GOODS AND SERVICE TAX - ISSUES REQUIRING BUDGET ATTENTION

[Dr. Sanjiv Agarwal]

India is on a threshold of the biggest tax reform of the century. While direct taxes are due for an overall rationalization and simplification, indirect tax reforms in the pipe line, if done, shall be historic.

On indirect tax front, India is all set to usher into the era of a all new tax to be called 'goods and services tax' (GST) which will bring in India at par with over 140 developed nations of the world. It is going to be the biggest ever tax reform in independent India. World over, goods and services attract the same rate of tax. This is the foundation of GST. Earlier in February 2009, Finance Minster made a statement in budget speech that GST is a critical part of our economic reforms.

So far as GST is concerned, this budget offers an unique opportunity to clearly spell out the blue print or load map for GST in India. Over last four budgets, Finance Minister's have been making a statement on need for GST that there is a large consensus that country should move towards a national level GST which should be shared between the centre and the states.  Though the earlier budgets talked about April 2010 as the probable date of implementation of GST, one needs a relook and a practical and clear view is desirable alongwith strong political will, given the fact that we have different states, ruled by different political parties. Unlike VAT, GST has to be implemented in one go. Once GST is clear, CST (central sales tax) needs to be phased out.

Goods and service tax (GST) is a comprehensive value added consumption based tax on goods and services wherein tax will be collected at every stage of value addition with cenvat credit mechanism to  avoid cascading effect. GST is not going to be an additional new tax but will replace other taxes. It being so, cost of product or service will not be affected due to GST.

Under GST, the format will change and central taxes (CST, excise, customs, service tax) shall be subsumed into one. Also, sharing between centre and states will be there mere with a major shift in sharing pattern. In fact, GST will change the tax horizon of the country for the good. GST will also provide an opportunity to policy makers to follow principle of certainty and have clear cut defined exemptions, concessions, non taxable areas and services so as to avoid confusion and litigation.

While it will be premature to comment upon GST's post implementation issues, what is more important is time frame, minimum tax slabs and tax structure.

The rate of GST is not yet final and various state governments are discussing it. While the indications of a dual GST structure look bright, unified GST would be preferred by assessees as it would be cost effective and provide efficient mechanism. Dual GST is not for which India is looking for. It will only increases complexities in already too complex and multiplex taxation system in India. In such a case, sharing formula could be devised between centre-states.

There are disagreements on rate and structure and compensation to states. Users and assessees would also require training and education on GST, besides review of supply chain, computerization, transitional issues.

Government also needs to address issues such as treatment of levies (octroi, stamp duty, state excise etc) as any exclusion from GST would again lead to many taxes and defeat the objective of comprehensive GST. Ideally, alongwith transitional provisions concerning input tax credit, pending demands and litigation, government will have to exempt or provide level playing field for projects and contracts with periods spanning over more than a year as in such cases, migration would be difficult and some cut off arrangement will have to be worked out. Obviously, as of now, all such contacts must be silent on this issue and may create a bottleneck between parties to contract.

In GST regime, there will be no place for duties like additional custom duty or special additional duties or cess. It needs to be cleared as to what would happen to issues involving stock transfers, inter state transfer, cross border taxation of service, taxation of service etc. Issues on Cenvat credit, place of taxation, timing of taxation and person liable- all are relevant and crucial. What all taxes will be subsumed in GST should be made clear.

India needs to take well thought of steps in implementation of GST and it should not be implemented hurriedly. It is still not clear about the final approach to be taken- unified GST or dual GST as also levy of GST on supply or on sale point. We also  need to take all the stakeholders into confidence such as state governments, trade &  industry, service providers & service recipients, consumers  and professionals.

Eying at April, 2010 may be a very   optimistic and ambitious target but before that, we need reasonable time to test run the GST, understand the system and tax structure and even the costs of implementation. Even the administrative preparations will take some time. Though we will have nine months time from July 2009 to reach the already announced date of April 2010, the road map is still not in place.

The GST is bound to come. It should - as early as possible, but not in a haste. It would be desirable to wait for a year more and implement it with full preparedness in 2011 or 2012, if not in 2010.