GST - SANTHOSH HATWAR

[GURU]

By Santosh Hatwar
THE much-awaited discussion paper on GST from the Empowered Committee
of State Finance Ministers, released last Tuesday, with much fanfare,
which was supposed to give a sneak peek into the world of GST, a major
turning point in the field of indirect tax reforms in India, was a
complete letdown.
It had all the excitement of a much-awaited Hindi movie with steamy
scenes from the lead actors but what was put on display is very
disappointing as it hides more than it was actually supposed to
reveal. However, what it has revealed provides enough fodder for
speculation and discussion on what is in store for the future of
indirect taxes in India, and how complex life would be for the
stakeholders after the actual introduction of GST.
Given the amount of paper work involved to amend the relevant
provisions of the Constitution and the appropriate legislations
required to be put in place by the Parliament and the State
Legislatures and also the enormity of the tasks cut out for
bureaucracy to revamp the administrative mechanism for an effective
pan-India roll out, it is very doubtful if all this could be achieved
before April 1, 2010 given the fact that it took several years and a
plethora of working groups to sort out various issues and ultimately
come out with this Discussion Paper.
In my view, if the Parliament and the State Legislatures do not meet
the April 1, 2010 deadline then we can expect it to be introduced from
April 1, 2011 along with the much awaited Direct Taxes Code scheduled
to become law from April 1, 2011. But we can rest assured that GST is
going to be a reality and it does not matter if it is 2010 or 2011.
In this brief write up an attempt is made to highlight the salient
features of the proposed GST as revealed by the Discussion Paper and
some of the complexities it has to negotiate before it becomes a
reality.
Dual GST:
++ Dual GST to be levied by both Centre and the States on goods and
services, which will be backed by relevant amendments to the
Constitution for the purpose of enabling the States to levy GST on
services and also allow Centre to tax the value addition down the
distribution chain.
One wonders as to how Centre will be able to tax this value addition
when States will also levy GST on this distribution chain. For e.g.
when goods emerge from a manufacturing entity it is subject to levy of
both CENVAT and VAT or CST as the case may be, when it is sold to the
consumer who is a wholesaler or another manufacturer who further
consumes these goods and services.
When the goods move through the distribution chain to reach the
ultimate consumer i.e. through the distributor to the retailers and
ultimately to the consumer, there is value addition which is already
subject to levy of VAT at various levels in this distribution chain
apart from other levies like entry tax, octroi, surcharge, cess etc,
and which will be subsumed by the proposed levy of GST by the States.
Then how can this value addition in the distribution chain be included
in the domain of Centre. Will it not amount to double taxation on the
same set of transaction by both Centre and the States? May be the
actual legislations and the proposed amendments to the Constitution
will take care of these issues and bring more clarity.
Subsuming of Central and State taxes:
++ Subsuming of Central taxes like excise duty (this was already
renamed as ‘CENVAT' in the year 2000), additional duties of excise,
excise duty levied under the M & TP Act, service tax, additional
customs duty levied under section 3(1) of Customs Tariff Act, 1975
i.e. CVD in common parlance, additional customs duty levied under
section 3(5) of Customs Tariff Act, 1975 i.e. SAD in common parlance,
cesses and surcharges, in the GST to be levied by the Centre which
will be called as Central Goods and Services Tax or CGST for short.
++ Subsuming of State-level taxes like VAT/Sales tax, entertainment
tax (other than those levied by local bodies – why should this be left
out), luxury tax, taxes on lottery, betting and gambling, cesses and
surcharges levied by states in so far as they relate to supply of
goods and services, in the GST to be levied by the States which will
be called as State Goods and Services Tax or SGST for short. CST will
be completely phased out which is on expected lines.
Both CGST and SGST will be available for set off at the subsequent
level of transaction.
Set off:
++ The set off of CGST and SGST are mutually exclusive. The input
credit accumulated from CGST shall not be utilized for discharging
SGST and vice versa. However, there is a new mechanism proposed to be
put in place for inter-state transactions in goods and services with
the introduction of the concept of IGST where Centre will levy IGST on
the inter-state transaction of goods and services. IGST will have
components of both CGST and SGST coupled with appropriate provisions
for consignment or stock transfer of goods and services (I wonder how
they will stock transfer intangibles like services).
The proposed credit mechanism in case of IGST will work as follows:
The inter-state seller will pay IGST on value addition after adjusting
available credit of IGST, CGST, and SGST on the purchases. The
exporting state i.e. the state in which the inter-state seller is
located will transfer to the Centre the credit of SGST used in payment
of IGST. The dealer in the importing state i.e. the buyer in the inter-
state transaction will claim credit of IGST for discharging his output
tax liability in that state i.e. CGST, SGST and IGST, which he may be
liable to pay further. The Centre will transfer to the importing state
the credit of IGST used in payment of SGST. In fact, Centre will act
as a clearing house for this purpose for all the importing states.
