Having missed the first deadline of 1st April, 2010, GST has now been proposed to be operational with effect from 1st April 2011. Will it make it? I do not think so. Why? There are a number of imponderables.
But before we count and dissect them, we should know what are the proposals of the Government, I mean of Government of India, what our Finance Minister terms as landmark economic reform.
Why and What of GST
GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer's point and service provider's point-up to the retailer's level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The clear advantage of GST is that a number of Central and States taxes stand subsumed in it. These include (i) Central Excise Duty, (ii) Additional Excise Duties, (iii) The Excise Duty levied under the Medicinal and Toiletries Preparation Act, Service Tax, (iv) Additional Customs Duty, commonly known as Countervailing Duty (CVD), Special Additional Duty of Customs - 4% (SAD), Surcharges, and Cesses. The following State taxes and levies are also subsumed under GST: VAT/Sales tax, Entertainment tax (unless it is levied by the local bodies), Luxury tax, Taxes on lottery, betting and gambling, State Cesses and Surcharges in so far as they relate to supply of goods and services and Entry tax not in lieu of Octroi.
However, in case of Purchase tax, some of the States felt that they are getting substantial revenue from purchase tax and, therefore, it should not be subsumed under GST while majority of the States were of the view that no such exemptions should be given. The difficulties of the food grains producing States and certain other States were appreciated as substantial revenue is being earned by them from Purchase Tax and it was, therefore, felt that in case Purchase Tax has to be subsumed then adequate and continuing compensation has to be provided to such States. This issue is being discussed in consultation with the Government of India.
As far as petroleum products are concerned, it was decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these products with prevailing floor rate. Similarly, Centre could also continue its levies. A final view whether Natural Gas should be kept outside the GST will be taken after further deliberations.
Both the Centre and the States will have concurrent power to levy tax on all goods and services. In the case of States, the principle for taxation of intra-State and inter-State has already been formulated by the Working Group of Principal Secretaries/Secretaries of Finance/Taxation and Commissioners of Trade Taxes with senior representatives of Department of Revenue, Government of India. For inter-State transactions an innovative model of Integrated GST will be adopted by appropriately aligning and integrating CGST and SGST.
However, exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.
The GST will be levied on imports with necessary Constitutional Amendments. Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services.
Centres Proposal on GST
The Centre formally proposed, on 21 July 2010, to the States the structure for the Goods and Services Tax (GST) would have two components-Central GST (CGST) and State GST (SGST) for achieving a single tax rate of 16% on almost all commercial supplies over three years. Proposing a phased approach for GST implementation, most goods would attract a standard rate of 20% in the initial year, 12% for merits and 16% for the services. The standard rate for goods would be reduced to 18% in the second year (2012-13) even as the other two rtes remain the same. In the third year (2013-14) all the three rates could converge into a single rate of 16%.
The Centre has also proposed a uniform exemption threshold for GST, which is an annual turnover of `10 lakhs, and agreed to accept the list of 99 items exempt from State VAT as the common exemption list for CGST and SGST. Any entity that trades and is having an annual turnover of `10 lakhs and above will get input tax credit. If the States agree, India will eventually have a single rate GST that would apply on roughly the same base. Fortunately, the States are reportedly willing, as the Empowered Committee Chairman Asim Dasgupta declared, The convergence process is on and there is a consensus on various issues. The States have agreed to a common list of exempted items. The Centre has proposed one standard and one lower rate for goods and another rate for services.
Significantly, the Centre has also proposed to grant itself veto on rate changes to be made by the States.
The Rough Road Ahead
Though the Union finance Ministrys proposal for a phased move towards single rate goods and services tax in three years reflects a pragmatic approach for adopting the biggest tax reform of recent times, it was very clear from the first discussion paper on GST issued by the Empowered Committee of State Finance Ministers that such a move was politically impossible to effect. There are indeed a number of problem that stare at both consideration and adoption levels.
