proposed dual GST, several goods and services will
continue to be exempt from the tax. Earlier, the EC had
indicated that there would be a small and defined list
of goods which would qualify for the exemption and that
the list would be a common one for the Central and State
GST. In other words, the earlier understanding was that
not only will the list of goods to be exempt be a small
one but that there would be uniformity in the tax
treatment of goods in the form of exemptions, at both
Central and the state levels. However, it is now
understood that consensus has not been possible on the
above lines and that states have sought and obtained the
right to exempt certain goods from the State GST, should
they so wish. Therefore, differentiated tax treatment in
the form of exemptions could be a reality for a small
set of goods in the states. Thus, a product could be
chargeable to the Central GST and not to the State GST
in a State. Equally, a product could be chargeable to
the State GST in one State but not in another. It
appears that such an accommodation with the States has
been found necessary to build consensus and agreement
around the dual GST.
Another aspect of the matter is that given the need to
prune the list of exemptions at both Central and State
levels, there could be products currently exempt from
the one or the other tax i.e. CENVAT or VAT, which would
now be chargeable to the GST. Since the GST on goods is
understood to be a dual rate and not a single rate, this
would mean such goods presently exempt could now be
chargeable at either the normal rate of 8 or 9 per cent
or at the concessional rate of 4 or 5 per cent. Hence, a
number of industries currently outside the indirect tax
net could come within the purview of the GST. This would
fundamentally alter the economic reality of these
industries.
On a different note and coming back to the matter of
area bases exemptions, it is now more or less certain
that such exemptions will be modified so that the goods
exempt so far are now brought within the GST net and
hence charged to tax. The idea is to not break the GST
chain for these goods so that an offset of input taxes
is available to both units manufacturing these erstwhile
exempt goods and also to units consuming the aforesaid
erstwhile exempt goods in subsequent manufacture or
trade. In such a situation of requiring the erstwhile
exempt units to start discharging the GST on their
manufacture, the benefit of exemption promised to such
units could be retained as post tax cash refunds to be
effected by the Centre, in relation to the central
excise free areas like the North East, Uttaranchal and
so on, and by the States, in all cases where exemptions
from VAT were granted to units as per the industrial
policy of those states. This fact of changed treatment
of area based exemptions under the dual GST will have
profound implications for units which have so far
enjoyed exemptions, notwithstanding that the benefits
will likely be preserved through a grant of refunds.
Clearly, the topic of exemptions to specified goods and
services from the GST is a complex and vexatious one but
is also central to the dual GST. A comprehensive and
well thought out response to exemptions will be key to
the ultimate success of the GST.
Source
: Business Standard, India, dated 19/10/2009 |
