BASIC CONCEPTS OF GST (PART-5)

[Dr. Sanjiv Agarwal]

Disadvantages / Possible Distortions of Implementation of GST

Proposed GST is not a national unitary / centralized tax but a tax to be levied by both, states and the union simultaneously.

In GST proposed GST-

(a) There is a retrograde move to extend GST to stock transfer by first charging on it and then giving credit. The states have forced their way in this decision which will cause a lot of impairment in work against the wishes of the Centre. It will involve tremendous work with no revenue gain. Even if certain amounts are given credit after initial payment of duty, the money has to be brought out from other circulations and to that extent the economy will become slower.

(b) On import, a countervailing (CV) duty of 27 per cent, which is said to be revenue neutral rate for IGST, is to be paid which is substantially higher than before. Earlier, service tax was not to be included in CV duty, but now that also is included in the IGST (integrated GST). Charging such higher duty is economically regressive. Government may have to lower the whole rate for countervailing duty which has not been indicated.

Following disadvantages and possible distortions are note worthy -

1. Not using the correct accounting method.
2. Incorrectly claiming GST credits on bank fees
3. Incorrectly claiming GST credits on government charges --such as land tax, council rates, water rates.
4. Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy.
5. There's a stamp duty component in the premium which is not subject to GST, a GST credit cannot be claimed on this portion of the payment.
6. Not remitting GST on some government grants and incentives which are received inclusive of GST
7. GST is not paid on the sale of cars and equipment including the trade of motor vehicles.
8. Incorrectly claiming GST credits on wages and superannuation payments.
9. Incorrectly claiming GST credits on GST-free purchases such as basic food items, exports and some health services.
10. Incorrectly claiming the full amount of GST credits on entertainment expenses where the business has elected for fringe benefits tax purposes to use the 50/50 split method, in which case only 50% of the input tax credits can be claimed.
11. Claiming the entire GST credits on a car purchased for more than the luxury car limit.
12. Sole traders and partnerships are not apportioning input tax credits and making adjustments to expenditure that's partly private and partly business use.
13. Incorrectly claiming an upfront GST credit on assets financed through a commercial hire purchase (CHP).While an up-front GST credit is available for businesses accounting for GST using the accruals or invoice basis,
14. Incorrectly claiming GST credits on payments for Yellow Pages advertising. If the business chooses to pay for the cost of advertising by installments.
15. Claiming a GST credit when the business does not have a valid tax invoice at the time of lodging the Business Accounting Standards.

Pre-requisites for GST an Efficient GST

A smooth and efficient GST system should possess the following pre-requisites:

• harmonization of tax base, tax rates, tax laws and procedures
• avoiding cascading effect by providing credit of total amount of tax paid on inputs
• levying tax on destination basis
• ensuring uniformity in law and procedure

GST regime should also consider the following to be an effective and efficient tax:

• the fiscal autonomy of provinces
• use of tax as an instrument to achieve social and or economic objectives
• risk and rewards of ownership of the tax.

Following can, therefore, be identified as the pre-requisites as a curtain raiser for entering into a GST regime :

• Setting up of empowered committee for GST (like VAT) which can steer the road map into action
• Broaden the tax base for excise duty (presently 40% comes from petroleum products)
• Finishing area based and product based exemptions
• Rationalization of concessions and exemptions including that on exports
• Expanding service tax to almost all services
• Common/unified tax rate for goods and services which may be ideally, revenue neutral (a suitable GST rate)
• Avoiding or minimizing differential tax rates
• Abolition of other small taxes
• Abolition of CST in a phased manner
• Power to levy service tax on select/agreed services to States
• Issue of inter-State services and goods movement vis-a-vis levy of duty or tax to be sorted out
• Revenue sharing mechanism to be rationalized
• Centre should be enabled to tax value added upto retail stage.

While GST may be seen as national VAT system on goods and services, states sales tax shall eventually cover all states to have state level VAT system for sales etc.

GST, if implemented, would end up prevailing distortions in goods and services taxation in term of money and scope. It will also result in lowering of cost of compliance, enhancing compliance levels and result in higher tax collections. It would offer a wider tax base and reduce revenue leakages. Industry would be a happier lot as it would allow them to avail

Cenvat credit on inputs and input services, besides eliminating other small taxes, making compliance cheaper and simpler. GST shall achieve economies of scale by creating a common market and help India become a global market. All states and centre will have to work for this unified goal.

GST is expected to be a more efficient system of taxation and is likely to give a boost to the tax revenue of the Centre and the States. GST will also remove barriers amongst the states and convert entire country into a common market. Once implemented, GST is expected to bring about a paradigm shift in the arena of indirect taxation in India.