Goods and Service Tax - A Precursor
Introduction
The idea from as far back as 1978 when the Jha committee recommended VAT In India to budget 2006-07 came to head when Mr. P. Chidambaram, announced a decision on GST by 2010. He said, “It is my sense that there is a large consensus that the country should move towards a national-level goods and services tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010, as the date for introducing GST.” The Report of the Task force released on 16th December 2009 appear to be well thought out and excellent suggestions with reasoning provided for almost all aspects which have been painful for thet tax payer in the past 2 decades.
India has moved a step closer to uniform taxation of products and services across the country. If the report is accepted, India will move to a dual goods and service tax (CGST + SGST). The objectives to be met are as under:
- tax incidence only on domestic consumption
- efficiency and equity optimised
- no export of taxes across taxing jurisdictions
- common integrated market
Different stages of production and distribution can be interpreted as value addition points and finally tax on final consumption in taxing jurisdiction.
Structure of GST
- Power, Vehicles, goods and passenger, financial and real estate and housing to be integrated intt GST.
- Dual Rate —a Central tax (CGST) and a state tax (SGST) across the country. The dual structure as well as another recommendation by the committee that a tax over and above GST could be levied by the states on tobacco, petroleum and liquor, will likely help the report find favour with the states. These three product categories account for a significant proportion of taxes collected by the states. Both taxes on the Invoice price. [ including stock transfers]
- CGST – Central Excise duty, Service Tax, Additional Customs duty (CVD) Surcharges / cesses. SGST – VAT/ Sales Tax ( including CST / Purchase tax), Entertainment tax, Entry tax ( not in lieu of octroi), Betting tax, luxury tax, lotteries, surcharges and cesses.
- All other leview presently to be subsumed inot one central excises and State excises.
- No distinction between services, goods, capital goods with seamless credit of all within each CGST and SGST.
- Common rate of 5% for CGST and 7% of SGST envisaged.
- Imports liable for both CGST and SGST
- Exports free of taxes
- CGST and SGST credited separately to Centre & State.
- Credit within each and not across without differentiation for capital goods/ services..
- For all inter state transaction – Modified Bank Model
- Exemption for all public services including defense, para military, government health/ education.
- Consignment sale/ stock transfer would be considered as inter state sale.
- Check posts only for contraband checking by using scanners.
- Basic exemption limit of Rs. 10 lakhs
- Small dealer ( upto 40 L) + high value goods { gold , ornaments} – 1%
- SSI + Area based exemption to go.
- No exemption to STPI/ SEZ- only refund mechanism
Progress of the implementation of GST
If implemented from April 1, 2011, [probable ] India will essentially have three major taxes - tax on personal and corporation incomes, GST and VAT.
The empowered group of ministers will be send these recommendations to the Centre after the state finance ministers discuss and give their views in writing. Thereafter, the Centre and states would together finalize the legislative changes that will be required to adopt GST.
What seems to have been missed out in the Report
- Taxes subsumed in GST: The need to retain some major all pervasive high revenue products [ tobacco + petroleum] in the sales tax/ VAT regime would be counter productive to the entire effort of unifying the taxes. Rather the possibility of a higher rate for these products for a limited period of time would have been preferable. Cascading of taxes to that extent would continue.
- State / Centre Sharing: The formulae of share between the originating state and the recipient state in case of stock transfer may have to consider a number of factors including the socio economic standing of the state. Economically weaker States could get a better deal.
- The Tax Credit Chain: If the tax credit chain were operating freely between the central and state taxes it would be an ideal system. Accumulations of credits due to export out of the country would be refunded by a central authority.
- Transparency in Government Expenditure: There is a resignation and high cynicism in the minds of the general public/ tax payer on the actions ( inactions) of the Government whether at the centre or in the state. This view urgently requires reversal. When the industry is looking at IFRS for reporting a few crores of rupees, why the Government which expends billions is not even on double entry? The Central and State Government should be under regular and independent audits. Using ERP to do the accounting over a period would ensure that the Government would be running like a large private Indian multinational. This practice would also reduce the graft which has been increasing in the past few years. This would also ensure that funds are not idle and infrastructure projects would be completed much earlier. The lack of accountability in Government expenditure is what has led to this lack of knowledge among the general public as well as the intelligentsia.
- The law should have Anteriority inbuilt: There should be a policy that no law which is proclaimed/ gazetted would be effective for a minimum period of 1 year from the time of publishing. This gap would provide for making the tax administration certain and fair. Obviously the oft used retrospective amendments to law would be banned. This would be made clear in the policy itself. This would ensure well thought out, thoroughly discussed and fair taxes are imposed and collected and the tax payer is not alienated.
