|
As
a next step too, the Finance Minister in his 2007 Budget
announced the reduction of CST (Central Sales Tax) by a
percentage point each year to facilitate the move
towards GST. The Centre, which was contemplating the
reduction in CST since implementation of VAT, could
break the deadlock with the States this year. With
phasing off of CST by a percentage point each year, the
road for GST becomes brighter.
Internal
controls
State
VAT allows credit for only the VAT paid within the
State. The problems of internal frontier controls
persist and once the goods cross boundaries, the credit
mechanism stops. On account of federal set-up, each
State has its own legislation and tax framework to
support their revenue interests. With this dual
structure of Centre and the States taxing the same goods
under different Acts, there exists a huge responsibility
on the Centre to bind the States in reaching a
commonality on the taxation of the goods.
We
have a great opportunity in understanding the tax
framework followed by European Union in relation to
member-countries in moving towards uniform VAT. The
issues faced by the member-countries in the transitional
phase of moving towards VAT would lend us a great
example in the implementation of GST here.
Europe
example
Let
us study the VAT mechanism followed in Europe. It
basically started in the late 1970s. The sixth VAT
directive adopted in 1977 established uniform VAT
coverage. As per this directive, the contribution made
by each member-state can be calculated. This, over the
years, gained momentum and in 1993, the advent of single
market across Europe resulted in the abolition of
controls at fiscal frontiers and uniform VAT was
implemented.
Goods
supplied between taxable persons in different
member-states are taxed in the recipient member-country
based on the VAT number of the receiver. The VAT number
can be checked using the VAT information exchange
system. By this, no frontier controls exist between
member-states and, therefore, VAT on goods traded
between EU member-states is not collected at the
internal frontier between tax jurisdictions. The
principle followed here is that a common and online
database is created across the countries and based on
the delivery of goods to a registered person, the VAT of
the recipient country is charged.
Need
for online network
For
GST to be implemented, uniform registration across
States needs to be created, and based on online network,
the goods can be tracked from the origin to the
destination. It has to be appreciated that the States
have already initiated online submission of VAT returns
which can be extended for GST.
As
per the Joint Working Group recommendations, dual GST
system will be implemented for the country, that is, one
for the Centre and the other for the States. On account
of the federal setup, the taxes levied by Centre and
States remain in the proposed structure except that both
are bundled into one. Though it has been named as Goods
and Services tax, the distinction between Central and
State taxes remains. This will curtail the intra credit
to be taken between the Centre and State.
To
obviate this problem, each State can be allotted a State
number and the dealer filing a consolidated return for
both Central and State Act. As each State has its own
VAT Act, the registered dealer, based on State code, can
compute the State GST and submit the consolidated
return. Submission of single return instead of
individual returns for Centre and State, will ease
administrative hassles.
Common
Database
Though
the jurisdiction of the Centre and the State remains for
the tax administration, the same return will be utilised
by the Centre and the States from the common database.
This will also pave way for the intra credit of the
total GST. The Centre, based on each State code, will
distribute the State GST component to each State based
on the returns filed by the dealers.
By
this, the twin objectives of sharing of revenue between
States and the administrative ease in submission of
returns for the dealers can be achieved. To make it a
single tax administration, Constitutional amendments are
required, for which States need to act in national
interest.
There
is still a small issue for getting inter-State credit
and inter-credit between Central and State GST. This is
because the taxation is based on supplier of goods
rather than receipt by the customer. Under GST, the
basic principle is that the taxation is on the value
addition component. And when the goods are sold to a
different State, the dealer takes credit of the earlier
paid value chain. Hence, if the same is taxed at the
seller level there will be a requirement of the selling
State, that is, the State of the supplier, to give
credit to the customer State, that is, the State of the
receiver.
Shift
taxation
The
way out for this is to shift the taxation from the
supplier of the goods to the customer level, that is,
receiver of the goods, by paying the dues after taking
the credit. This is because GST is based on principle of
consumption rather than production. In the initial
phase, the Centre can compensate the State with higher
production capacities with a large share in the Central
taxes as an incentive to move towards the total credit
system.
