PROPOSED GST IN INDIA - MISSED OPPORTUNITIES

PROPOSED GST IN INDIA - MISSED OPPORTUNITIES

CA Dinesh Kumar Agrawal 

Recently, the Empowered Committee of State Finance Ministers (“Committee”) released the First Discussion Paper on Goods and Services Tax in India (“discussion paper”). This discussion paper is the result of three years of deliberations between policy makers of the Central Government and State Governments to herald the Indian economy in to a unified common market with free movement of goods and service across the length and breadth of India. Presently, due to various central and state levies on the goods and services, Indian market is fragmented. It is expected that subsuming all indirect taxes and levies under a single tax regime will create a grand common market with little distortions due to local factors. It was expected that the Committee will come out with a “White Paper” outlining the finer details of the proposed Goods & Services Tax (“GST”) regime, but alas, it has come out with a discussion paper prefixed with “First”, suggesting that second, third and many more such papers are yet to come.

Before going into nitty-gritty of the proposed regime, it will be useful to briefly understand the present regime of indirect tax. The Central and State Governments derives powers from the Constitution of India to levy tax on various economic activities. Centre is, inter alia, empowered to levy tax on services and manufacture of goods (except alcoholic beverages) whereas states are, inter alia, empowered to levy taxes on sale of goods. Presently, service tax is levied under the Finance Act on provision of services for a consideration whereas tax on manufacture of goods i.e. CENVAT is levied under the Central Excise Act. Service tax and CENVAT are levied on pan-India basis and input tax credit of CENVAT and service tax used in such activities are permitted for set off against output CENVAT/service tax. Cross-utilisation of the credit of central levies between CENVAT and service tax is also permitted under the Cenvat Credit Rules. During the erstwhile sales tax regime, sales tax on sale of goods was used to be levied either on the first sale or on the last sale without any setoff for taxes paid earlier. Sales tax regime was replaced in 2005 (last by the state of Uttar Pradesh in 2008) with VAT regime which allowed setting off input tax against of VAT against the output VAT liability thus eliminating cascading effect of taxes on VAT. Central Sales Taxes levied by states on inter-state transaction was supposed to be phased out in the VAT regime itself.

There is a little cascading of taxes in the present system as base for VAT is value which includes CENVAT. Further, cross utilisation of credit of central and state levies are not permissible resulting in certain cascading effect to the service provider as their transaction are not subjected to VAT.

It was widely expected that subsuming of various indirect taxes presently levied by the Central and State Governments under the GST regime will altogether eliminate cascading effect of the tax. The discussion paper has proposed dual rate structure, comprising of Central GST (CGST) and State GST (SGST). It is proposed that CGST and SGST are to be treated separately and therefore, taxes paid against the CGST will be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized only against the payment of CGST. The same principle will be applicable for the SGST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of ITC. It has been categorically stated that cross utilization of ITC between CGST and SGST would not be allowed. On comparison with the present regime, one will find that there is hardly any change except that value base for tax has changed. Credit and setoff for central levies (now subsumed in CGST) and state levies (now subsumed in SGST) are available even in the present regime without facility of cross-utilisation. The cascading effect of tax due to different value base can be easily addressed in the present system also. It may be noted that under central levies, Excise Duty on products containing alcohol and surcharge/cesses has also been subsumed but revenue impact of such levies are miniscule for the Central revenue. On the other hand, subsuming of Entertainment tax, Entry tax, Luxury tax, Tax on lottery, betting and gambling and State cesses and surcharges are significant but then same can always be subsumed under the present VAT regime itself.

The Committee paper has proposed different taxable threshold limit for CGST and SGST. Proposed threshold limit for SGST, for both goods and services is Rs 10 Lakhs whereas for goods under CGST is Rs 1.5 Crore and for services, it is yet to be determined. It seems that present proposal instead of integrating the supply chain will disintegrate the same in different segments. Let consider this aspect with an example. A small manufacturer ‘X’ has taxable turnover below Rs 10 Lakhs, medium dealer ‘Y’ has taxable turnover below Rs 50 Lakhs and large dealer ‘Z’ has taxable turnover above Rs 150 Lakhs. If X directly sells goods to consumer, his goods will not suffer any GST, but if he sell to Y, his same goods will suffer SGST and if sells to Z, his same goods will suffer CGST as well as SGST. Same goods manufactured by X will have different tax treatment. Now, let us assume that X sells goods to Z who in turn sells goods to Y. in this transaction, CGST component charged by Z to Y is lost, although ultimate cost of goods to consumer is inclusive of CGST. Now, if ultimate consumer happens to be a large manufacturer, he will either lose CGST or ensure that he procures it only from Z. To maximise the benefit, one has to ensure that goods produced by X should always be dealt by small dealers, goods produced by Y are always dealt by medium dealer till it reaches the final consumer and so on. A reverse flow of goods from small to medium and thereafter to large dealer will eliminate tax benefit of the small dealer and ultimately consumer will lose out. This proposal has serious consequences for the micro and small enterprises. Micro and small enterprises, to be part of ITC, has to come in the GST regime making them costly and thus rendering them unviable or lose out the business to big enterprises.

The Committee has also proposed that CGST will be administered by the Central Government and SGST will be administered by the respective State Governments. In other words, Central Excise Department of the Central Government will administer CGST, who in present also administer all levies proposed to be subsumed in the CGST. Similarly, commercial tax departments of respective State Governments will administer SGST who in present deals with all taxes proposed to be subsumed in the SGST. Poor assessee has to file returns with both authorities. Both authorities will be scrutinising the same return and different conclusion will be drawn thus leading to never ending litigation. In the present scenario, where even binding instructions of the CBEC are ignored by the field officers, it is difficult to accept that there will excellent co-ordination between the central and state government employees and the poor assessee will not be harassed. Indian public may accept harassment from one department but simultaneous harassment by two different authorities on same issue may not acceptable.

Indian economy is a vibrant and thriving economy. World is presently facing recession-II but Indian economy is still growing against all conventional wisdom. It is expected that policy makers of the Central Government and State Governments will use their conventional wisdom to tax supply of goods and services but refrain from re-packing the same old laws in the new GST regime. New ideas are required for the new order. Indian public is aspiring for a single tax with multiple tax rate and seamless credit. Distinction between CGST vs SGST and goods vs service should not be thrust at the taxpayers’ door but should be used as a tool to appropriate revenue amongst the Centre and State Governments.