Goods and Services tax in India – Ushering in a new tax regime
with S Krishnamurthy, Adjunct Faculty
Goods and Services Tax (GST) is a part of the proposed tax reforms that center around evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the central and state levels. GST is proposed to be a comprehensive tax levy on manufacture, sale and consumption of goods as well as services at a national level. The introduction of goods and services tax will lead to the abolition of taxes such as octroi, Central sales tax, State level sales tax, entry tax, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, and eliminate the cascading effects of multiple layers of taxation. In this interview with Prof. S. Krishnamurthy, faculty in the Finance and Control area at IIM Bangalore, we explore the possible challenges and impacts of the implementation of GST.
Common man and GST
Tejas:
Why is the Indian Government keen to move towards a Goods and Services Tax regime? Do the benefits, such as de-cascading and simplification of taxation, correction of market distortion, replacement of indirect taxes and other benefits justify the huge cost and effort which is needed to make the transition to the new regime?
SK:
As of now, the central government charges excise duty and service tax while the state government charges sales tax or VAT. For interstate transactions, we have Central Sales Tax which is an origin based tax while VAT is consumption-based tax. There are complications and issues due to the multiplicity of taxes. So, India is trying to follow other countries like Canada and Australia, where there is seamless tax structure, where both the central and state governments get revenue from all transactions. Therefore GST is at two levels – the State GST and the Central GST. Additionally we have the concept of manufacture, sale and deemed sale etc. All of this would be replaced by one word-“supply”. So when business to business supplies of goods/ services are there, these will be charged the Central and State GST which would be equally shared by the centre and the states. Therefore there would be no separate excise duties, separate sales tax, service tax, etc. Presently, every month, assessees have to file several returns before different authorities: CST returns, VAT returns, Entry tax returns, CenVAT returns, Service Tax returns etc. Now, under the GST, there’ll be only one return per month for the entire business. This one return per month, will capture everything. This would reduce complications and streamline collection of taxes at various points. The benefits would definitely outwiegh the costs.
Tejas:
With a 3-tier tax rate under GST, levies on common items of consumption would be affected. Should a better model for GST be in place?
SK:
I don’t think there’ll be any change because it is basically a consumption tax you are arriving at. So business entities are not going to bear the burden; it will be passed on ultimately to the customer. But unbilled or black purchases will come down because if one person purchases from another without bill, he cannot claim the benefit of GST credit. So, necessarily he has to have a bill. Already that system is in place, so that means invoice based trade will be much more. The problem that they are working on is, India is too large and a lot of transactions occur in the unorganised sector thereby “an entry level turnover exemption” is being worked out. For central GST, the minimum is Rs. 50 lakhs, and for the state GST, it is Rs.5 lakhs to be taxed under GST.
Implementation woes
Tejas:
The GST model has been criticized in Australia as a regressive tax model, with a more pronounced effect on lower income earners. Also, after the tax came into effect, the Australian economy saw negative economic growth for the first time in more than 10 years. How will the implementation in India be different and overcome such problems?
SK:
I would say it is not correct to compare Australia, because their total population is minuscule compared to ours and their federal structure is also quite different. Probably Canada is more comparable to us.
Tejas:
It is quite evident that sound IT infrastructure is needed to share tax-related information among the states. Do you see a well-spread out implementation by April 2012, given we do not have good IT facilities in all states?
SK:
We do not have excellent IT infrastructure as of now, but it is being ramped up. There are some states that are not going forward with proper implementation either due to their financial constraints or due to political reasons. Southern states have done quite well, if you consider Tamil Nadu, Andhra Pradesh, Karnataka, Maharashtra and Gujarat. In the South the people and the government are more aware of IT and it is being put to good use but there are issues in the North.
Tejas:
We see wide disparity in GST applicability and GST rates around the world (Austria 20% from 7% in Singapore to 20% in Austria), each rate being dependent on the economy of the country. Revenue neutral rate, as shown in the study of NCAER and Task force report is 12% while the proposed GST rate in India is 16-20%. How is the most suitable rate arrived at and how does a sub-optimal or excess rate affect the economy?
