The Goods and Services Tax (GST), as was the wont, has been postponed now and thus far to 1 April, 2011, after the fixed target of 1 April, 2010 had slipped, first in favour of 1 October, 2010 and finally to the new fiscal 2011-12. Lot of discussions have been held within and outside the Empowered Committee of Finance Ministers. In the course of several meetings of the Committee, whatever was produced was considered to be a dilution to the flawless GST as Kelkar commented. The enforcement of GST would also need constitutional amends, which are going to take own time.
Now, what is flawless GST and its objectives. The introduction of the flawless GST has been deemed to be one of the most important reform agenda, which can provide a new impetus to Indian industry and inclusive growth. It is an economic game changer and all stakeholders will have to unite and develop the necessary will to co-operate in introducing the flawless GST.
Basic elements of GST
The efficiency of the Value Added Tax (VAT) enhanced with increase in the purity of the GST model with 10 important elements of a pure GST, is central to the proposed piece of legislation. These are : (i) The base should extend to all goods and services including immovable property; (ii) There should a single low rate, (iii) The tax should be destination based, (iv) The tax should be designed on invoice-credit method, (v) Full and immediate input tax credit in respect of capital goods; (vi) The GST must replace all transaction based taxes on goods a nd services and factors of production, (vii) There should be seamless flow of the tax through all stage of production and distribution so as to stick on final consumption, (vii) The exports should be zero rated and imports should be fully taxed, (ix) There should be a threshold exemption for small dealers; and (x) Full computerization of the compliance and administrative systems.
As will be seen, the flawless GST is designed as a consumption type destination VAT, based on voice-credit method. It provides for a comprehensive base including financial services and immovable property. A threshold exemption of Rs. 10 lakhs has been provided for small businesses in the Kelkar Committee report. Even more important to note is that imports into the country are proposed to be taxed in the same manner as domestically produced goods. Further, it also provides for a single rate of tax of 12 per cent for all categories for all general goods and services across all states, comprising of 5 per cent by the Centre and 7 per cent by the States.
Perhaps the most important element for the garment exporters is that the exports should be zero rated and the imports should be fully taxed.
The Kelkar Committee has also recommended that the Central Government should provide a sum of Rs. 30,000 crore over the next five years, which will be used to compensate the States for revenue loss, if any, and the balance of distribution between the States should be on the basis of the same formula as applicable for tax devolution to the States. While the RNR for State level TF-taxes (including Stamp duty) is only 6 per cent, the Committee has recommended a higher rate of 7 per cent, which has the potential to increase the combined tax revenues of the States by an estimated amount of Rs. 70,000 crore. This along with Rs. 30,000 recommended above will augment the combined resource base of the States by an aggregate sum of Rs. 100,000 crore, which is equivalent to 2 per cent of GDP.
The Committee has also set up an institutional mechanism which would be responsible for making any change in the design and structure of VAT by way of Council of Finance Ministers, which will subsume the independent powers of both the Central and State Governments to levy tax on goods and services in favour of collective exercise of the powers.
Empowered Committee of Finance Ministers views
There was a significant dilution of the flawless GST, while formulating its views by Empowered Committee of Finance Ministers. The First Discussion Paper released by the Committee on 10 November, 2009 envisages an extremely diluted form of GST under which, inter alia, (i) a number of cascading taxes including purchase tax will continue to be levied by the States, and (ii) the base is considerably eroded on account of the proposed continuation of the exemptions. The Empowered Committee has also been credited with the view of creating two rate structure for the general goods and services (other than high value goods).
When will GST be operative?
For quite sometime, it was evident that it would be difficult to keep the date of operation of GST as 1 April, 2010, as quite a few differences of opinion did come up in a series of meetings of Empowered Committee. Keeping that in view, the Kelkar Committee had recommended that the implementation of the GST should be postponed to 1 October, 2010, which date, the Committee felt, could be adhered to. The Committee, however, added that since the benefits from the switch over to the GST are contingent upon the purity of the GST design and that the international experience has shown that any design-related VAT design mistakes are very hard to rectify, it must be ensured that there are no design related mistakes at birth. However, if there is a trade-off between the timeline and the design of the GST, the dilemma must be resolved in favour of design.
Second, now how much of time would be taken by the Empowered Committee to reconsider its own stand vis--vis Kelkar Committee on GST, particularly on its 10 basic elements ? Then, there are differences of opinion within the Empowered Committee, where strong political considerations, too, can prevail. The political compulsions read along side the perceived dilution of States power could also play a spoiler. The Congress is in hopeless minority for undertaking constitutional amendments to enable both the Centre and the States to exercise concurrent jurisdiction over the taxation of all goods and services, creation of the proposed Council of Finance Ministers and assignment of part of the GST proceeds to the third-tier of Government. These amendments must, inter alia, provide that the taxation of goods and services by both the Centre and the States should be a consumption-type, destination-based GST.
Third, the harmonization of tax laws is critical. Variation in the wording and structure of tax provisions can be an unnecessary source of confusion and complexity, which can be avoided if the Centre and all the States adopt a common GST law as in the case of the Central Sales Tax or agree to separately legislate an identical GST law. In either case, there would be need for harmonization in respect of critical elements like common time and place of supply rules, common rules for recovery of input tax, valuation of supplies, invoicing requirements, tax interpretations and the rulings regarding classification of goods and services.
Fourth, administration and compliance is an area where the need for harmonization is the greatest where Centre-State or inter-State variations are unlikely to serve any social or economic policy objectives. This includes items such as the tax payer registration system, tax payer identification numbers, tax forms, tax reporting periods and procedures, invoice requirements, cross-border trade information systems and IT systems. Harmonization of these elements would result in significant savings in costs of implementing the GST by avoiding duplication of efforts in each Government, as well as recurring savings in compliance costs. Harmonization would also permit exchange of information between different levels of Government so as to enable effective monitoring of cross-border transactions. A common tax identifier number across States and the Central Government is a key element in the efficient exchange of information.
Thus, there is a whole host of issues, on which uniform decisions would need to be taken by all stakeholders and this is, by no means, an easy or even a time-bound matter. This can take time and it would be hazardous to lay down any deadlines in such cases.
Loss to garment exporters
To that extent, the garment exporters, who have been seeking exemption from all national, state and municipal taxes, will have to wait. It would be great day for the garment exporters, as for other exporters too, when they are exempted from the taxes, which though the Government of India has reiterated several times, should not a part of export prices and the efforts of government at all levels national, state or municipal - have been no more than a lip service or at best very sketchy and patchy.
The garment exporters would continue to suffer by the repeated defaults on the implementation of GST.