Indirect taxes have been the bane of the common man. With a common tax regime now in place, will corporate pass on the benefits to consumers so that prices come down?
By Sumit Dutt Majumder
With parliament finally ushering in the Goods and Services Tax (GST) Bill, the next step would be clearance of the Bill by at least half of the total number of states and Union Territories, ie 16 out of 31 states and Union Territories. Then, there will be issuance of a notification after getting the approval of the President of India.
Let us first track the political history from 2006 when then finance minister P Chi-dambaram announced during his budget speech that India would go in for GST. The Empowered Committee (EC) of state finance ministers led by Dr Ashim Dasgupta, the finance minister of West Bengal, came out with the First Discussion Paper in November 2009. It proposed, inter alia, three types of taxes—central GST, state GST and Integra-ted GST (IGST) for inter-state transactions. It also proposed a “dual GST” structure where the center and states would collect and administer central GST and state GST respectively, and in addition, the center would administer IGST where the states’ share of GST will accrue to the destination states where consumption will take place.
GST will subsume a number of indirect taxes levied by both the center and the states. They include central excise on manufacture of goods, service tax on provision of services, state VAT on sale of goods, entry tax/octroi, central sales tax, luxury tax, entertainment tax and some more. In place of all these taxes, there will be one tax, ie GST, to be administered both by the center and the states.
A major change in the Bill is that it now clearly specified that the center would give full compensation to the states in case of loss of their revenues.
And a robust IT infrastructure—GST Net—will operate a common GST portal. The ease of interacting with GST Net lies in the fact that at the front end of the portal taxpayers would file one application for registration, one document for payment of taxes after self-assessment and one set of returns. At the back end of the portal, these documents will get split into two—one for the center and the other for states. All interactions will be through e-filing. Thus, in case of normal transactions, a taxpayer won’t have to meet the taxman at all. Efforts are on to ensure that even in cases of allegations and disputes, taxpayers interact with one tax authority—CGST or SGST.
UPA ATTEMPT FAILS
The first requirement for implementation of GST would be constitutional empowerment of both the center and states to administer and collect GST concurrently.
While the center and states were having seemingly endless negotiations on issues like exclusion of petroleum, alcohol, entry tax, etc, and the compensation for the expected revenue loss by states, then finance minister Pranab Mukherjee set the ball rolling with the introduction of the 115th Constitutional Amendment Bill in parliament in March 2011. States ruled by the BJP and a few others opposed the Bill. Eventually, with the expiry of the tenure of parliament in May 2011, the first attempt by the UPA failed. With the change of government in late May 2014, there was apprehension about the views of the BJP, the ruling party, on GST.
But Arun Jaitley, the present finance minister, cleared the air in his first Budget speech in July 2014 when he stated that he would make an all-out effort to bring in GST. Subsequently, he made certain necessary compromises for the benefit of states and presented the fresh 122nd Constitution Amendment Bill in the winter session of parliament in 2014.
Apart from empowerment of the center and states to administer GST, the other important feature of the Bill is constitution of a GST council comprising all the finance ministers of states and chaired by the union finance minister. The Council will make recommendations with respect to all issues related to policy and implementation of GST, including rate (s) of GST and the items to be kept out of GST.
While the Bill could not be pushed through in the parliament sessions of 2015 and 2016, during this Monsoon Session, the BJP made certain changes in the Bill to satisfy opposition parties. It scrapped the proposed one percent additional tax on interstate movement of goods to be retrieved by the manufacturing, supplying states.
The second change in the Bill was that it now clearly specified that the center would give full compensation to the states in case of loss of their revenues. Thirdly, it was clarified that the states’ shares of GST, ie SGST, will go straight to the coffers of the respective states and not through the Consolidated Fund of the Government of India. It was also clarified that the residual amount of IGST would be shared between the center and the states.
The ease of interacting with GST Net lies in the fact that at the front end of the portal, taxpayers would file one application for registration, one document for payment of taxes after self-assessment and one set of returns.
With the aforesaid changes, the 122nd Constitution Amendment Bill was passed by the Rajya Sabha on August 3 and by the Lok Sabha on August 8. The next destination of the Bill is the state legislatures. The government proposes to complete all processes in a month’s time so that the all-powerful GST Council can be in place. The draft model GST law has been put in public domain and is being examined by all stakeholders.
BENEFITS OF GST
First of all, the prices of goods are expected to come down because of the following reasons:
In the current system of indirect taxes, there is cascading of tax, ie taxing the tax which artificially increases the incidence of tax and hence, the price. For example, biscuits are made of flour, vegetable oil, sugar etc, each of which is subjected to central excise duty. When the biscuit manufacturer purchases these raw materials, he pays central excise duty and simultaneously, takes credits of those taxes, which he utilizes in payment of central excise duty at the time of clearance of biscuits. He would have paid service tax also in the process of manufacture, and so he takes credit of those taxes as well and utilizes that credit in a similar fashion. There is no cascading of taxes upto this point. But as soon as the biscuits are taken out of the factory after payment of all central taxes, these are sold to wholesalers and become liable to payment of state VAT. The state VAT is charged on the value of the biscuits which contains the elements of central excise duty and services tax. The wholesaler does not get any credit for these central taxes as he now deals with a state tax authority. Suppose the cost of the biscuits is Rs 100 and it has suffered central excise duty of Rs 10 and service tax of Rs 10, its value becomes Rs 120. Suppose the state VAT rate is 10 percent, the taxpayer pays Rs 12 out of which Rs 2 is the tax on taxes (ie, 10 percent of Rs 20).
