GST: So near, yet so far

The GST Constitutional Amendment Bill will, hopefully, come up for discussion in the last week of the Budget session of Parliament, and get through both Houses. While there is broad consensus on the introduction of GST, some sticky points in terms of compensation, rates, and so on still remain. The revenue neutral rate (RNR) of 27 per cent recommended by the Empowered Committee, has not found favour with industry, prompting the finance minister to indicate a reconsideration. The upside is that all stakeholders agree that GST is absolutely necessary to bring about reform in indirect taxes, and will, ultimately, benefit each one of them.

Any new system is bound to be resisted and in this case, the concern of the States has stemmed predominantly from two quarters: the first on revenue loss (mainly raised by ‘producing States’) and the second on compromise of sovereignty in the matter of deciding rates of tax.

The States’ concern on revenue loss is not unfounded. The GST would be a destination-based tax, accruing to the State that consumes the goods or services, as against the origin-based system we have in the current regime, where the revenue accrues to the State from where the goods are sold.

While the flip side is that though the States would get revenue from the services that they do not currently tax, their apprehension is that this revenue is also limited to the services that are consumed in the respective States. Currently, States are able to augment their revenue requirements, by raising VAT rates — particularly in times of natural disasters. If the GST Council is going to decide on the rates, the States believe that their autonomy in terms of rate fixation would be eroded and, therefore, the demand for a band within which the rates can be manoeuvred.

In order to assuage the concerns of the producing States, the 1 per cent origin-based optional tax for a period of 2 years was inserted in the Constitution Amendment Bill. However, it is important that this tax be restricted only to inter-State sales and not inter-State supplies.

The States, anyway, do not earn tax revenue from non-sale inter-State dispatches (except to a limited extent of reversal of input tax credit) and therefore, restricting this tax would not be detrimental to the producing States’ interest. Since every stock transfer will have a 1 per cent tax, if there are three stock transfers before a product reaches the customer, there would be a 3 per cent non-recoverable tax.

Given the assurance the States have from the Centre on compensation for loss of revenue, trade would be disappointed should they use this 1 per cent tax to garner tax revenue. Although the tax is proposed on supply of goods only, it is definitely going to affect the sectors that use goods in the process of rendering services. Typical examples are maintenance contracts and telecom services. That apart, the present sticky disputes of stock transfers versus inter-State sale would continue, where the dispatching States constantly monitor stock transfers which can be treated as predetermined sales to augment revenue.

On the rates of GST itself, the RNR recommended by the Empowered Committee is a combined rate of 27 per cent, which must be among the highest in the world. The finance minister has gone on record to say that the rates are being reconsidered.

The larger issue is if goods and services are to be taxed at different rates. In that case, we would still be saddled with questions of classification as ‘goods’ versus ‘services’, as also complicated tax regimes on works contracts. This would lead to an inverted duty structure of a new kind, where works contractors would see an accumulation of input credit, assuming the services would be taxed at a lower rate.

It is also important to come out with an indicative list of goods that would be taxed at a lower rate. There are a number of goods that are taxed at a lower rate for central excise duty but at standard rate for State VAT. Similarly, there are a number of items taxed at standard rate for excise duty but lower rate for State VAT. Then there are priority sectors such as alternate energy , mega power projects, and many end use-based concessions. These need clarity on whether their lower rates or exemptions would continue or whether they would be zero-rated.

Between the current central excise, service tax and VAT legislations, there is hardly an aspect of traditional business that is not addressed, be it treatment of job work, non-sale dispatches, works contracts, taxation of intangibles, and the like. However, when it comes to new business models such as e-commerce, our laws as not as explicit. Law makers must address existing controversies instead of allowing room for ambiguities. Alternate dispute resolution mechanisms must be strengthened, encouraged and the coverage extended, so that it becomes open to all taxpayers.

The emphasis must be on compliance, fair treatment of honest taxpayers and bonafide errors, but harsh penalties for evaders. E-invoicing, digital signatures, e-filing, e-audit and e-refunds should become the order of the day if the required simplification of the tax regime is to be achieved. For small assessees, helpdesks can be set up in local tax offices, where they can be assisted with online filings; alternatively, the tax return preparer mechanism currently available for preparing I-T returns can be extended for GST returns also.

Finally, if the GST is to bring in the desired results of achieving transparency in tax administration, and contribute to the improvement of the country’s index in ease of doing business, tax administrators have to be trained to change their orientation from being tax collectors or enforcers to facilitators. It is a herculean task, but if a system of accountability is built into the system, this can be achieved.

Currently, accountability in most of our revenue departments revolves only around revenue loss, but where is the accountability for frivolous demands that are set aside by courts after prolonged litigation and the undue hardship that it causes to organisations or accountability for rejection of refunds for untenable reasons or judicial indiscipline? The new regime presents a great opportunity for the government to look into these aspects, which incidentally have been highlighted by the Tax Administrative Reforms Committee. This is a crying need, and I hope that the industry is heard this time round.

The writer is a senior director with Deloitte in India