The
dialogue between the Centre and the states has now given
a design for the proposed goods and services tax (GST). What has, however, not yet been decided, and seems to be the Gordian knot for the GST is the number of services that should be given to the states.
In
principle, the application of GST calls for the same
base both under the central goods and services tax (CGST)
and state goods and services tax (SGST). It cannot have
two different bases, i.e., one for CGST and another for
SGST.
This is what has been done in Canada when Quebec wanted
to have the right to collect GST, instead of
surrendering their power of collection to the federal
government through the levy of HST. The federal
government of Canada insisted that the base should not
only be similar but must be the same. In following this
direction, Quebec had to give up some of the exemptions.
A similar principle has been adopted by the central
government in the case of CGST. Following this, the
proposed CGST would now be levied up to the retail level
instead of being confined to the manufacturing level.
Although the Centre has applied the principle of keeping
the same base for CGST for goods, it has not applied the
same principle for services in the case of SGST. As per
present indications, all the services would be covered
in the base of the CGST but only some services would be
included in the SGST.
This can create many problems. First, the services that
are with the Centre and the states would have two rates
(rate of CGST as also of SGST) to be levied but those
services which do not fall in the arena of SGST will
have only one rate. The tax rates would, therefore, vary
across services in the country.
Second, adjustment for input credit in the SGST for
services from the goods would be different for different
commodities.
Same would be the case with the adjustment for input
credit for goods from services. Thirdly, this would
create inter-service distortions due to variations in
tax rates.
It is, therefore, important that the same base is
adopted for services both for the CGST and the SGST.
This will not only sort out the issue of whether or not
to have the same base but would also give another
advantage to the overall system, viz., mobilising larger
resources from these taxes. It would allow us to have a
lower, revenue-neutral rate for the GST.
Interestingly, calculations from the available data
indicate that although 52% of the GDP
is contributed by services (excluding public goods and
merit goods), 38.5% of GDP could still be included in
the taxable base. Similarly, the private final
consumption expenditure (PFCE) indicates that 27% of
personal expenditure is on services. Excluding
expenditure on public goods and merit goods, data
indicate that 74% of the expenditure on private services
could be the taxable base.
If we add the final consumption expenditure by the
government (FCEG) on taxable services to the PFCE, the
taxable base would be of the order of Rs 475,000 crore.
This could yield India Inc a revenue of Rs 71,000 crore
at 15% rate and 95,000 crore at 20% rate of the GST.
Looking at the share of this between the CGST and SGST,
the former would yield 34,000 crore at 7% and 74,000
crore at 10% rate.
The calculations further indicate that SGST contribution
would vary for different states as per capita
expenditures differ amongst states.
With taxes
at the 10% rate, services would yield revenue above Rs
600 to Rs 856 crore in states of Bihar and Manipur; more
than Rs 1,000 to 1,300 crore in Jharkhand, Orissa and
Uttar Pradesh; exceeding Rs 1,500 to Rs 1,800 crore in
Gujarat, Haryana, Madhya Pradesh, Rajasthan, Tripura and
other north-eastern states; more than Rs 2,000 to Rs
2,600 crore in Andhra Pradesh, Assam, Chhattisgarh,
Jammu & Kashmir, Karnataka, Mizoram, Tamil Nadu, and
West Bengal; more than Rs 2,500 to Rs 2,800 crore in
Maharashtra and Punjab; and much more than Rs 3,000
crore in Himachal Pradesh, Kerala and the Union
Territories.
The levy of GST on services by the states, however,
raises the issue of cross-border transactions.
This has been cited as one of the arguments against
assigning services to the states. It is said that this,
first of all, would involve the issue of who would
collect the tax on such services. In this context the
report of working group has opined that in a transaction
of service where the buyer and seller are located in two
different states, the jurisdictional reach of the
service tax is to be determined on the basis of place of
consumption of service.
This issue, however, is further elaborated in A Model
and Road Map for GST in India which proposes that the
states may collect tax on intra-state services for CGST
and from intra-state transactions for SGST. Similarly,
the Centre may collect tax from inter-state services
under CGST and from inter-state transactions for SGST.
This would sort out the issue of “who would collect
the tax?”
In regard to relocation of funds the empowered committee
(EC) is of the opinion that the share of the respective
governments would first be decided on the basis of
destination principle. It would then be transferred to
the respective governments.
Transfer of the central share would not face any problem
as the states would directly credit it to the account of
the central government. The distribution of the share of
the states from the inter-state transactions in services
would face some problems. In this context the suggestion
of the EC to place this amount in a divisible pool is
worth considering. It is proposed that a committee be
appointed by the central government to decide on this
issue.
It could also be proposed that the share of this pool
could be decided by the Finance Commission appointed
every fifth year. The Gordian knot of taxation of
services would thus be cut by allowing both the tiers of
governments (central and state) to tax all the services
and not by just transferring 33 services, as was decided
earlier. Assignment of a few services to the states does
not provide a level playing field.
Source
: Economic Times - Gurgaon, Haryana, India, dated
23/02/2009