13th Finance Commission Recommendation Ignored
It has been pointed out that the recommendations of 13th Finance Commission have been ignored. While the Commission had recommended the revenue-neutral 12% GST, the Centre has proposed that most of goods would attract a standard rate of 20% in the initial year, 12% for merits and 16% for the services. The standard rate for goods would be reduced to 18% in the second year (2012-13) even as the other two rates remain the same. In the third year (2013-14) all the three rates could converge into a single rate of 16%. This would be much higher than what had been recommended by the 13th Finance Commission. There has been reasonable doubt in almost all the quarters that the targeted rate of 16% could really be maintained. Most probably, no.
Infringement of States Right on Taxation Rate
The States have minced no words in opposing any infringement of their rights by the Centre which the Centre has suggested in their proposal by reserving veto power to itself. The States cannot be faulted for wanting to safeguard their powers of taxation and must retain the flexibility to change GST rates if they want to. The proposal tantamounts to the Centre taking over the States fiscal powers, which has strongly been resisted by the States. Prima facie, the proposed changes are not acceptable to us as they end States autonomy and are against the spirit of Parliamentary democracy, says Raghavji, Finance Minister of Madhya Pradesh. His counterpart in Gujarat was more forthcoming when he declared, The Centre, by this amendment, has completely taken the power to tax from States. We did not expect this. It is like cutting both your hands and giving them to the Centre. We are sending a letter to the Centre seeking some time to exami0ne the constitutional amendments in detail he added. According to Kerala Finance Minister, Thomas Issac, First, it should have a Vice Chairman, and second the Union Finance Minister cannot have a veto power over two-thirds majority in the Council. On some items, the States should have flexibility to change rates, added Issac. This kind of opposition can cripple GST rollout as constitutional changes are not possible without a broad political consensus a fact that the Opposition is deeply aware of. Says Raghavji, The Centre can go ahead and introduce the bill, but it will have to make changes to get all parties on board.
Justifying the veto power to be exercised by the Centre under the new tax regime on indirect taxes, Pranab Mukherjee said, I you do not allow me to have the final say, I will not be able to usher in major reforms. Seeking to allay fears of the States that the Centre would usurp their powers through the veto provision, Mukherjee said, I have no intention of becoming the Super Finance Minister to interfere with the State GST. He, however, conceded that They (the States) will have their rights and I shall have my rights They have a responsibility to their States. That basic structure cannot be altered.
Perhaps, our Finance Minister does not feel convinced that he is not going to be perpetually and for all times to come the Union Finance Minister, which has only fixed term with no guarantee who would take over the next Government. Again, he needs to concede that all draconian measures, when introduced in the Parliament were sworn to be bonafide, but turned out to be instruments of extreme misuse. The argument of Pranab Da would have no takers, probably in his own political party, particularly when a number of States and Opposition leaders have been charging the Government with politically biased decision.
Biting Ground Realities
In the meanwhile, Indias supreme audit body, Comptroller and Auditor General (CAG) has questioned the preparedness of States to roll out the GST. CAGs observation needs to be seen in the context of its study/report on Implementation of VAT in India lessons for transition to GST. The said report says there are several deficiencies in the value-added tax (VAT) regime, which is based on an extensive study, based on audits o State tax administrations. The Study says It was known that VAT will eventually lead to GST and common software developed on a common platform across States would be precursor for this shift. The study observes that varying levels of automation and computerization aside, the lack of a common platform is another big problem, given the paucity of time. Disparate efforts in automation led to multiplicity of efforts and resource allocation, but more importantly the outputs generated from thee silos have not been evolved on a common platform for integration.
Gujarat Chief Minister Narendra Modi highlighted the lack of preparedness and caution against the lack of preparedness and caution against rushing into rolling out the new indirect tax regime. He said, The GST dream will not get fulfilled till the time you link all the taxpayers n the country with an IT network. Tamil Nadu Chief Minister M. Karunanidhi also has raised concerns in a letter to the Union Finance Minister. Even the industry has also strongly suggested cautious approach against a hasty rollout. It may be in fitness of things to postpone the rollout by a few months to have a flawless GST rather than to have a partial one in haste, said FICCI in a recent paper on GST.
