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Q:
Many CEOs we talk to are very enthused about the
fact that the nation is moving to a GST, in fact many
claim that this will help bump up GDP by almost a percent
– what does GST replace and why is it going to be such a
big growth driver?
A:
At the moment India has got multiplicity of taxes, you
have the VAT at the state level and the CENVAT at the
center level, service tax at the center level and you also
have entry taxes, luxury taxes, entertainment taxes –
all kinds of taxes. The idea is that you replace all of
those taxes by a simple comprehensive tax on all goods and
services. In the process you lower the tax rates
dramatically because when you have lots of exemptions and
partial taxes, you’re tax rates go up but you’re
revenues come down. If you levy the GST on a comprehensive
basis on all goods and services, then in fact you can
lower the tax rate from the current 25-30% down to 15% or
even 13-14% - that’s the idea. Now how does it lead to
more growth? Very simple – right now about one third to
40% of taxes collected by the governments comes from
business inputs, machine and equipment – it could be
building materials, it could be stationeries, computers
brought by companies for use in business. That business
tax hurts businesses – it is bad for the competitive
position of
India
in the global markets. It is bad within the industry as it
discourages investment.
A
GST falls essentially on the consumer sales. It does not
fall on investment goods and it is that part that makes it
very attractive and that provides boost to the GDP. In
other countries where they have moved to a GST type tax
boost to GST could be as much as one to two percentage
points. Imagine a two percentage point boost in GDP is a
tremendous growth in GDP coming from a GST type tax.
Q:
So you have explained to us as to why this is such an
important move for the nation. Who imposes this tax? Is it
center or state and when you say that it takes away the
plethora or multiplicity of taxes, does it also take away
the differential taxation that we have between states?
A:
The tax will be levied concurrently by the two levels of
government states and the center. So on very invoice you
will have two taxes – a central tax and the state tax.
Both will be levied hopefully on identical values. So if
you are buying something for Rs 100 and suppose the
central tax rate is say 6% and the state tax rate is 7%
– there will be a tax of Rs 6 at the center level and
tax of Rs 7 at the state level – you will pay tax of 13%
in total. So even though there are two calculations it is
really one tax of 13% in one sense.
Q:
Is there someway you can give us an illustration? Let
us say a packet of biscuits that cost Rs 10 – what are
the various taxation levels that it has to go through
right now between manufacture and point of sale and really
how that will be replaced by GST – is that illustration
that will help us follow the implementation of this?
A:
Biscuits may be bad example. Let me start with an air
conditioner. An air conditioner will have first of all the
central excise duty which before the stimulus package
could have been 14%. Now the rates have been reduced to 8%
but if we ignore the stimulus package say 14% excise duty.
Then they have a state VAT which could be 12.5% on top of
the central excise of 14%. Now if the air conditioner is
manufactured in one state say Maharashtra and shipped to
Delhi
– there is another tax called the central sales tax
(CST) of 2%. So these are the three taxes that apply at a
minimum. In some cases you may also have entry tax or
Octroi in few cities when the goods enter the city mainly
say Mumbai. But minimum we are talking about 14% excise
duty, 12.5% state VAT and 2% CST – when compound, one is
levied on top of the other, one can have a combined tax
rate of 28-30%. Now all of these will be replaced by a
central GST and a state GST – going to my example again
in the central GST rate is 6% and the state GST rate is
7%, you will have 13% tax on this air conditioner.
Q:
Does this mean that therefore goods will be cheaper in the
hands of consumers based on the rates that the government
has suggested because like you mentioned we are going to
have a duel rate system which is unique in itself, the
fact that there will be a central GST and a state GST –
will it bring prices of consumer goods down that’s the
first question and secondly why are we insisting on a
central and state GST? I am told that’s not how most
countries have done this.
A:
On the first point about will the prices come down – no.
The idea of the GST is to replace a partial distorter
taxes by uniform tax. If the revenues from the new tax are
the same as from the current taxes then they should be
really no change in prices. You will be spreading the tax
more evenly across all commodities and services as oppose
to unevenly today. So, some prices may come down, others
may go up, on average they should remain roughly the same
as today. Now in terms of a duel tax – yes – in fact
the very few models of duel tax in most countries, most
federation is a single tax.
In
Australia
, it is a national tax and the revenues are given to all
the states. In
Germany
, it is a national tax and there is revenue sharing
arrangement with the local governments which are called
lenders and the nation. In
China
again it is national tax, it is a single law – one base,
one base rate but there is a revenue sharing arrangement
with the states. In
Canada
there is a duel tax in four provinces but there also even
though it is a duel tax, the tax has been harmonized to
such an extent that there is really a unified tax. It
operates like a unified tax and that’s the goal.
