The ongoing exercise for introduction of the Goods and Services Tax (GST) —— widely viewed as the big ticket taxation measure to bring about the much-needed reform in the arena of Indirect Tax system —— has, no doubt, gathered momentum with the release of the discussion paper outlining the contour of the proposed new tax regime. 

Though serious doubts have arisen as to whether the GST would be introduced across the country from the scheduled date of April 1, 2010 in view of complexity of issues associated with the proposed new tax regime, the release of the Discussion Paper is acting as the catalyst in expediting the process of heralding a new tax system that would replace most Indirect Taxes at the central and state levels.

The proposed GST, which in popular parlance means a comprehensive Value Added Tax (VAT) on goods and services, is being considered to be the most ambitious indirect tax reforms in the country after state-level VAT. The GST would replace most of the Indirect Taxes levied by the Centre like Central Excise and Service Tax and subsume state-levied taxes like VAT and local taxes like Octroi.

While the States and Centre are now resorting to intensive discussions to fine-tune the modalities for putting in place the new tax regime the Discussion Paper on GST prepared by the Empowered Committee of State Finance Ministers suggests that the GST would have two components —— Central and Stare —— with both applicable on a largely uniform base across the country with minimal rate variations and as few exemptions as possible.

Important suggestions

However a critical look at the suggestions made in the Discussion Paper reveals that some of the recommendations amount to a significant compromise on what an ideal GST structure should be.

Ideally through a tax credit mechanism, GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retail tax.

Significantly, the Discussion Paper has kept petroleum products and alcohol outside the purview of the proposed tax. Octroi —— a cumbersome levy that frustrates the concept of unified market at the national level —— is also proposed to be kept out of the purview of GST.

The paper suggests a dual rate structure for goods at the state level and expects the Centre to follow suit. However, services will be taxed at a single rate.
Significantly, it shies away from prescribing tax rates. Experts feel that the paper has not described unambiguously the taxation and revenue-sharing procedures for inter-state services like telecom and financial intermediary services. It has also not spelt out the norms for inter-state transactions of services —— the most cumbersome component facing the GST structure.    The GST structure outlined would now be critically examined by the Centre, States and other stakeholders including trade and industry.

Disagreement continues

It is not that all states are in full agreement with the recommendations made. There are serious differences among states on various issues.  As Chairman, Empowered Committee of State Finance Ministers, Ashim Dasgupta says “there are still some differences among states. Each state has its own peculiar local problem. The task before us is to build up consensus.”

As analysts and experts say the very exercise to evolve consensus on the modalities for implementation of the GST is an arduous task and there are manifold issues and concerns, which need to be addressed before putting the new tax regime in place.

Many states apprehend that they may lose revenue by switching over to GST.  Though it may seem tempting to states to have right to levy tax on wide range of services under the new GST regime, many may not gain significantly.

For instance, such states, which are endowed with huge mineral resources and oil and gas reserves, but economically backward, may face significant loss of tax revenues under the GST regime.

As economists say consumption of services is normally low in economically backward states. As Dasgupta says “Normally around 50 per cent of a state’s income comes from Services. But consumption of services is not always proportionate to income from services. Some of the states are not big consumer of services.” “The Centre should compensate such states, which are likely to incur revenue loss by switching over to GST. In the past Centre did compensate states at the time of introduction of VAT,” says Dasgupta. It is learnt that states have been pressurising the Centre to compensate them for up to five years. Though the introduction of the GST is expected to help in ushering in an unified market on all India basis, there is some apprehension that the new tax regime may lead to price rise. However, Dasgupta has brushed aside this apprehension saying the new tax regime would in fact have a sobering effect on inflation.   “Under the GST the overall burden of taxes on goods is bound to fall.

Because of total set-off under the GST, which is not possible under the current taxation system, consumers are going to gain under the new tax regime. The Centre and State governments should work together to ensure that the benefits under the GST are passed on to consumers,” says Dasgupta. Experts also feel that the prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods.
Experts say eventually GST should benefit all because the continuous chain of set-offs, which is based on payment of taxes, would lead to significant improvement in tax compliance —— both for the Centre and the states. Ironing out differences among states the ECSFM has so far evolved a consensus for a two-tier duty structure for GST. The ECSFM has proposed one standard rate for general goods and services and another lower rate for essential commodities.

The ECSFM while proposing one GST for precious metals like gold, silver and platinum has suggested a list of goods and services which would be exempted from the purview of GST.  As experts say the most difficult aspect of the GST appears to be on evolving consensus on key issues like what should be the structure of  GST rates, tax base for GST as well as items and services to be covered under the GST. In fact, the final decision on number of goods and services to be included in GST would take quite some time, sources in the Finance Ministry say.

Considering the fact that the introduction of GST is going to bring about drastic change in the entire spectrum of Indirect Tax regime both at the Central and State level all factors must be taken into account before implementing the new tax regime.