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'GST is not about tax, but business operations'

Last Updated 27 February 2015, 20:06 IST

The Economic Survey 2014-15 released on Friday says the introduction of GST can be a game changer. Industry is eagerly awaiting Saturday’s Budget for financial year 2015-16 which Finance Minister Arun Jaitley is presenting in Parliament to see if he is unveiling a road map for the GST rollout. Krupa Venkatesh, Senior Director of Deloitte in India, told Deccan Herald’s Georgy S Thomas that GST will leave its imprint on every sector of the economy

The average person is not aware of what GST is all about. Can you explain to us how GST will impact the economy?

GST will substitute a number of taxes. When you produce something you have to pay excise duty. When you sell something, you have to pay VAT. Ultimately when the customer buys something made in India, it has the embedded excise duty and the VAT. The peak rate of both these put together,which is 27-28 per cent, is the hidden tax on any item you buy. Excise duty is collected by the Centre. VAT is collected by the states.

So we are actually subjecting the manufacturer to two different authorities. In GST, these two will be rolled together, including service tax. The latter is payable when you buy services, say you avail of Deloitte services you will have a 12.36 per cent service tax on that. All these will be clubbed together in the GST. That means the central taxes — the central excise and service tax — will be called the Central GST. And the state taxes — entry tax, luxury tax, octroi, CST, VAT — will all be clubbed into something called the state GST. So everybody in the chain will be subject to both Central GST and State GST.

How does it differ from the present situation?
Take a departmental store owner. He collects VAT from the customer across the counter and pays to the government. But when he buys, from say a manufacturer, he would have paid excise duty. Suppose he has rented a place, he would have paid service tax on the rent. Both these are paid to the Centre. But the VAT that he is paying (after collecting) is being paid to the state. So he cannot set off one against the other.What the GST is trying to do is eliminate this cascading effect. Suppose he buys something at Rs 100. Say, Rs 12 is the excise duty on that. So Rs 112 is his cost.Then there's a mark-up, then there's a VAT. But Rs 12 is actually sitting as cost for him, because he cannot take set-off against this tax because it is paid to the Centre. That means this VAT of say 14 per cent, is being charged on the Rs 12 also, which is sitting in Rs 112. There's a tax on tax today, which GST wants to eliminate. So he now has to charge the 12 per cent excise component also. It won't be called excise, it will be called Central GST. He can set it off. So his operations cost or landed cost comes down. So therefore, ultimately it should benefit the customer.

I understand states have a fear that they will lose revenue. Can you elaborate on that?
There are two aspects to it. One, from 2003, VAT started replacing the sales tax. Now to reduce the distortion in trade, we have the central sales tax, i.e. when goods move from one state to the other. Now that is not creditable. That's a cost.The central government said, progressively we will bring down Central CST (i.e. the revenue which goes to the originating state at the time of sale). And they assured states to compensate them for whatever revenue they stood to lose on account of the CST coming down. Accordingly, states reduced the rate from 4, to 3, and finally to 2 per cent. But that compensation to the states was not initially paid by the centre. Therefore, they had misgivings about GST when they learned that the originating states will lose their right to tax goods because taxation is going to be destination based. On the other hand, today in a producing state everything is paid at the state of origin. They wondered about losses, having given facilities to set up factory, production, employment, etc. But when the Centre said it will compensate them, the states didn't have the faith because they didn't have a good experience on the CST compensation front. That is why it took so long. Also, states needed some leeway to fund for emergencies like famine, flood, or outbreak of some disease. For example in North Karnataka, we had a flood some four years ago. That time the VAT rate was increased to fund the relief operations. Now if you tell the states that they will lose the leeway to increase the VAT, how are they going to be compensated? That's the concern (VAT rates were initially uniform at 12 per cent, but it is now at 14.5 per cent almost everywhere).

What did the Centre do to remove state apprehensions?
First, it set aside the money owed on the CST. It was paid. Second, it said we will form a GST Council which will have as its members all the states and the Centre. And this council is mandated to make recommendations on rates. It will be only recommendatory because states have to pass the GST law in their assemblies. The council may give the states a band of 1-2% leeway to fund emergencies. Again, the centre said states will have the right to charge a 1% tax, like the CST at origin for a period of two years for their comfort.The centre has built this into the constitutional amendment itself. This is where the states got the confidence: a.) The compensation will be paid, and b.) Revenue loss can be mitigated on account of the 1 per cent tax.

So in GST, everything goes to the centre and they will disburse the proceeds to states?
No it won't happen like that. Suppose the buyer and the seller are in the same state. Then, the two taxes that will be paid — the Central and the State GST — will be paid to the respective governments, i.e. the C    Centre will collect the CGST and the state will collect the state GST. But when there's an inter-state movement of goods, then the sum of these two taxes will be paid to the Centre and that will be called integrated GST. The Centre will keep its portion and transfer the state portion to the state where the goods are going to be consumed.The Centre will put in place a clearinghouse mechanism. And as the goods move, the same taxes will get paid. Every movement will be taxed like this.

