This is the final article in the series which discusses the recent developments in the EU, in relation to VAT law reform, and their significance / relevance to the GST in India. In its Green Paper on the VAT, the EU has highlighted two broad categories of issues for discussion and debate. The first one relates to the principles of taxation of intra EU transactions and this was discussed in detail in an earlier article. The other category of issues relates to legal processes, efficiencies in collection and reduction in red tape and bureaucracy. Put differently, these issues could be categorised as follows:
• Ensuring the neutrality of the VAT system
• Harmonisation of VAT
• Robust VAT collections
• Efficient and modern VAT administration
• Reducing red tape Accordingly, the Green Paper discusses the above categories of issues, in the context of the VAT reform that is being envisaged.
The discussion on the first issue of neutrality of the VAT system, proceeds with regard to the scope of the tax, exemptions and the right to offset and treatment of international services. On the scope of the tax, the Paper informs that the rules relating to taxation of public bodies create differences in the VAT treatment of similar activities, depending on the status of the supplier. The evolution towards privatisation and deregulation of activities traditionally reserved for the public sector has increased these differences. Given that public private partnerships are the typical models that are increasingly resorted to, the fact that public bodies are exempt or outside the scope of VAT means that there are incentives to limit outsourcing, in order to minimise non deductible VAT, thereby resulting in the VAT being an influence on investment and spending decisions. This is evidently not desirable. Accordingly, the Paper requests feedback on how the current VAT rules for public bodies operate in terms of tax neutrality and what should be done to remove the problems encountered in relation thereto. On the second issue of exemptions and the right to offset, the Paper suggests that the present exemptions are too many and their continued relevance is questionable. The narrow based tax that results from such exemptions is not desirable and there is a need therefore to broadbase the tax. From a technical standpoint, the narrow based tax is characterised by the following:
• narrow definition of a taxable person
• low registration thresholds
• multiple rates of taxes
• many zero rated supplies
• many exemptions
• limitations to the right to deduct (offset)
In contrast, the broadbased tax will have the opposite of the aforesaid characteristics of the narrow based tax. The Green Paper suggests that exemptions and the right to deduct ought to be reviewed in the light of economical and technical changes, so as to bring about the desired broadbased tax. Minimisation of exemptions and maximisation of offsets is the objective of the broadbased tax. The last point in the tax neutrality discussion is with regard to international services where, as the Green Paper points out, globalisation, deregulation and developments in communication technology have meant that cross border services have proliferated, thereby resulting in VAT complexity, leading to possible double taxation or double non taxation. To conclude, tax neutrality is stated to be desirable in the Green Paper and it states that the VAT reform that is visualised needs to necessarily keep this objective in mind. In India, this principle will undoubtedly be relevant, given the similar objective of a broadbased and neutral VAT that is sought to be introduced in the form of the GST.
The issues relating to tax neutrality and the challenges in moving from a narrow based tax to a broadbased one are relevant for India and it will therefore be very instructive for us to follow this debate in the EU closely. Coming to the second issue, namely that of harmonisation of the VAT systems in order to foster a single and common market in goods and services, the Green Paper talks about legal processes in relation to VAT law, derogation and speedy responses and finally and, most importantly, VAT rates. On legal process, the Green Paper posits several means by which the present mechanism of issuance of VAT directives by the EU, to be thereafter adopted into local VAT law by member countries, could be changed into one where regulations are themselves issued by the EU, as opposed to mere directives, thereby resulting in harmonisation, with the benefits of avoidance of double taxation, among others. This particular point of harmonisation is very topical, given where we are in our attempts to bring about a uniform GST law, by way of the 115th Constitutional Amendment Bill 2011 (GST Bill) which, inter alia, envisages the formation of a GST Council and aDispute Settlement Authority. It appears that the EU and India have similar challenges but are perhaps moving in different ways to respond to these challenges. This, in itself, is very instructive. On the last matter of the VAT rates, the Green Paper argues that a VAT system based on taxation at origin would require a greater degree of harmonisation of VAT rates compared to one based on taxation at destination, which is the current model. Thereafter, the Paper argues the case for single VAT rates but recognises that multiple VAT rates are perhaps inevitable, in certain circumstances. The Paper discusses the possible of limiting the reduced rate, as opposed to the normal rate, to a few goods and services, largely in the digital domain. On the third issue of robustness of the VAT system, the Green Paper fundamentally discusses how VAT collection efficiencies can be enhanced. It talks about the various means by which collections of VAT can be facilitated through usage of modern technology and/or financial intermediaries. The four possible VAT collection models that have been set out in the Green Paper are as follows:
• Split model whereby the bank effects payments on behalf of its customers through a split of the taxable amount and the VAT and by a direct payment of the VAT to the tax authorities and only the balance amount paid over to the supplier. This model cannot handle cash payments and credit card transactions.
• Central VAT database, which will monitor, on a real time basis, all invoices generated in the economy. This is very similar to how the IGST model is expected to operate in the Indian context for taxing interstate supplies and it will be very interesting for us to see whether this particular model will be pursued further by the EU.
• Uploading of transaction data in predefined formats by the dealer into a secure VAT data warehouse
• Certified VAT dealer model whereby a taxable person’s VAT compliance processes and internal controls are certified. Suggestions have been invited on each of the 4 models. In relation to the next issue of an efficient and modern administering of the VAT system, the Green Paper envisaging the following measures:
• enhancing the dialogue between the tax authorities and other stakeholders by setting up a permanent discussion forum.
• pooling best practice by issuance of guidelines for streamlining administrative practices and reviewing transaction costs.
• drafting of a common policy on specific arrangements with stakeholders such as the LTU, partnership models and prior rulings on specified transactions.
• paying attention to IT issues, when implementing new VAT rules, particularly relating to work processes, automated information transfer, better interoperability of software and related initiatives. Here again, this discussion is directly relevant in the Indian context given our similar attempts to facilitate and bring about the dual GST through a significant usage of information technology resources by both the tax administration and the tax payers.
On the final issue of reducing red tape, the Green Paper discusses specific EU initiatives such as the program to reduce administration burden and streamline all VAT processes, the scheme for small business, the one stop shop scheme as proposed in 2004, VAT groupings for larger and pan European businesses and, finally, ensuring synergies between VAT law and other related laws. As earlier informed, the Green Paper has invited suggestions on a total 33 questions straddling the entire gamut of VAT reform. The Paper is accompanied by a working document which contain extensive discussions on all the issues that have been identified in the Green Paper. This document has not been discussed in these articles for several reasons, but it is indeed very instructive to go through it in order to understand the tremendous degree of complexity that has crept in, in the more than half a century of existence of VAT in the EU. A key learning for India would be to emphasise on simplicity and broadbasing, as the two tenets on which the GST should be premised, thereby both enabling a relative moderation in tax rates as well as ensuring ease of compliance. Fundamentally, there is an opportunity for us in India, based on some hard choices surely, to bring about a state of the art, business friendly and modern indirect tax regime in India. This appears a dream currently but is definitely worth pursuing, if the EU developments are anything to go by. - www.business-standard.com
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