Vote on Account 2014: India envisaging significant tax reforms for future
Tax Partner, EY
Associate Director - Tax & Regulatory Services, EY
The last memorable wave of tax reforms, anchored by Dr. Manmohan Singh, catapulted India into global limelight and the country is in anticipation of a repeat of that fabled story on introduction of the integrated Goods and Services Tax (GST).
In that respect, it is heartening to note that most major indirect tax amendments in India over the last few years seem to have been made with the ultimate goal of transitioning to GST.
The GST model of levying a single consumption tax on all transactions of goods and services, while allowing minimum exemptions and seamlessly providing credit across the value chain, has been adopted across the European Union as well as Singapore, Australia and Canada amongst others.
The evolution of indirect taxes in India has been such that GST now seems like the logical answer to everything adversely affecting businesses and consumers - from ending the cascading effect of myriad taxes and inefficiencies in the credit chain to facilitation of free movement of goods across the country as a single integrated marketplace.
Though the process of implementation might not be taking place at the pace that the economy requires, the foundations on which the GST is to be built have been steadily laid over the past decade - the push for widening the tax base and reducing exemptions along with rationalization of rates has been systematic.
The scope of credit of CENVAT was broadened in 2004 with manufacturers and service providers being allowed to utilize credit of excise duty against output service tax and vice versa. This was the first step in integrating two separate levies and was welcomed by the industry with open arms.
Introduction of Value Added Tax (VAT) across all States in the country, starting in 2005 (except Haryana which introduced in VAT in 2003), was a success story in itself. We moved from single point tax to taxation of the value add across the supply chain. State registered double digit growth in revenue collections and the cascading effect of taxes was plugged to a fair extent. The rate wars earlier prevalent between States also largely came to an end.
On the excise front, 130 odd everyday goods which were not being taxed earlier were brought into the duty net in 2011 at a concessional 1% rate which was increased to 2% in 2012. The median rates were also gradually rationalized to boost collections. Most goods and services are currently taxed at 12.36%.
After VAT, the next big ticket change came in 2012 when all services were brought under the ambit of service tax, save for a handful of exemptions, which we now know as the Negative List regime.
These changes seem to have had a positive impact on trade and have not faced persistent rebellion from the industry. However, their unfulfilled expectation is that piecemeal amendments are unified to realize the true spirit and intent of our fiscal policy. The sustained effort on part of the Government is yet to provide significant relief from compliance burdens and documentary requirements. It was also expected that the political deadlock regarding the Constitution Amendment Bill and the CST compensation issue for States would be resolved during the tenure of this Government to set the ball rolling for implementation of GST. So far, the Centre has not succeeded in putting to rest the States' fears of loss of autonomy.
There were some misses in other legislative and administrative spheres too. Entry tax legislations were introduced in various States to strengthen revenue collections, only to be declared unconstitutional in some States as the proceeds were not being used to provide any quantifiable benefit to trade at large. Refunds of large sums rightly due to the taxpayers were being withheld without good reason. There was a plethora of needless litigation pressurizing the already overburdened judiciary. And most States could not provide a comprehensive electronic platform with a robust IT system to taxpayers to manage their VAT compliances.
There is reason to reflect on this past and look to the future with optimism. Political hurdles aside, the ultimate introduction of GST seem imminent. There is a strong call from the industry for its implementation as well as a genuine concerted effort on part of the Empowered Committee of State Finance Ministers on GST to bring about consensus.
From more competitively priced goods in inflationary times, encouragement of investment in the country, right up till macroeconomic indicators like the GDP growth rate, the GST is set to impact it all.
There is heavy cause in the longing for GST. It is not without reason that it is increasingly being touted as a panacea for the Indian economy.