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Taxation in India is a
bit like the wild-wild West, we don’t know who is on
whose side and fighting against whom. Two curious events
occurred this week. On Wednesday the MET department put
out a cyclone warning shutting this 24x7 city down very
early, but in fact no cyclone hit Mumbai and it hardly
even rained. About the same time the much awaited white
paper on GST that is the goods and services tax was
released by Asim Dasgupta Chairman of the Empowered
Committee of State Finance Ministers and just like the
cyclone warning, the white paper too turned out to be a
damp squib. It hides more than it reveals – no dates, no
lists of low rates or exempt items, no clarity on
exemption threshold, key sectors like real estate,
petroleum, electricity kept out of GST.
Tax Expert Satya Poddar,
Partner at E&Y analyzes this white paper with gray areas
while Seshagiri Rao, Joint MD at JSW and Pramod Gupta,
CFO at Novartis India explain the impact on corporate
India in an exclusive interview on CNBC-TV18’s The Firm.
Here is a verbatim
transcript of the interview
Q: To quote some of
the comments that you made when the white paper was
released. You said the GST designed opted for is a
compromise which could prove to be neither good
economics, nor good politics. What it reveals is far
less than what is missing”. You seem very disappointed,
can you break down for me what you consider the good,
the bad and the ugly of this white paper?
Poddar: Firstly
it’s a good thing that the paper came out because India
is impatiently waiting for this GST to happen because it
will provide a significant boost the economy. so the
good part is that the paper came out but the main
problem with the paper is that it only deals with the
goods part of the goods and services tax and so to that
extent is largely a photocopy of the Value added tax
(VAT) we already have in India but the Goods and
Services Tax goes beyond goods, it taxes services, it
should be taxing real estate and that is where the paper
is largely silent or has taken positions which may not
be good for the economy or the design for the tax. for
example they a have left out real estate completely,
they have left out petroleum, they have left out
alcohol. On the taxation of services we recognize that
it will take time for the rules to be developed but
without having those rules we cannot really say what the
impact of that tax will be. Again there is no clarity on
the rates. The empowered committee paper talks about
keeping three rates; one for precious metals like gold
and silver, one for essential commodities, one for the
rest of the commodities and services.
The main difficulty is
that if you have all these exemptions preserved, and low
rates preserved, the rates which will apply to
commodities will remain same as they are today. They are
talking about rate of 8-9% for goods other than those in
the low rate brackets but in my view 8-9% may turn out
to be too low if they don’t cut back on existing rates
and incentives. So that can become ugly because if we
impose the tax rate on other commodities, at rates which
are currently applicable and shift the central tax on
top of it you are talking of standard rate minimum 16%
possibly 18-20% and very few countries are able to
collect GST type taxes at the retail level at rates of
16-18-20%.
Q: Is rates the only
big area for you Mr Rao, I know that there are no
specific rates defined but the indications that Mr
Poddar is drawing from this are that it could be as high
as 18-20%- is that how you read it and if yes what could
the implications be?
Rao: If we look at
the post announcement of stimulus packages, the rates
have come down particularly the excise duty at 8% and
the state VAT is in the range of 4-5%. So in that
context if you see any rate above 15% appears to be high
but pre stimulus package rates if you look at, at that
time the excise duty was 14% then the VAT was 4-5%, so
in that context when all the rates are getting merged;
both state and central taxes. So 16-20% in that context
is not very high in my view.
So I don’t fully agree
with Mr Poddar’s view; 16-20% may not be prevalent in
other countries but in Indian context, taking into
account the avenues which government has to generate,
that may be an appropriate rate once the government
decides to withdraw the stimulus packages.
Q: What would you like
to list as the good, the bad and ugly of what you have
drawn from this white paper or this gray paper or as
some tax experts are calling it this black paper?
Rao: Whatever I
could understand from the white paper, if you look at
the positives then there are certain taxes earlier which
had a cascading impact but once this is implemented like
entertainment tax, or set off restrictions which were
there earlier which cannot be set off against/as the
output tax. Now the possibility of setting out taxes
against/as the output taxis possible as per this white
paper. Similarly Central Sales Tax (CST) will not be
there in future, so again there will be a set off
benefit which will come to the companies, so there are
2-3 positives which I am seeing, the cascading impact
will significantly get reduced. But at the same time if
you look at the other areas where clarity is lacking is
the brands transfer and the consignment sales where the
companies will do mostly the interstate transactions
through branches and consignments agents, it is not yet
clear what the rules would be in that context. One more
aspect is that in case of wroks contract tax how this
treatment would be in the post GST scenario that is also
not clear. So, that way there are lots of areas where
clarity has to come. But on positive side the cascading
impact of these taxes will be lower in the post GST
scenario.
Q: So we have one
negative view or a critical view to put it honestly from
Mr Poddar, a middle of the path view from Mr Rao. Where
do you swing in this entire scene?
Gupta: I think
given to myself I would much rather prefer a single rate
across commodities, services.