- Refund of Taxes: The present state of refund of indirect taxation in India even for exporters of goods or services give strength to the study wherein it was reported that India has the dubious distinction of having the most miserable taxes in the world!! A title we should not be associated with for long. Senior Revenue officers stating reasons of retirement benefits and GAG audit and issuance of circulars which are disregarded by all officers avoid sanction of refunds. Since the amounts involved are enormous, nefarious practices are followed to obtain the same. It should be the policy that for registered exporters who have been filing their returns for a set period ( say 1-2 years) 80% of the refund claimed should be paid within 1 week with the balance being paid within 1 month. Interest at commercial deposit rates should be available for any delay from the date of first claim of the refund. This would ensure that the STPI/ SEZ/ 100% Exporters would be competitive and not have to add the local taxes as costs when quoting to the rest of the world.
- Export & Import of Services: This is an aspect which is internationally not settled as on date. Some advocate the origin based approach whereas other the destination based approach both with exceptions. In this regard it maybe advisable to align with the European Model which takes care of member states within a broad common understanding.
- Social Contribution: In most of the developed countries, the social security provided by way of free medical/ unemployment benefits are quite substantial. In India most of the meager amounts announced do not reach the intended citizen/ beneficiary. Once all the household in India are mapped and all have an bank account, direct credit of a portion of tax collected to the economically challenged on a monthly basis would go a long way in seeing that the middleman does not loot them. This aspect would also be tied into the massive computerization effort required to network the entire country.
- Transitional Period – Tax Administration: In the first 2-3 years of the GST being implemented, the light touch/ voluntary compliance should be the approach. While trusting the tax payer an independent uniform audit by competent professionals should be clearly in place with enough teeth to ensure compliance. A major mindset change is necessary for the tax administrators. It should be realized that they are dependent on the tax payer and that they are merely a service provider. This does not preclude punitive/ harsh measures for tax evasion/ fraud which should be settled speedily and be sufficiently discouraging. There should be a common appellate body for all GST ( centre / state) disputes across India with appropriate locations in Sate Capitals. The law should provide for awarding of costs for infructuous litigation.
- Electronic Connectivity of entire Population: The success of GST would be largely depend on the building up a massive electronic networks connecting all the citizens and the tax payers. The fact that 98% of the population of Brazil which is 3 times the geographical size and also has a sort of federal structure has been covered lends weight that this should be possible today in India. However the political and bureaucratic will along with the strong support of the Industry should make this foundation for GST possible.
- Law Drafting Process: The drafting of the GST law could be path breaking in the sense that for the first time balanced representation from the revenue ( central and state), industry, trade, professionals ( Chartered Accountants, Advocates etc) are involved not only at the conceptual levels but also in the actual drafting stages.
It would be ideal if the Act and the rules are finalized much prior to the date of implementation to enable the tax payer to understand and comply with the law. It is expected that traditional supply modes may have to discarded or changed to optimise the taxation.
Goods and Service Tax - A Precursor
Introduction
The idea from as far back as 1978 when the Jha committee recommended VAT In India to budget 2006-07 came to head when Mr. P. Chidambaram, announced a decision on GST by 2010. He said, “It is my sense that there is a large consensus that the country should move towards a national-level goods and services tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010, as the date for introducing GST.” The Report of the Task force released on 16th December 2009 appear to be well thought out and excellent suggestions with reasoning provided for almost all aspects which have been painful for thet tax payer in the past 2 decades.
India has moved a step closer to uniform taxation of products and services across the country. If the report is accepted, India will move to a dual goods and service tax (CGST + SGST). The objectives to be met are as under:
- tax incidence only on domestic consumption
- efficiency and equity optimised
- no export of taxes across taxing jurisdictions
- common integrated market
Different stages of production and distribution can be interpreted as value addition points and finally tax on final consumption in taxing jurisdiction.
Structure of GST
- Power, Vehicles, goods and passenger, financial and real estate and housing to be integrated intt GST.
- Dual Rate —a Central tax (CGST) and a state tax (SGST) across the country. The dual structure as well as another recommendation by the committee that a tax over and above GST could be levied by the states on tobacco, petroleum and liquor, will likely help the report find favour with the states. These three product categories account for a significant proportion of taxes collected by the states. Both taxes on the Invoice price. [ including stock transfers]
- CGST – Central Excise duty, Service Tax, Additional Customs duty (CVD) Surcharges / cesses. SGST – VAT/ Sales Tax ( including CST / Purchase tax), Entertainment tax, Entry tax ( not in lieu of octroi), Betting tax, luxury tax, lotteries, surcharges and cesses.
- All other leview presently to be subsumed inot one central excises and State excises.
- No distinction between services, goods, capital goods with seamless credit of all within each CGST and SGST.
- Common rate of 5% for CGST and 7% of SGST envisaged.
- Imports liable for both CGST and SGST
- Exports free of taxes
- CGST and SGST credited separately to Centre & State.
- Credit within each and not across without differentiation for capital goods/ services..
- For all inter state transaction – Modified Bank Model
- Exemption for all public services including defense, para military, government health/ education.
- Consignment sale/ stock transfer would be considered as inter state sale.
- Check posts only for contraband checking by using scanners.
- Basic exemption limit of Rs. 10 lakhs
- Small dealer ( upto 40 L) + high value goods { gold , ornaments} – 1%
- SSI + Area based exemption to go.
