PREPARING FOR GST

[Dr. Sanjiv Agarwal]

The introduction of goods and services tax (GST) from April 2010 was announced by Finance Minister in 2006-07 Budget. Union Budget 2007-08 reconfirmed the proposal and moved a step ahead in announcing that the empowered committee of State Finance Ministers will work with the Union Government to prepare a road map for introducing a national level goods and services tax with effect from April 1, 2010. Union Budget 2008-09 has reported that there is considerable progress in preparing a road map for introducing the goods and service tax with effect from April 1, 2010. After value added tax, if implemented, GST shall be the most significant fiscal initiative of independent India and shall boost the economic development.

Need for a common tax

Why do we need GST today? In today's Indian economy, where service sector contributes over 55%, separate taxation of goods and services is neither viable nor desirable. Value added in manufacture and sale of goods require inputs of both - goods and services and vice versa, which is often not separable. Taxation of goods and services separately by union as well as States brings in distortion in tax structure, is retrogatory and adversely affects revenues. The present consumption tax system in India is complicated as well as multi-layered. GST is a part of ongoing tax reforms which aims at evolving an efficient and harmonized consumption tax system. It shall replace the multiple taxes with a single tax operating at various levels of supply chain, thus, avoiding the cascading effect of multiple taxes. Also, it shall cover all goods and services, unlike the present system, with a negative or exempted list. It will also end the distortion in differential tax treatment of various goods and services. GST is going to be pinnacle of achieving an integration of excise duties, service tax, State value added tax and other local taxes. With GST, uniformity of levy of indirect taxes will be ensured across the country.

Tax Reforms and GST

Dr. Vijay Kelkar headed Task Force on implementation of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 recently submitted its report in July 2004 to the Government. The report outlines the fiscal strategy needed to meet the objectives of the FRBM. The task force has recommended the following strategy for tax reforms:-

-  widening the tax basefew rates, lower rates

-  enhancing equity of the tax system - vertical as well as horizontal equity

-  shift to non-distortionary consumption taxes to increase efficiency in production and enhance international competitiveness of Indian goods and services. The destination based VAT on all goods and services is the best method of eliminating distortions and taxing consumptions.

-  enhancing the neutrality between present consumption and future consumption.

-  enhancing neutrality of the tax system to the form of organisation.

-  enhancing the neutrality of the tax system to sources of finance

-  establishing an effective and efficient compliance system - establishing a program for taxpayer service and education to promote voluntary compliance with tax obligations, making non-compliance risky for violators, simplifying compliance procedures to reduce transaction costs and using information technology.

-  focus on buoyancy rather than immediate sources of tax revenue.

The Task Force has proposed the levy of Goods and Services Tax (GST) as a common tax for goods and services and availability of CENVAT to all the assessees. GST is proposed at both Central and State level and shall be accompanied by the simultaneous withdrawal of all the cascading taxes.

The fiscal policy strategy statement released on 29th February, 2008 states that the government objective is to integrate the taxes on goods (central excise) and services (service tax) and more to a comprehensive goods and Service Tax (GST).

What is GST

Simply put, goods and services tax is a tax levied on goods and services imposed at each point of sale or rendering of service. Such GST could be on entire goods and services or there could be some exempted class of goods or services or a negative list of goods and services on which GST is not levied. GST is an indirect tax in lieu of tax on goods (excise) and tax on service (service tax). The GST is just like State level VAT which is levied as tax on sale of goods. In India, GST may be a national level value added tax applicable on goods and services alongwith state land GST.

A major change in administering GST is that tax incidence is at the point of sale as against the present system of point of origin.

Preparing for Goods and Services Tax (GST)

Proposed Goods and Services Tax (GST) as an alternative to excise duties on manufacturer and service tax on services should be aimed as a major indirect tax reform which evolves as an efficient and harmonized consumption tax (indirect tax) in India. This is going to be a difficult task, given the state's desire to have taxation autonomy and existing parallel system of indirect taxation, both at union and State level.

GST is levied in over 130 countries across the globe. In Europe, it exists for over fifty years and is a preferred form of indirect tax. There are different models in different countries, i.e., single rate for all taxing subjects; a tax rate with zero rate or exemption; taxing only select goods and services etc. But, the overall experience suggests that GST is a better structured and transparent indirect tax. It provides revenues to the Government as well as facilitates economic growth.

GST is expected to play a key role in bringing about more transparency into our tax system. Instead of fiscal concessions, concessions to select industries on grounds such as environmental protection etc. could be provided in a transparent manner through cash refunds or otherwise. While unified rate may be there, he transition from excise and service tax into one integrated tax called Goods and Services Tax (GST) is a welcome ambition but also a huge challenge at all fronts-political as well as psychological, administrative and technological. In fact, VAT took India over a decade and if India wants GST to happen, a beginning has to be made. It may achieve 2010 deadline or not but atleast a beginning should be made. GST shall be aimed to make for an efficient, transparent system of taxation which is imperative for Indian industry to compete at global and domestic fronts.

Pre-requisites for GST

Following are the pre-requisites 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-à-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. In an ideal GST regime, all indirect taxes should be convatable against one another. 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.

In European Union (EU), VAT has been fully harmonized since 1993, while in Mexico, unified VAT was implemented in 1980 to replace 30 federal excise taxes and 400 plus state and municipal taxes with revenue sharing. In Brazil, federal VAT was introduced way back in 1967.

Steps involved

Following steps are needed on political, administrative and technological fronts -

-    Arriving at common/general consensus including political agreement.

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

-    Preparing a blue print/road map for GST

-    Creating a conducive environment for GST

-    Centre-state coordination

-    Consolidation of Central Excise, Service Tax and VAT on imports

-    Identification of issues to be resolved

-    Interaction with trade and industry and others concerned

-    Building up GST infrastructure and administrative machinery

-    Establishment of information technology systems, software and enabling environment (like TIN)

India will require two tier integration - one at central level and other one at state level where all indirect taxes integrate into a single value added tax. All this will require great deal of political will, intellectual skill and administrative drill.

For national level GST, Central Sales Tax (CST) of four per cent will have to be abolished, which Government has already announced from 1st April, 2007 in a phased manner. The country shall have to follow uniform Cenvat rate alongwith administration for goods and services and a uniform exemption free level. An efficient data base (tax information network) and audit system are also pre-requisite for an efficient and effective GST regime. The phasing out of CST has since been announced in Union Budget 2007 and implemented and it is expected that by 2010 it shall be completely abolished.

The empowered committee (to be set up) should also try to integrate the recommendations of Govinda Rao and Vijay Kelkar Committees. There will be a need to follow a gradual approach rather than one go stand.  It may be noted that Finance Minister has in his Budget speech (2007) announced that empowered committee of VAT shall help the Centre in implementation of GST also. During Budget Speech for 2008-09, it was indicated that substantial progress has been made in moving towards GST.

Union Budget 2006-07 (and reconfirmed in Budget 2007-08 and 2008-09) has proposed a date, i.e., 1st April, 2010 for introduction of GST in the country. Whether it can happen has to be seen.