GST - SOME ISSUES ARISING OUT OF DISCUSSION PAPER

[Dr. Sanjiv Agarwal]

Taxes out of Scope of GST

The state governments are finding it difficult to arrive at consensus on following taxes to be subsumed in GST-

- purchase tax

- octroi duty

- tax on alcoholic beverages (country liquor / IMFL)

- tax on petroleum products

- tax on tobacco items

- stamp duty

- toll tax

- passenger tax

- road tax

- mining cess / royalty

- electricity cess etc.

Besides above, there is still no clarity on services- whether both, CGST and SGST would be levied on all services or that centre and states would distribute services amongst themselves or that centre alone will levy service tax on services and then appropriate it amongst states.

Dual GST or Multiple GST

Indian is a country with federal status wherein we have a Union Government (Central Government) and State Governments. So in the proposed setup, we are likely to have one central GST and 29 state GST's as we have 29 states. Each state will have separate GST. Union territories will be taxed as that of central GST. Though empowered committee is trying to have a model GST Act for all states so that legal provisions on GST are harmonious, it may actually not happen. With this scenario, there are bound to be problems for taxpayers such as -

(a) State GST legislations  are not likely to be uniform.

(b) It is to be seen whether state GST in introduced in whole of India in are one, ie, on a common date or states may have their over date. If that happens, taxpayers will be losers at the cost of politics.

(c) It is most unlikely that there will be a single return, single assessment and single tax administration. Even appellate procedures would be duplicated leading to different interpretation.

(d) Business men having multi- state operations would face the most of brunt in compliance.

(e) Cost of compliance will be higher adding to cost of production.

(f) Refunds and cenvat credit are not expected to be fast, simple and easier in implementation.

Tax Cascading Effect

The greatest advantage of new GST regime is that it addresses fully the concern of tax cascading. Presently tax cascading is found in both- central and state taxes as the exempt sectors of economy (trade, oil etc) are not allowed to claim any cenvat credit of indirect taxes. It neither happens in excise duty nor in state value added tax. Also, on inter state sales, central sale tax (CST) is collected by the origin state for which no credit is allowed by any Government. It increases cost of production and makes business non-competitive. GST regime shall subsume most of the indirect taxes and will reduce the tax cascading effect to a great extent in entire supply chain. Only the final consumer will not be able to avail or utilize tax credit.

Composite Contracts

At times, it is seen that it is a common practice to have single composite contracts for various works, jobs, services etc such as in case of engineering projects, construction contracts, EPC projects, installation & erection, software and information technology etc. The issue that may arise in GST regime is whether such works contracts be treated as goods or services or as a special class of goods or services for the purpose of levy of GST as these comprise of both the elements of goods and services.

There is a need to simplify the convoluted tax treatment for such contracts and to simplify it, it may be desirable to treat such contracts as services. This would help in simple and reasonable valuation by keeping out such contracts from different classification or valuation if treated as goods. With different threshold limits and GST rates both at central and state level, it will be very difficult to tax and pay tax on such composite contracts. To have a hassle free taxation of such contracts, it could be thought of to treat such contracts as services only. Presently, such contracts are subject to both, VAT or Central Excise duty and Service tax which lead to litigation between the revenue and tax payers as to classification and valuation. One such contentious issue is that of software comprised in a compact disc wherein cost of media or the compact disc is labeled attracts central excise duty and its licence or right to use attracts service tax under intellectual property right service. Unfortunately, the first discussion paper is silent on this issue and it needs to be addressed appropriately. Government will have to specifically provide for such treatment clearly under the new GST regime.

Fiscal Autonomy of States

Presently, states enjoy total autonomy so far as state taxes are consumed- be it type of levy, what to levy, at what rate to tax and how to tax. Under GST regime, it is expected of states to have harmony in taxing including that in tax rates.

Since the rates are going to be same, it would be a harmonious levy. How this is going to take shape is any body's guess. It is very difficult to have agreement on this aspect of GST unless there is an assurance from the centre for total compensation against losses suffered on account of fall in tax revenue. Central Government may not be in a position to offer and afford one hundred percent compensation for revenue loss. The Empowered Committee Chairman has already said that much would depend upon the collection and compliance levels.

Presently, arriving at revenue neutral rate is posing the major challenge and there is no uniformity in views. Also, states are worried as to whether gains from service tax would be adequate to compensate the state for losses on account of GST. Centre will have to ensure that there is a revenue neutral rate and a compensation formally in place as a GST package it self.

Compensation to States

The discussion paper state that there would be a need for compensation to states by centre during initial phase of implementation of GST as some states would gain while some may loose revenue. Though effect would be made for arriving at revenue neutral rates, it may not be possible to achieve a near revenue neutral situation.