The importance of systems integration comes across clearly in the CAG study, which has revealed tax evasion amounting to `873 crore from just 2,614 returns in 16 states. The Study also found that 13 manufacturers did not reduce the maximum retail prices of goods despite sharp decline in the rate of tax. As a consequence, the benefit of `40 crore was illegally retained by the manufacturer and dealers in the VAT chain instead of passing on the gains to consumers.
However, the Centre has formed a Tax Advisory Group for Unique Projects (TAGUP) headed by Nandan Nilekani to prepare a detailed road map and strategy or requisite IT infrastructure of GST. A separate empowered group, also chaired by Nilekani with joint representation from the Centre and he States, has been se up to take decisions about necessary IT parameters. This is expected to help create a seamless pan-India market with both manufacturers and service providers having the right to offset State taxes paid on inputs sourced from anywhere.
But all this is a long drawn out and cumbersome project, which is going to take its own time both in terms of finding and adopting the common platform and its implementation.
Re-engineering Process Poses Challenge
The Centre-appointed Central Board of Excise and Customs Group on Implementation of GST for common IT platform and common registration has suggested complete re-engineering of business processes to make the transition smooth and to scale up the capacity of the department to deal with five-fold increase in taxpayer base to about 50 lakh. The increase in the taxpayer bas would be a result of lowering the threshold to `10 lakh for all business to be covered by the GST from the existing level of `1.5 crore for Central Excise as well as from reduction of the number of exempt items.
Now this re-engineering processes before GST is rolled out in April 2011 is critically dependent on two factors-creation of a robust IT infrastructure and early completion of the cadre review and its reorganization to meet the requirements of the new tax regime. The Group has said that the IT infrastructure needs to be ready three months before the rollout of GST. Thus the IT infrastructure needs to be ready by January 2011. It is highly ambitious to think it could be.
Another front which would crave for attention would the completion of the cadre review and reorganization of the Excise and Service Tax commissionerates country-wide as GST commissionerates along with separate Commissionerates for audit and anti-evasion, which would take indeed a long, long time and any rushing of process without much thought can prove disastrous for the ax department. The changes proposed by CBEC Group on GST Implementation are wide-ranging the existing 27 zones for Central Excise and Service tax Commissionerates and four large tax payers units are to be reorganized as 150 commissionrates, 45 audit commissionerates and 20 anti-evasion commissionerates. The idea is that each commissionerate handle about 35,000 to 50,000 tax payers. Further the GST Comnmissionerates may be organized as a one, two or three tier structure or a mixed model of three depending on the density of taxpayers in the jurisdiction of each commissionerates. Within each GST commsionerate, work will have to be divided along functional lines to encourage specialization rather than on territorial basis, as is the norm now. Other matters that would need to be attended to include identifying premises for setting up the GSAT offices, setting upon common facilitation centres, familiarizing the staff with the framework of the new tax.
Has the Honble Minister of Finance in Government thought of all these things while trying to rush to operationalise the GST, which is facing yet another high wall of political consensus, which is defiantly tall ? As GST has to have clearance by two thirds majority in Parliament, apart from endorsement by at least 15 legislative assemblies, the need for enlisting co-operation of Opposition parties is very crucial and inevitable. In fact, today, there is no love lost between the Treasury benches and the Opposition, a taste of which can be amply found in what the Leader of Opposition in Rajya Sabha Arun Jaitely directed specifically to the Union Finance Minister Pranab Mukherjee, The Finance Minister wants the Opposition to share the blame for inflation. He, therefore, repeatedly referred to co-operative federalism. As it is, our federalism is too Centre-centric. ..If the Centre wants the spirit of co-operative federalism, it cannot merely extend to sharing the blame for inflation..State legislations which require the Centres concurrence are being held up. The Opposition governments are being destabilized by misusing Central agencies. If you are committed to co-operative federalism, let it extend to these areas of governance also.
Do I, or for that matter, anyone else, need to be a soothsayer to conclude that Hunuz Delhi door hast or more politely to say that GST has indeed a long, long (repeat long) way to go.
Views presented here are those of the author.