GST: Seeking A Place In The Budget Platter
Tax Partner, EY
The Indian Government has been struggling to introduce Goods & Services Tax (GST), one of the most important tax reforms. The major hurdles for GST are politically driven, where the consensus between Centre and State Governments is still eluding.
NDA being committed to implement the GST will have the first official opportunity to prove its intent in Budget of 2014-15, after being elected into power. With the ever rising expectations of the stakeholders, the task in hand would be far from easy, as the conflict between such expectations is inevitable. Though India Inc. seeks uniformity in taxation, the same may not be acceptable to State Governments who are not willing to compromise on their revenue share and autonomy.
Finance Minister, Mr. Arun Jaitley has been having discussions with the State counterparts seeking their support and suggestions on the roll out of GST. Principally, most of the State Finance Ministers appear to give their assent on moving to GST regime, however, the same is contingent on the Centre to compensate the States adequately to cover any adverse impact on revenues.
Corporate India has been eagerly awaiting the implementation of GST, and has consistently recommended a speedy implementation of the same in their budget wish lists. Various industry forums representing IT, automobile and other manufacturing sectors have yet again made recommendations for implementation of GST in Budget 2014-15, hoping that the new government would take some rapid steps in this direction.
GST is seen as a progressive tax reform to provide an efficient and harmonized consumption tax system, and therefore, has been adopted by many counties globally. The indirect tax system in India is currently knitted in multi-layered taxes levied by the Centre and State governments at different stages of the supply chain. In GST, all these will be subsumed under a single regime. Further, GST would bring uniformity in tax administration, and thereby alter the existing system drastically.
Adoption of GST is expected to ease the businesses in managing the multiple indirect taxes applicable in the current indirect tax regime, remove cascading effect of taxes, and widen the tax base. From the perspective of the end consumer, GST is believed to reduce the prices of goods. Reduction in prices would in turn lead to increase in consumption, and GDP. It is estimated by experts that this move can boost the GDP by 1% - 2%. Further, the government revenues are also expected to rise under GST regime.
Even though GST is expected to benefit the economy as a whole, the effectiveness of the same is entirely dependent on its structure, implementation and administration. As a first step on the road to GST, the new government should provide a clear line of sight to the stake holders on the status, and give a prelude to the GST structure.
For speedy implementation, work should be done towards elimination of road blocks to infuse centre - state consensus. Accordingly, in the upcoming budget, the Finance Minister should address the issue of mobilizing adequate funds to compensate the States on the revenue losses that they may incur during implementation.
As the GST involves significant changes in the existing indirect tax laws, the implementation should be done in a phased manner for a smooth transition. Accordingly, the Finance Minister may consider merging the federal laws – service tax and excise laws in the first phase. Currently, both the laws are governed by separate rules for valuation, collection, payment, refunds etc., which are quite different. In the first phase of implementation, attempts must be made to merge these rules, and prescribe one set of rules uniform for both goods and services. This should also include laying down common rules governing the place of supply/ provision of goods/ services in line with the GST laws applicable globally. The credit rules also need to be rationalized keeping in mind the best practices prevailing in International VAT jurisdictions.
Further, the government should ensure that in the upcoming budget, adequate clarity be provided in respect of the issues/ ambiguities prevalent in the existing laws in light of the proposed GST regime. The issues include double taxation on software, value added services, IPR etc. This is likely to be resolved under GST, wherein uniform tax rates for goods and services are proposed. Further, there are still multiple issues under the service tax law with in relation to the negative list regime, such as taxability of intermediary services, online database access and retrieval services, liquidated damages, financial services etc. These must be addressed in the upcoming budget as well, as a pre-cursor to the proposed GST.
Accomplishing the above would not be a straightforward affair, and therefore, it needs to be seen how the finance minister pulls the rabbit out of the hat while putting together the Budget 2014-15.
Views expressed are personal.