Despite the sincere attempts being made by the Empowered Committee on the determination of GST rate structure, revenue neutral rates, it is difficult to estimate accurately as to how much the States will gain from service taxes and how much they will lose on account of  removal of cascading effect, payment of input tax credit and phasing out of CST. In view of this, it would be essential to provide adequately for compensation for loss that might emerge during the process of implementation of GST for the next five years. This issue may be comprehensively taken care of in the recommendations of the Thirteenth Finance Commission. The payment of this compensation will need to be ensured in terms of special grants to be released to the States duly in every month on the basis of neutrally monitored mechanism.

According to Empowered Committee Chairman, based on the tax compliance in the initial year of GST, possibility of subsuming more taxes could be reviewed under what is called the phased approach to GST. Also, it might not be possible for the centre to compensate all the states for all the losses arising out of loss of revenue, if any. The key to more taxes being included, could therefore, lie in level of GST compliance.

The centre and states are also required to decide on exemptions. Presently more than 300 goods are exempted in Union list and about 100 are exempted under state VAT out of which about 60 are common items in both lists. The exempted goods and services and yet to be finalized.

GST on Inter-States Transactions

IGST on inter-state transactions is a new and innovative concept which will be adopted in GST.  Inter-state GST (IGST) will be imposed on inter-state transactions and will be entirely collected by the Central Government. The dealer of the importing State will be entitled to avail VAT credit of entire of IGST. If this dealer utilizes the credit for payment of SGST, such amount will be reimbursed to the importing State by Centre. On a similar basis, if the dealer in exporting State utilizes credit of SGST for payment of IGST, Central Government will debit that amount to the exporting State. Thus, Central Government will act as 'clearing house' among different States for the purpose inter- state GST.  IGST will be charged in invoice only if the selling dealer is registered under IGST. Similarly, credit of IGST can be taken only if the purchasing dealer is registered under IGST. Credit will be cross checked and verified through e-returns to be filed by selling dealers and purchasing dealers. IGST is expected to reduce the number of claims made, besides reducing the corruption and harassment. It will also reduce the litigation.

Supply Chain Impact

The dual GST structure will adversely affect the cost of supply chain, more particularly in manufacturing sector -both for inputs and output. The supply chains could be in relation to procurement of raw material and other inputs and in relation to distribution network for finished goods. The problem areas could be in the form of physical delivery, entry barriers, inter-state movement of goods, imposition of local levies (octroi, entry tax etc), longer transportation time etc. In the proposed GST regime, while we move from origin based tax to consumption based destination tax, entire taxation base would shift to a base where consumption of goods or services takes place. Supply chain would also get affected as even inter-state transfer or depot stock transfer would be subject to GST without there being actual sale of goods. The discussion paper talks of providing for taxing any branch or consignment transfer. It is feared that longer supply chains would mean more tax compliance and cost attached to it. Companies will, therefore have to revisit and realign their manufacturing facilities, procurement and distribution channels, business processes, sale etc to strike a balance between economic and tax implications. Businesses will have to and should undertaken a complete review and assessment of compliances under GST regime. Now that GST is likely to be deferred beyond April 2010 dead line , companies  should evaluate the cost benefit in GST regime, based on existing systems and procedures.

IT Infrastructure

After acceptance of IGST Model for Inter-State transactions, the major responsibilities of IT infrastructural requirement will be shared by the Central Government through the use of its own IT infrastructure facility. The issues of tying up the State Infrastructure facilities with the Central facilities as well as further improvement of the States' own IT infrastructure, including TINXSYS, is to be addressed expeditiously and in a time bound manner.

The major task before the Empowered Committee and the government will be to build up information technology (IT) platform or infrastructure. In my view, the tax information network (TIN) system, built by NSDL for income tax is the right foundation for implementing the GST. It (TIN) already reaches to over a million entities and this can be easily done. Also, as a preparatory to the exercise, individual states should be merged into TIN, one by one, at an administrative level while keeping the state VAT distinct from the GST. Once all major states are administratively working on this network, a stage would be set to throw a switch on the appointed date. A strong and robust IT infrastructure is needed as an essential pre requisite to address the concerns of inter-state transactions for cross verification and minimal dependency on issuance or production of declaration/ forms.

Requisites for GST - An Update

Following steps are needed on political, administrative and technological fronts in implementation of GST-

-    Strong political commitment - appears to be in place.

-    Arriving at common/general consensus including political agreement- likely to happen

-    Setting up a high level committee for monitoring the project of GST - empowered committee exists

-    Preparing a blue print/road map for GST -first discussion paper just out

-    Creating a conducive environment for GST - being done but slow

-    Centre-state coordination -empowered committee takes care of

-    Consolidation of Central Excise, Service Tax and VAT on imports/exports - expected move in forthcoming budget

-    Identification of issues to be resolved - done

-    Interaction with trade and industry and others stock holders concerned - in place but slow

-    Building up GST infrastructure and administrative machinery -will involve time and money, commitment missing

-    Adequate reinvention of tax administration, training and public education programme - to follow, must start now

-    Establishment of information technology systems, software and enabling environment -like TIN network in direct taxes