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Of
late, there has been much speculation and a lot of expectations around the
possible introduction of the Goods and Services Tax (GST) with effect from April
2010. Given that we are already halfway through calendar year 2009, it is
pertinent to pause and consider the various challenges that need to be addressed
if the country is to meet its tryst with this date. Before we do that, however,
it is important to quickly note the model of the GST that is likely to be
introduced in the country.
Dual
GST, as opposed to unified GST, is the model that has been identified as the
most appropriate one, for a variety of reasons. Thus, the GST will comprise a
federal as well as a state component. The federal and the state GST would, in
turn, comprise of a GST on goods and a GST on services. The goods GST and the
services GST would be mutually exclusive and also operate throughout the supply
chain.
Given
the above context, let us look at some of the challenges.
GST
rates
Clearly,
setting appropriate GST rates is the fundamental challenge. The Empowered
Committee (EC) has set up a Working Group to address this issue and the group is
likely to finalise its recommendations in the near future. As yet, no official
confirmation of the GST rates is available. According to information available
in the public domain, it appears that the aggregate rate of GST, on both goods
and services, is likely to be in the range of 14 per cent to 16 per cent, with a
high probability of introduction of the 16 per cent rate. The question remains
as to whether the GST rate on goods at the federal and state levels ought to be
a single or a multiple one. It is most likely that the GST on goods would
comprise at least of two nominal rates and a zero rate would also be present for
exports and for specified goods. It would, thus, be a three-rate structure, at
the least. There are many other dimensions to this debate. With regard to the
federal and the state GST rate on services, the country needs to come to terms
with the fact that the GST rate on services will be at par with that on goods.
Given that there is no state service tax at the moment, this would mean a
significant enhancement in the aggregate incidence of taxation of services.
Constitutional
changes
Another
fundamental challenge is with regard to the statute. Evidently, the GST law
needs to be written from first principles and the present myriad indirect tax
laws such as the Central Excise Act, 1944, the Finance Act, 1994 as well as
various state VAT Acts need to be replaced by a new legislation relating to the
GST. In addition, various amendments/modifications to the Constitution would
also be required, based on the particular dual GST model that will be finally
adopted. This challenge is a formidable one. It is unclear whether enough
preparatory work has been done and whether it can be completed within the short
time-frame that is available.
Inter-state
transactions
A
key challenge under the dual GST model concerns the taxation of inter-state
supplies of goods and services. Given that the existing taxable events of
manufacture and sale of goods under the present excise and VAT regimes
respectively will no longer be relevant, it would be essential to draw up
comprehensive rules for identifying the time and the place of ‘supplies’ of
goods and services in order to tax them appropriately. The problem is limited to
the state GST on such inter-state supplies since the federal GST would, in any
event, be charged and collected by the cederal government. Here again, it is
understood that a specific Working Group has been formed within the EC to come
up with recommendations on the taxation of such inter-state supplies. Since the
Central Sales Tax, which is relevant for inter-state sales of goods, is
scheduled to go down to zero with the introduction of the GST, and since there
is presently no service tax at the state level, the final model of taxation of
inter-state supplies of goods and services under the GST would need to evolve
through a mature give-and-take approach between the Centre and the states in the
EC. This consensual approach is key to a successful implementation of the GST.
Threshold
levels
It
is well-recognised that GST is inherently a tax which only reasonably-sized
businesses can comply with, for several reasons. Consequently, it is the
universal practice to not extend the GST to taxpayers below a certain size.
Hence, a key decision needs to be taken with respect to the threshold of
turnover for dealers which would determine the cut-off for inclusion within the
ambit of the GST. In India, this discussion is made complex because of the
present varying levels of exemption threshold that exist under the federal
excise and service tax as also under the state VAT regimes. The relevant
threshold under excise is Rs 1.5 crore and that under service tax is Rs 10 lakh.
As regards the state VAT, varying threshold exist ranging from Rs 10 lakh to Rs
20 lakh. There are serious equity considerations that need to be kept in mind
and a final decision on threshold will inevitably be influenced by political
compulsions.
IT-readiness
It
is, by now, quite clear that a successful implementation of the dual GST is
based on substantive IT capability both at the tax administration level and at
the taxpayer level. While efforts are going on to implement an all-India VAT
data exchange and validation model called the TINSYS, significant additional
investment required in either scaling up this system to cater to the GST or,
alternatively, to put in place an entirely independent IT infrastructure to
administer the tax.
Training
Finally,
since the dual GST is considerably different from the present indirect tax
regime, a massive training initiative would be required at both federal and
state levels to familiarise the respective administrations with the concepts and
procedures of the dual GST. However, the task is not limited to technical
training but also extends to a similar effort made to re-orient the attitude and
approach of the tax administration in order to achieve a fundamental change in
mindset. The knowledge and awareness of the GST, at both federal and state
levels, at the staff and operational levels at present is almost non-existent
and the challenge in regard to training is, thus, perhaps the most formidable of
all that have been discussed in this article.
Therefore,
while it is now universally acknowledged and recognized that the GST, in
whatever form, should be introduced at the earliest as a fundamental fiscal
reform measure, it appears unlikely that the dual GST will be introduced by
April 2010. If we are really serious about the April 2010 deadline, policy
makers, as also the tax administrations at the federal and state levels, need to
be immediately galvanised into action under a clearly laid-out timetable for
implementation. Perhaps Budget 2009 could play a role in this.
Source :
Business Standard - Mumbai, Maharashtra, India,
dated 29/06/2009 |