Q: But that is not
going to happen. The political reality of that is that
it is not going be a reality. We knew right from the
beginning that we were going to be faced with multiple
tax, right?
Gupta: I think in
that case it is going lead to something like 16% odd.
Q: Are you comfortable
with that the 16-20% which Mr Poddar seems very
disappointed with it and Mr Rao has accepted?
Gupta: I think
that depends on the sector in which you are in. if the
single rate is not possible than things like
pharmaceuticals which is life saving and essential
commodities. Then 16% starts becoming very high.
Q: So you might be in
the nominal rate list but we don’t know which items will
come under the nominal rate list?
Gupta: Yes, so
that becomes a huge amount of uncertainty for the
industry going forward. That sometimes leads to the ugly
part where the individual industries will start talking
about where do we fall. But at this point of time, the
most important thing is that we have a white paper, you
may call it a grey paper or any other paper, but we
atleast have clarity on the way forward. It is a good
starting point. But it is just a starting point.
Q: Many people believe
that atleast we have a starting point. We could very
well be faced with the outcome or the fact that we are
no where close to actually getting this tax off the
ground by the deadline that was initially set that is
April next year, maybe it will take a full extra
financial year for everything to come into place. The IT
systems and all of that to come into place for companies
to be prepared. Do we have this space in the course of
that 10-12 months to be able to rectify some of the
issues or do you believe that from a direction point of
view itself, this white paper has gotten it wrong. So
are we directionally going wrong or is it just that we
have a long way to go?
Poddar: The paper
is only the position of the State Finance Ministers. The
center has not revealed its view as yet. I expect that
infact the finance commission chaired by Dr. Kelkar is
also working on a draft model for the GST and
expectation is that model will be revealed shortly,
could be next week or few days away. That has one of the
view as to what the GST should look like. Then there
will be a debate and hopefully out of that debate will
come a consistent draft which reflects the collective
view of the center and the states. Without really
knowing of what the center is going to do, it is very
difficult to say how fast we can move and do we have the
time or not because the timing critically depends upon
the simplicity of the tax. If you have a very complex
structure then even a year is not enough. But if you
design the tax to be comprehensive at one or in a very
few rates like not more than two, highly harmonized
between the center and the states then yes we can move
ahead and implement it in 6-12 months time period. Let
me just also respond to Mr. Rao’s two comments about
cascading. I agree with you that the GST is going to
reduce cascading. But by leaving sectors like real
estate, petroleum and even alcohol and the natural gas
out side the scope of GST, you basically go against the
principle of reducing cascading. The construction of
real estate is a huge sector in India. All the
commercial buildings, factories they buy cements, steel,
construction services and they pay the VAT or the CENVAT
on those. If those sectors are kept outside then that
tax becomes cascading tax. Petroleum whether it is
refining, exploration, geological mapping, surveys, all
of those activities will attract tax under the GST. If
they are kept outside that tax will not be recoverable.
It will make India uncompetitive in a global market. For
example octroi, by keeping octroi outside again you are
creating cascading because octroi applies on many
business inputs and investment commodities. So I agree
with you that the GST is a good tax because it is going
to reduce cascading. But why stop half way. Let’s remove
cascading completely.
Q: For your response
to what Mr. Poddar has said, also if you could tell me
considering that you supply steel to the real estate
sector, if they cannot benefit from the ability to
offset, which is something that GST gives you. Would it
impact you in any fashion as being part of their supply
chain?
Rao: No only if we
look at before and after the white paper and also the
implementation pre and post of GST, will it make any
difference if you ask me. Today there is not set off or
cenvatibilty. So after implementation if certain sectors
are excluded I don’t think it will have an impact. But
as Mr. Podar rightly pointed out whether it will have
the full impact of GST implementation, it may not have
but gradually it may come in. So certain sectors are
excluded, maybe for political or strategic reasons or
consensuses have not come among all the states.
Similarly some purchased tax has been excluded in
certain items which they want to keep outside the GST.
So there are certain areas where a comprehensive GST has
to be introduced including those sectors, items which
may take longer time.
Q: Coming to the issue
of service tax- the fact that they have not paid
adequate attention to services in this white paper does
it mean that the – increase also the fact that you are
looking at a indicative rate of between 16-20%- does
that mean that there is going to be a higher tax burden
on services?
Poddar: Definitely
the services will be taxable; the paper doesn’t talk
about them because the State Finance Ministers don’t
really have adequate understanding of taxation of
services because historically their domain has been
taxation of goods. So they are looking at the center to
provide more of guidance on how the services should be
brought into the tax net.
Q: So are you
expecting that the note that will likely come out of the
center or the Kelkar Commission Report in a few weeks
from now will tackle this services aspect in a lot more
detail?
Poddar: Yes that
is my expectation and even empowered committee has got
some additional documents prepared on taxation services.