Q:
What are the disadvantages of having a duel tax structure?
A:
The main disadvantage is the complexity. There are 35
states and union territories and there is a national tax,
so we will have 36 tax laws. Now even though the tax is
meant to be common in all those 36 jurisdictions as long
as you have 36 tax laws you have to go through them all
and make sure that you understand and there are
differences. So my idea was or my proposal would be to the
government and request to the government that if you do
have to design a duel tax, please make it so harmonized so
that there are no 36 laws but one law – one base, one
law and one set of rules – let the tax rates be
different. Then the difference between the duel and the
unified tax really becomes cosmetic as oppose to real.
Other
problem with a duel tax is that suppose you have
inter-state services – you are sitting in Delhi, you
make a telephone call to Mumbai or you are roaming from
place-to-place, in a duel tax then you have to decide
which state will collect that tax on a telephone call
originating in Delhi but terminating in Maharashtra and
that’s pretty messy. It can be very difficult. It is for
that reason that most of the countries have gone to
unified tax.
Q:
Are we also looking at different rates in different states
when it comes to the state GST?
A:
Again the goal of the empowered committee is to have a
uniform tax rates in all the states. That’s how the VAT
was introduced – all the states agreed initially to have
uniform tax rates. That uniformity is breaking down
unfortunately – Rajasthan just announced increase in the
VAT rate from 12.5% to 14%, some other states have also
deviated from the uniformity. If the tax rates are not
uniform then it has the potential of becoming a tax
jungle. That’s the risk we face.
Q:
So that’s one of the implementation challenges that is
to bring all states onboard with a common rate and like
you said to have a basic law that all states can then
implement within their state laws. What are the other
implementation challenges that you see on route to April
1, 2011 and what could be the consequences to some extent
– you have already descried some of them of not having
all states onboard – do you think that date can then get
deferred and that this tax is only efficiently
implementable if we have all states onboard?
A:
There are lots of challenges. It is a major initiative of
India Inc after independence. In my view this would be the
single most important fiscal initiative for the country
which is good for the country if done properly and good
for the taxpayers and good for the governments also
because they can simplify the tax regime and they can have
a hassle free tax administration and compliance. The
challenges are multiple. First of all you have a political
challenge of all the governments agreeing to a common
design of the tax. Now a common design necessarily implies
giving up the fiscal autonomy. In designing the tax there
are challenges like should the tax apply to real estate,
should it apply to land transactions, should it apply to
alcohol and petroleum?
Right
now those debates are taking place and there is some
degree of consensus but I must confess that not everybody
agrees about all these design features. Next part will be
the tax rates which is the most difficult challenge. Will
it be a single tax rate like in
New Zealand
or
Singapore
or
Japan
or will you have multiple tax rates. If so how will you
divide your consumption basket into low tax rate and the
high tax rate? The problem with having duel tax or two or
three tax rates is that even though you may think it is
good that we are taxing say food at a lower rate, it
pushes up the tax rate on other items, which those
industries won’t like.
So
there are these design challenges, political challenges
– then you have administrative challenge and the
administrative challenge is that you want to make the tax
system so good that it works by itself. You want to
automate, you want to improve services to tax payers, you
want to minimize interference by officials which is not
conducive to proper compliance – you want to minimize
harassment. At the same time you want to built tax and
balances so that dishonest taxpayers get caught and
punished properly. Those things have been done but
implementing those changes will require certain amount of
time and effort.
Q:
What are the milestones that you are looking for the
government to place to be able to achieve that date of
April 1, 2010? Do you think we are going to be able to
achieve it and if we don’t achieve and may be if it gets
pushed by 3 or 4 or 6 months, will it be that bad?
A:
The first task for the government is to compose a
committee chaired by some senior officials who can make
things happen, who can provide the leadership. Number two
will be very quickly the government must sort of close the
chapter on a various design issues and that’s
political as well as technical and once those things are
done then a drafting has to commence. If they can form the
committee of senior officials and they can agree on the
broad design issues then they should be given roughly more
months to design the tax law and simultaneously the work
should commence on design of the new forms, procedures,
method of filing the tax returns and registration system
for the new tax and most importantly the new IT system for
administration of the tax. But if they can come out with
the draft law by end of this year – it is going to be
impossible to implement on April 1, even if they come out
with the draft law by December 31, think some delay will
be unavoidable beyond April 1.
Q:
Does that delay bother you in any sense or that you prefer
that we go through all these paces very thoroughly before
we implement the tax?
A:
I have been using the phrase that a slight delay is better
than a baby in an incubator.
Source :
Moneycontrol.com - Mumbai, India,
dated 11/07/2009
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