What is the benefit to the originating state?
The originating state doesn't get the benefit. That is where the fear is. Every state now will get paid based on the consumption. Here, I am talking with regard to B2B transactions. In B2B, suppose the goods are moving from Karnataka to Maharashtra. Let's assume 10+10 or 20 per cent aggregate tax will be paid to the Centre as integrated GST by the seller. The Centre will keep 10 per cent and will give 10 per cent to Maharashtra. Why does it give to Maharashtra? Because the buyer in Maharashtra should be allowed to take a set-off against this tax. So if the money doesn't go the Maharashtra treasury, from where will Maharashtra give this set-off credit?

What about business to consumer or B2C?
Let’s take eCommerce, which is all the rage now. Now, I am selling from Karnataka to say, Kerala. Now, the person in Kerala is an end-customer. He doesn't need this credit to set-off. There may not be a case at that time to transfer this credit. So the thinking is that this transfer of this tax will happen in B2B and not B2C

Even in non-eCommerce B2C?
Yes, in non-eCommerce is also. That is the thinking at this point. But this transfer is very important. If the transfer mechanism doesn't work, we will see it collapse.They call it the GST end. It's clearly the most important aspect. Everything has to be captured.

Are all the states ready?
There are different levels of technology I would say. States like Maharashtra and Karnataka are tops in it. They can capture every movement, even invoice-wise details. Except e-invoicing, they allow everything. Even comparison of credit is done online. But most states now have started staking the returns online, payments online.They may not have a very high level of computerisation, but if there are two or three states, others will gain confidence. But this management of the movement of money across states would probably be done by NSDL. There seems to be political will. So it can be done.

Some aspects are still kept out of GST. What are they?
Alcohol is one. The reason why they kept alcohol out is that today the Centre doesn't earn anything out of alcohol sales. It's a large chunk of revenue for the states. So, therefore they have decided to keep that out of phase-1 of the GST rollout even though it hurts the liquor companies which pay a lot of duty to the Centre. Petroleum also, for the same reason, is kept out of the phase-1. But it is included in the constitutional amendment. So it can come into the GST in the next two-three years. But alcohol is not even there in the constitutional amendment.

What else has been kept out?
Stamp duty and electricity charges are the major items. In stamp duty, 8-9 per cent of land value is good revenue. Producing states are not sure how much they will lose. If they agree to subsume everything in the GST, then it may not be a workable proposition for them.

What are the takeaways from the VAT rollout which we can use for the GST?
One takeaway is that there was hardly any revenue loss for states. But it can't be straightaway compared because in VAT the point of taxation did not change. It remained the originating state itself. And there was no movement of revenue from one state to the other. And the Central taxes were not touched at all. But here it's a fact that the money is going to shift to the destination state. So that's a point of distinction. But what you can learn is that the base really widened. But compliance is high in VAT. That's a big takeaway. Audit is easy. Because you are leaving a trail everywhere. Unless everybody in the chain is flouting the law.

B2C has an unfair advantage because end-consumers don't need the set-off. So do you think GST will end up encouraging eCommerce?
It's not just eCommerce. If you remove the trade barriers, even the manufacturers would like to sell from fewer states. FMCG companies now have depots in up to 25 states. One reason they have the depots is because the people in the distribution chain, their dealers, don't want to buy interstate and incur the 2 per cent CST loss. So the dealers tell the manufacturers to do a branch transfer and sell out of a branch in that state. They will say, “You give me a VAT invoice so that I will get credit of whatever tax I have paid you. I will use it as a set-off.” Whereas if they buy from a different state, 2 per cent will be charged to him and that's his loss. That's one reason why manufacturers have so many depots. Other reasons could be to be close to the consumer, lead time, etc. Now if you take away this 2 per cent loss and even if it's an inter-state transfer you will be able to take set-off. Then what's the case for having all these depots. It's a huge business change. GST is not about tax. It's about business operations. The model will change.

They can have a central warehouse and supply throughout?
Why not? Or it may evolve into a hub and spoke model. Look at what it does to the balance sheet. All the fixed cost of paying salary, rent, etc. will be changed to operational expenses and reduce the capex.All these days you probably wouldn't have evaluated a supplier because he was outside the state and he would have charged you the 2%. But now whether a supplier is within the state or outside doesn't matter tax-wise. It's commercial sense that will make them buy or sell to anybody. It will not be guided by CST or the VAT. It may be freight. Or quality versus tax, whatever. But the tax will go away and be replaced by a purely business decision as to why a business wants to buy from somebody or sell to somebody. For manufacturers, this is a massive change. All businesses will benefit.

What is the timeframe by which you see the whole process coming into place?
I think it was introduced in December without any discussions. I expect it to come up in the budget session. If it get passed in the budget session, then it will go to the states. There's no challenge in the Lok Sabha, but there's a challenge probably in the Rajya Sabha. But I am sure it will get resolved.The important thing is that there's an empowered group of state finance ministers. They have formed a number of sub-committees. At the backend, there's one committee working on technology, another on writing the law, another on designing forms, another on network. This is a work in progress and not as if they will wait for the constitutional amendment to be in place. Only hitch is that the GST council can be formed only after the law is enacted.

What about the rates?
The rate recommended by the empowered committee is 27 per cent, which is high for the industry. After the GST law is passed, the rates can be changed only by the GST council, and that too only with a majority of two-thirds.The checks and balances have been built in. It can't be like VAT where each state ends up having its own VAT.This will be a good start.

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(Published 27 February 2015, 20:06 IST)

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