Moreover,
as at the time of implementation of State-level VAT,
many registered dealers had planned the sourcing and
procurements from VAT-compliant States on account of
lower taxes. Similar will be the case here too as the
States, in the fear of losing revenue and competition,
would try to come to a common understanding and adopt
uniform classification and State GST rates. This will
also remove the parallel economy and move the trade
towards the value chain.
Dual
component
An
important aspect of service tax is that there is a
single rate levied by the Centre and decentralising it
to States will lead to dual component of service tax.
With automation of returns, the revenue generated by the
registered dealer from each State can be tracked and the
taxes thereon are separated which automatically flow to
different bank accounts maintained by States. There is
no requirement of the Centre even sharing them with the
States.
The
real question posed would be the place of performance of
services to segregate between States. Normally, the
services are rendered at the supplier’s place of
establishment or the services actually delivered.
Similar to the taxation of goods, those service which
are to be taxed in the recipient’s hands, like
management consultants is done in the State where the
customer is situated. Services connected to immovable
property like rent are taxed in the State where the
immovable property is located. By framing rules it can
be specified where the services have been performed.
Considering
the various acts and procedures for export benefits, the
Empowered Committee has to come out with a common
procedure for tax benefits on exports. The documentation
and forms required for submission in relation to export
should be made uniform across States and Acts.
Classification
issue
Another
major step to move towards GST would be the common
classification of goods and services. At present, the
HSN classification of goods for Customs and Excise is
similar. The Empowered Committee has already taken steps
in aligning the classification of goods across the
States to achieve uniform VAT regime. The major exercise
now would be to extend the HSN classification to State
GST.
Under
each State VAT Act, works contract tax is levied on the
contracts entered by registered dealers. Basically, as
these contracts involve a combination of materials and
labour, each State Act has different methodology in
taxing. There are different abatements given for
different types of work undertaken on account of labour
component if the tax is not paid based on actual
material utilised. There are also composition schemes
wherein lower VAT rates are applied and the subsequent
value chain provider will not be able to take the
credit.
In
this scenario, a lot of groundwork is required to arrive
at a common understanding. As the GST also includes
service tax, the same work is also charged to service
tax with abatement on account of material used. Hence,
due to combination of different goods and services
involved and different taxing provisions in various
Acts, the Centre and the State have taxed the same work
in different forms, thereby leading to double taxation.
To
rationalise the works contract tax, the Centre should
tax the commodities at the respective Central and State
GST rate and the services at the Central GST rate,
instead of giving abatements at the level of each Act.
For GST to achieve its real intent, the composition
schemes should be removed.
Threshold
limits
There
are certain threshold limits for small traders and
small-scale industries in various Central and State Act.
The Empowered Committee should arrive at a consensus for
minimum threshold limit and common criteria for levying
a flat and concessional rate. The registration
certificate will qualify as a small-scale dealer,
wherein the purchases made by the buyer from the
small-scale supplier will not be eligible for credit.
The
White Paper on State-level VAT had mentioned that on VAT
being implemented, States will not charge additional
sales tax, turnover tax and surcharges if any. But still
some of the taxes remain post-VAT. All other State taxes
need to be removed and no new taxes levied on
implementation of GST.
The
efforts made by Centre and the Empowered Committee in
streamlining the taxes in difficult political
environment need to be appreciated. As seen initially in
EU too, there were only few members which followed VAT
and to a limited level. To reach this common
understanding and maturity level, a lot of years have
gone by.
The
Planning Commission expects GDP to grow at over 10 per
cent from 2010. The implementation of GST would
definitely help achieve this goal.
The
other major advantage would be the big reduction in
government establishment, as single GST would remove the
duplication of the tax administration at both the
Central and the State levels. As GST is proposed to be
implemented by April 2010, the Government without losing
time has to create a strong online framework which would
lead to transparent taxation on the value chain.
Source
: The Hindu BusinessLine, India, dated 29/12/2007
|
