Budget 2014 Should Outline Roadmap for GST
Tax Partner, EY
Indirect taxes prevail on all articles of consumption, whether goods or services. For end consumers, there is no choice but to bear the entire cost. This cost pinches more if indirect taxes are imposed on more than the actual value of consumption. For instance, if one spends Rs. 100 on getting a house constructed, the value on which indirect tax is imposed could be higher. This is because state governments would assume a spend of Rs. 65-75 (out of the total Rs. 100 spent) as value of goods and impose VAT (value added tax), while the central government would generally assume Rs. 40 as value of services on which the service tax is levied. The net result is an increase in the ultimate cost for the consumer, on account of an artificially enhanced tax based for the purposes of VAT and service tax.
It can be equally or even more fractious and costly for corporate. Conflicting demands between service tax and VAT can be observed on various transactions. Temporary assignments of intellectual property, electronic supply of software, works contracts, distribution rights, etc. are all examples of transactions where potentially both VAT and service tax can have a play.
VAT and service tax should be considered as mutually exclusive, i.e. a transaction can be a transaction for sale of goods or a transaction for provision of services. Even in cases of works contracts, which involve a composite/bundled supply of goods and services, the principle of law has been that the taxes have to be imposed on the respective value of supply of goods and services respectively - the Constitution of India mandates this. Situations where both VAT and service tax are imposed on the same transaction and on the same value by treating a transaction as both supply of goods and supply of services, have evolved largely on account of unclear legislative authority and as the natural consequence of opportunistic litigation to capitalize revenue collections. This requires curative thought and action.
Another interesting point to note is that disputes on jurisdictional authority (to tax and collect revenue) are not confined to central government versus state governments. Conflicts arise between state governments too on issues revolving around jurisdiction to collect VAT.
The bottom line is that such situations arise because of the multiplicity of legislations and authority trying to tax the same source of consumption. A comprehensive Goods and Service Tax (GST) would be a significant step in the direction of streamlining the administration of indirect taxes in India to help remedy these maladies.
However, it would be unrealistic to expect GST to be implemented overnight and therefore the need to address such issues pending GST's implementation must still be kept on the government's focused agenda. Keeping in mind many of these issues, the Government of India has set up the Tax Administration Reform Commission (TARC) under the chairmanship of Dr. Parthasarathi Shome and comprising of senior government officials and private sector tax professionals. The first report of the TARC was made available to the public in June 2014 and has identified and addressed a plethora of pain points. The report also offered various recommendations to achieve the desired tax reforms.
The recently concluded Lok Sabha election has provided a renewed hope that GST will see a fresh impetus for implementation. News reports indicate that the new government is also well aware of the need for the roll-out of this reform and perhaps the most awaited expectation is that the soon to be announced Union Budget will set some concrete measures and a definitive road map towards GST implementation.
As the new government ponders over the future of India's reassertion of its place in the global market place, we hope to see steps in the right direction towards GST implementation, appropriate measures to resuscitate the nation's manufacturing sector and learnings from the TARC report to take India's tax administration to the next level.