So as and when they are released they will provide more
guidance on how the services will be taxable. But the
important point you raised about the taxation of
services at what rate is a critical one because services
have to be taxable at the same rate as goods. So even if
you put food in a lower rate category, the remaining
items where the services get bundled quite often have to
be taxed at the same rate as services. now if the
standard rate which applies to these goods is like
16-18% then the services have to be taxable at 16-18%
and that is a very problematic tax rate to start with in
India. Because currently the services are taxable at
10%, now if you jack up the tax rate to 16-18% you have
lot of political resistance and that is one more reason
why before they go into a two rate structure, they
should examine how difficult will it be to bring
services into tax net at 16-18%.
Q: Would you like to
add anything to that point?
Rao: There is only
one indication which I have seen in the white paper that
in the case of services there will be a single rate
instead of having two lower rate for certain goods and
standard goods for certain other goods. In the case of
services only one single rate but there is a central
service tax and the state service tax. So far on
services there is no tax at all from the state. So when
the GST comes in services will be taxed even by the
state. So both together it can be even within 10% or
slightly higher than that but it cannot be like GST. It
is a combination of both state and service tax which is
significantly higher and there are two rates in the case
of goods. If the services as per my understanding of
white paper there will be a single rate.
Q: And you are saying
that single rate will be lower than the rate that is
imposed on goods which could be around 14 or 16% is it?
Rao: Yes that is correct.
Q: Do you agree with
that?
Poddar: No the
system will fall apart, if you have a separate rate for
taxation of services, separate from that for the goods
other than the low rate goods. So in my view technical
complexities are keeping the service tax rates separate
from that applicable to goods, is unworkable.
Q: Your view?
Gupta: I agree
that we cannot have a fifth rate; you have an exemption
rate, you have a precious metals rate, you have
essential commodities rate, you have a nominal rate and
now you are talking about a fifth rate. So if you are
going to be leaving real estate aside, very large part
of inputs of real estate like architectures, developers,
contractors etc they are all services. So therefore the
amount of cascading you are going to create in the whole
thing and those costs are going to come back to either
home owners or the other corporate sector.
Q: The other point
that I want to bring in that Mr. Rao mentioned it
briefly and that is the taxation of things like branch
transfers or captive consumption. In large complex
companies of yours where you manufacture in one state
and ship it out to maybe a company depot in another
state. How are you going to able to deal with this
because it seems that area is been left unclear?
Gupta: I think it
is going to be Mr. Poddar’s delight because E&Y is going
to get a lot of revenue out of this whole thing. So I
can ask him to double his faults.
Q: I think in the note
that you put out you also raise the issue that there is
no clarity on the exemption thresholds for small traders
both between what the exemption thresholds will be for
the center and the state taxes as well as between goods
and services. Do you want to quickly tell us how
important that detail is?
Poddar: That is
very fundamental because infact the clarity that has
been put out in a discussion paper is bothered some.
They are really saying that there will be threshold of
Rs 10 lakh for the state taxation. There will be a
threshold of Rs 1.5 crore for the central taxation and
yet another threshold for the service taxation. So if
you have three taxations thresholds then what you do
with the dealers who are dealing in all three products;
products which are taxable by the center, services as
well as goods. Then you will be registered for one not
for other, if that is the case then there is no
harmonization between central and state taxation. So if
the central and state taxes are not harmonized then
again there will be disaster. With the threshold of Rs
1.5 crore for the central GST, you will be leaving lot
of people outside of the tax net. Then how can you have
a broadening of the base a level playing field and then
what is the point of doing it all.
Q: They don’t need to
broaden the base, they are hiking the rate to 16% to 18%
they will make up for any revenue loss, right?
Poddar: But the
rates may have to be much higher that 15% or even 20%,
if they keep all the exemptions the way they are right
now.
Q: I am told that in
Australia it took them 21 months from the time that the
first draft was put out to GST actually being able to be
fully implemented on ground. Is that how long it is
going to take us from this week to actually seeing the
fruition of this tax?
Poddar: India is
impatient for GST reform. They want it. But they don’t
want a mediocre reform. India deserves the best, a
flawless GST. I hope that the governments go back to a
flawless design that is going to suit the needs of
Indian economy.
Rao: There are
lots of clarifications, even as it has come out in this
discussion which has to come. As it is mentioned it's
only a white paper, they are also looking at responses
from the industry and the experts. So it will come over
a period of time, maybe in the next few weeks and lot of
clarity will come in my view.
Gupta: I won't
call it a white, grey or black paper, I will call it a
concept paper. In a way it does not tell us anything
more than what we have been broadly hearing from various
groups of people. If I went back to your theme of the
good, bad and ugly- it has the potential of being good,
it has the potential of being ugly. It depends on how
the reforms are being implemented. It has the potential
of being the most significant and important reforms in
the taxation regime of India but if not implemented well
it also has the potential of saddling us ugly taxation
regime for a very long time to come.
Source :
Moneycontrol.com,
India,
dated
14/11/2009
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