SK:
The same rate of tax would be applicable for both CGST and SGST- if SGST is 8%, CGST will also be 8%. The states are already receiving some tax revenue which they should not lose. In fact, the states already have revenue neutral rate (RNR) of 12.5% in VAT. This was the outcome of extensive statistical analysis and study. RNR, as of now, is only on VAT, whereas we are now going to add central excise tax which is at 10% as of now (reduced from 16% temporarily). The service tax is at 10% (because of the economic downturn the rates were brought down from 12%). Now again the rates would go up. So the state’s rate is at 12.5% and central government rates are different. So now you have to have an RNR which is for both the central and the state you can say an “Indian RNR”.
Impact on key industries
Tejas:
The finance ministry’s draft proposal for the GST regime proposes to keep crude oil, petrol, diesel, ATF and natural gas permanently outside GST to protect finances of states, which rely heavily on collections from levies on oil products for their budgetary targets. But the oil industry has demanded the inclusion of crude oil and its products to avoid fuel price variation from state to state. Do you think the oil industry’s demand is justified?
SK:
It is the same case in almost all countries. The problem with fossil fuels is that of availability, hence there is a high dependence on imports. Our maximum foreign exchange outgo is on oil, and we have no control over the prices. That is the reason why under WTO also, India has not made any binding commitment as to the maximum duty to be charged. Under the WTO binding, India has said that three items would not be bound to a fixed rate of duty – petroleum, fertilizers and consumer products. For rest of the items, bound rates have been put in place.
Tejas:
Recognizing that the current indirect tax regime is adversely impacting export competitiveness of the country, a study by National Centre for Applied Economic Research (NCAER) has said that the proposed Goods and Service Tax (GST) regime will be beneficial for India’s foreign trade engagement with the rest of the world. Which export oriented industries would benefit from the implementation? How would it impact the imports?
SK:
Exports industries would not be affected much under GST as exports would be zero-rated. All tax paid can be claimed back as tax credit. Imports are always subject to customs duty and when the imports enter the states, anyway the states will tax and receive the state GST.
Dilemma of the states
Tejas:
The states resist the implementation of GST because of the losses of revenue from a wide range of taxes (such as the State Sales tax, Luxury tax) they can levy. The Centre has promised to compensate the states for whatever losses they incur due to the new tax regime. Is it reasonable to do so?
SK:
The government says that it will make compensatory funds available so that the national integrated tax system is implemented successfully. About Rs.50 thousand crores have been set aside for compensation to the states which is a temporary amount and would not be required forever.
Tejas:
The states believe that a single GST rate would be regressive and rob them of fiscal autonomy. Do you see a strong rationale in this argument?
SK:
The states are inhibitive because the CST is being revoked. Earlier the CST was reduced to 2% from 4% and will finally be revoked due to GST which could result in loss of revenue to the states. This is an apprehension of the states, which is not necessarily true. A lack of understanding and comprehension is the cause of this worry and proper training and knowledge sharing is needed. There were about two years of problem when VAT was introduced, now VAT has taken off well. So this is actually introduction problem. Unfortunately , there are two issues they are trying to solve at the same time :DTC and GST. DTC is more populist from the point of view of the common man because it deals with income tax. Most probably GST would be completely rolled out by October 2012.
Conclusion
Despite the complications being faced with the implementation of GST, its realized benefits in terms of ease of operations, a more seamless taxation regime, reduction in black market activities and minimal cascading effects of different tax levels are worth considering. To an extent, it may make some sense to compare India with the other economies with GST but on a larger scale there are stark differences and performance of other economies are no indicators of the effects GST would have on India. There is definitely a need for better infrastructure to help in the efficient implementation of GST and cooperation from the states too. Therefore, as per our discussion with Prof. S. Krishnamurthy Goods and Services Tax is a step in the right directon for the Indian Economy.
Profile
Prof S.Krishnamurthy is an eminent visiting faculty at IIM Bangalore in the area of Finance and Control. He has been a visiting faculty at IIT Bombay at IILM Delhi and at TAPMI in Manipal. He has worked as the Chief Executive and Course Director for Business Systems in Bangalore and was deputed by UNIDO to study the industrial structure in horological field in Switzerland. His areas of interest include Commercial Contracts Custom Duties, Central Excise Tax, Sales and Service taxes. he has been awarded the best Visiting Faculty award for the course "General Commercial Knowledge" at IIMB in 2001.