- No exemption to STPI/ SEZ- only refund mechanism
Progress of the implementation of GST
If implemented from April 1, 2011, [probable ] India will essentially have three major taxes - tax on personal and corporation incomes, GST and VAT.
The empowered group of ministers will be send these recommendations to the Centre after the state finance ministers discuss and give their views in writing. Thereafter, the Centre and states would together finalize the legislative changes that will be required to adopt GST.
What seems to have been missed out in the Report
- Taxes subsumed in GST: The need to retain some major all pervasive high revenue products [ tobacco + petroleum] in the sales tax/ VAT regime would be counter productive to the entire effort of unifying the taxes. Rather the possibility of a higher rate for these products for a limited period of time would have been preferable. Cascading of taxes to that extent would continue.
- State / Centre Sharing: The formulae of share between the originating state and the recipient state in case of stock transfer may have to consider a number of factors including the socio economic standing of the state. Economically weaker States could get a better deal.
- The Tax Credit Chain: If the tax credit chain were operating freely between the central and state taxes it would be an ideal system. Accumulations of credits due to export out of the country would be refunded by a central authority.
- Transparency in Government Expenditure: There is a resignation and high cynicism in the minds of the general public/ tax payer on the actions ( inactions) of the Government whether at the centre or in the state. This view urgently requires reversal. When the industry is looking at IFRS for reporting a few crores of rupees, why the Government which expends billions is not even on double entry? The Central and State Government should be under regular and independent audits. Using ERP to do the accounting over a period would ensure that the Government would be running like a large private Indian multinational. This practice would also reduce the graft which has been increasing in the past few years. This would also ensure that funds are not idle and infrastructure projects would be completed much earlier. The lack of accountability in Government expenditure is what has led to this lack of knowledge among the general public as well as the intelligentsia.
- The law should have Anteriority inbuilt: There should be a policy that no law which is proclaimed/ gazetted would be effective for a minimum period of 1 year from the time of publishing. This gap would provide for making the tax administration certain and fair. Obviously the oft used retrospective amendments to law would be banned. This would be made clear in the policy itself. This would ensure well thought out, thoroughly discussed and fair taxes are imposed and collected and the tax payer is not alienated.
- Refund of Taxes: The present state of refund of indirect taxation in India even for exporters of goods or services give strength to the study wherein it was reported that India has the dubious distinction of having the most miserable taxes in the world!! A title we should not be associated with for long. Senior Revenue officers stating reasons of retirement benefits and GAG audit and issuance of circulars which are disregarded by all officers avoid sanction of refunds. Since the amounts involved are enormous, nefarious practices are followed to obtain the same. It should be the policy that for registered exporters who have been filing their returns for a set period ( say 1-2 years) 80% of the refund claimed should be paid within 1 week with the balance being paid within 1 month. Interest at commercial deposit rates should be available for any delay from the date of first claim of the refund. This would ensure that the STPI/ SEZ/ 100% Exporters would be competitive and not have to add the local taxes as costs when quoting to the rest of the world.
- Export & Import of Services: This is an aspect which is internationally not settled as on date. Some advocate the origin based approach whereas other the destination based approach both with exceptions. In this regard it maybe advisable to align with the European Model which takes care of member states within a broad common understanding.
- Social Contribution: In most of the developed countries, the social security provided by way of free medical/ unemployment benefits are quite substantial. In India most of the meager amounts announced do not reach the intended citizen/ beneficiary. Once all the household in India are mapped and all have an bank account, direct credit of a portion of tax collected to the economically challenged on a monthly basis would go a long way in seeing that the middleman does not loot them. This aspect would also be tied into the massive computerization effort required to network the entire country.
- Transitional Period – Tax Administration: In the first 2-3 years of the GST being implemented, the light touch/ voluntary compliance should be the approach. While trusting the tax payer an independent uniform audit by competent professionals should be clearly in place with enough teeth to ensure compliance. A major mindset change is necessary for the tax administrators. It should be realized that they are dependent on the tax payer and that they are merely a service provider. This does not preclude punitive/ harsh measures for tax evasion/ fraud which should be settled speedily and be sufficiently discouraging. There should be a common appellate body for all GST ( centre / state) disputes across India with appropriate locations in Sate Capitals. The law should provide for awarding of costs for infructuous litigation.
- Electronic Connectivity of entire Population: The success of GST would be largely depend on the building up a massive electronic networks connecting all the citizens and the tax payers. The fact that 98% of the population of Brazil which is 3 times the geographical size and also has a sort of federal structure has been covered lends weight that this should be possible today in India. However the political and bureaucratic will along with the strong support of the Industry should make this foundation for GST possible.
- Law Drafting Process: The drafting of the GST law could be path breaking in the sense that for the first time balanced representation from the revenue ( central and state), industry, trade, professionals ( Chartered Accountants, Advocates etc) are involved not only at the conceptual levels but also in the actual drafting stages.
It would be ideal if the Act and the rules are finalized much prior to the date of implementation to enable the tax payer to understand and comply with the law. It is expected that traditional supply modes may have to discarded or changed to optimise the taxation.
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