GST on import of goods and services:
++ Levy of GST by both Centre and States on import of goods and
services into India and allowing this levy as set off. The incidence
of this levy will follow the destination principle and the tax revenue
in case of SGST will accrue to the State where the imported goods and
services are consumed. This levy will also be backed by necessary
Constitutional amendments to enable the States to actually levy GST on
import of goods and services.
While the Empowered Committee has identified the taxes and levies at
both the Central and State level which should be subsumed into the new
levies, the idea of imposing both CGST and SGST on import of goods and
services by both Centre and States is intriguing since there is no
proposal to disband the basic customs duty levied under section 12 of
the Customs Act, 1962.
Moreover, there is no proposal to subsume basic customs duty as well.
Only CVD and SAD are considered for this purpose. If the idea is to do
away with levy of basic customs duty altogether and in turn impose
CGST and SGST separately on imports then it is welcome because it
becomes eligible for set off for the subsequent entity in the value
add chain. But imposing basic customs duty and also CGST/SGST on
imports of goods is not a very good idea as it will burden the
consumers (irrespective of whether he is an individual or a
manufacturing entity) very badly.
Alternatively, basic customs duty may be replaced altogether with levy
of CGST and SGST by both Centre and States since basic customs duty is
not available for set off though it is an indirect levy ultimately
passed onto the consumer whereas CGST and SGST levied on imports will
be available for set off.
GST Structure:
++ While the Empowered Committee decided to adopt a two rate structure
– a lower rate for necessary items and goods of basic importance and a
standard rate for goods in general and special rate for precious
metals, there is no clue as to what the rates would be and whether
this structure would be uniformly adopted in CGST as well as SGST.
There is a proposal to adopt the exempted goods list in the VAT domain
including goods of local importance on an all India basis including
the Central Government. This is yet to be resolved and finalized and
given the diversity in production of goods and services in this
country, it is to be seen if there will be any consensus on this
issue. But let us hope that there will be a consensus and a uniform
list is adopted for both CGST and SGST, while keeping the list to the
barest minimum.
Threshold limit and compounding scheme:
++ The Empowered Committee proposed a threshold of Rs.10 lakh both for
goods and services for SGST for all the states and union territories
with adequate compensation for certain states (particularly, North-
Eastern region and special category states) where a lower threshold
had prevailed in the VAT regime.
Further to benefit small traders and small scale industries and to
avoid dual control, the threshold for CGST for goods is proposed to be
at Rs.1.5 crore while recommending a higher threshold for services
under CGST. If the threshold for services under SGST is proposed to be
Rs. 10 lakhs then for the sake of uniformity a similar threshold limit
makes sense even for CGST. There is no reason why there should be a
higher threshold for services under CGST.
++ In addition to the proposed threshold limits, the Empowered
Committee imported the concept of compounding scheme prevailing in the
VAT domain into GST. However, strangely, its recommendation is only in
the realm of SGST and not CGST. The composition/compounding scheme for
the purpose of GST would have a uniform upper ceiling on gross annual
turnover (Rs. 50 lakhs) and a floor tax rate (0.5%) with respect to
gross annual turnover across the states.
The scheme would also allow option for GST registration for dealers
with turnover below the compounding cut-off. However, it is not
revealed if this tax paid by the entities availing composition scheme
is eligible as set off for the buyers.
Strangely, there is no proposal from the Empowered Committee for
adoption of a similar mechanism under CGST for the sake of uniformity.
It may be noted that there is already a compounding scheme prevailing
in service tax which is currently limited to works contract service.
Also, there are several abatement schemes for various taxable services
with various permutations and combinations.
Probably, it was presumed that since the threshold limit for goods
under CGST is already set at a high of Rs. 1.5 crores, there is no
requirement for a separate compounding scheme for goods under CGST. If
that is so, then let there be a common threshold limit of say Rs. 50
lakhs for goods under both CGST and SGST and do away with composition
scheme altogether as it will only complicate procedural requirements
for availing set off.
Products and taxes out of GST fold:
++ Since some states earn substantial revenues from purchase tax,
especially states which produce food grains, this issue is yet to be
resolved.
++ Local levies like octroi imposed by local bodies on movement of
goods and services are not in the list of taxes which will be subsumed
by GST and will continue to exist even after introduction of GST.
++ Alcoholic beverages, petroleum products, tobacco products
(partially) will continue to be out of GST.
++ Area based exemptions are in jeopardy as the Empowered Committee
proposes to discontinue these exemptions, abatements, rebates etc.
Unfortunately, the special industrial area schemes operating in the
VAT domain is completely different from the area based exemptions
provided by the Central Government.
It will be interesting to see how this pans out when the actual
legislations are put in place because the states which have benefited
from this Central scheme will have to do a tight rope walk to actually
persuade the Centre to extend this exemption benefit.
Thus, while the efforts put in place by various working groups burning
midnight oil to bring about life altering changes in the field of
indirect taxation in India is laudable, the revelations through the
Discussion Paper is certainly disappointing as it gives scope for more
questions than answers. After years of pain staking exercise and hard
labour by the Empowered Committee and its various working groups, the
least we can expect is that the child will not be a still born.