This cascading of taxes will not happen in the GST regime as seamless flow of credit will be available under one single tax regime right from the beginning of the journey of the raw material till the finished product is supplied to the consumers. This will help bring down the price.
PRICE OF GOODS
Secondly, GST will lead to a drastic reduction of contact points between taxmen and taxpayers. This, in turn, will result in substantial reduction in compliance costs—both visible and invisible ones. This will also reduce the prices of goods.
Thirdly, the abolition of entry tax will do away with interstate border checks and man hours being lost waiting at each border post. This will reduce transportation and logistics costs. The abolition of entry tax, coupled with states having the same rate of state GST, will give the country a true sense of a common economic market that will tremendously boost its economy.
Finally, there is a principle of equity embedded in the GST. Being a destination-based consumption tax, SGST will accrue to the destination state in case of interstate transactions. Thus, less industrialized but more populous states will have more revenue than in the present system where CST for inter-state movement of goods accrues to the manufacturing-origin states. It is expected that this extra revenue would be spent on development of infrastructure and generation of power. In course of time, this will transform poorer states into industrialized ones. Thus, there will be even distribution of industries without any economic distortion across the country.
The first challenge will be getting the two central Bills—CGST and IGST Bill cleared in parliament. The passage of the states GST Bill will have to wait till both these Bills are passed in parliament, since it would have to be similar to the CGST Bill, and in conformity with the IGST Bill. There are differences between the center and states on the key clauses of the aforesaid three GST laws as outlined in the draft model.
Then, there is the controversy about whether the two central Bills are to be considered Money Bills or Financial Bills. A Money Bill needs clearance only by the Lok Sabha where the ruling alliance has the majority, while a Financial Bill would need to be cleared by both houses of parliament. The ruling alliance does not have a majority in the Rajya Sabha. The opposition parties have demanded that these central Bills be considered Financial Bills so that they can have a say on critical clauses, particularly those related to ring fencing a particular tax rate. We may see a political storm of sorts on this issue.
DECIDING THE THRESHOLD
The finalization of the pending policy and administrative issues between the center and the states will be the next challenge. First is the threshold for taxability that will decide, among other things, how much of small businesses the government wants to bring within GST. Experts across the world have felt that small businesses should be kept outside GST simply because taxing them is prone to breed corruption and not at all cost-effective. The states have demanded a threshold of Rs 10 lakh, while the center would like to have it at Rs 25 lakh and the chief economic advisor has advised that it should be kept at Rs 40 lakh.
The next issue is finalization of the list of tax exemptions that will be common for the center and the states. Currently, there are more than 250 exemptions in Central Excise and 98 exemptions in state VAT in state VAT. Both the center and states will have the same number of exemptions. The next major challenge will be the transitional issues such as registration, utilization in GST regime of the existing credits lying under the existing central excise, service tax, state VAT, etc.
Further, a major disagreement has arisen recently between the center and states over the dual control of GST. States have demanded exclusive single control in a dual GST model, over the assesses having a turnover less than Rs 1.5 crore. The Central Board of Excise and Customs has pointed out the pitfalls in single control. It has questioned the wisdom of outsourcing the center’s tax collection work in GST regime to states which have no experience in dealing with taxation of services. They argue that the interest of small business can be taken care of by simplified procedures and simple compliance requirements.
Cascading of taxes will not happen in the GST regime as seamless flow of credit will be available under one single tax regime right from the beginning of the journey of the raw material till the finished product is supplied
to the consumers.
It is also essential for the government to have a few pilot runs of GST Net. That will give confidence to both taxpayers and taxmen. On capacity building, taxpayers and corporates are lagging behind. Training of employees at all levels, both on technical issues and IT ability, will have to be geared up.
From the government side, there will have to be extensive mass awareness programs through print, visual and electronic media. For small business, it would be necessary to organize “handholding programs”. The chambers of commerce and industries would have to organize “industry specific handholding programs”. A self-learning interactive GST kit will have to be developed and distributed amongst the stakeholders. In order to tackle the problems of undue profiteering, some sort of price-control and anti-profiteering Act, as was introduced in Malaysia recently, may be in order.
It will also have to ensure that the tax relief in the GST regime is duly passed on to consumers, leading to a fall in prices. There must be monitoring cells at different levels of the GST implementation.
The hurdles are many, but not insurmountable. GST in India will no longer remain a dream but a reality soon. At least that is the expectation.
—The writer is former chairman, Central Board of Excise and Customs. He is currently working as senior GST and Customs expert on an EU project
Lead picture: The GST Bill promises to bring down the prices of all products. Will the benefits percolate to the common man? (Photo: UNI)