In the revised Constitution (115th) Amendment Bill, 2013, the union government has proposed to define GST as any tax on supply of goods or services or both, leaving out those exemptions from GST that were suggested in the earlier drafttaxes on supply of petroleum crude, high speed diesel, motor spirit or petrol, natural gas, aviation turbine fuel and liquor.
The states, at present, have exclusive power to levy state excise duty on alcohol for human consumption. The Empowered Committee felt that if potable alcohol is deleted from Clause 12 (A), then the Centre will also get the power to levy GST. Therefore, the committee was of the view that liquor should be exempted from GST. Moreover, the committee felt that the Centre should firmly commit to the exemption of petroleum products from the GST regime till GST stabilises and the need for compensation goes away.
The power to levy sales tax and CST on petroleum products should be retained by the states. The revenue-neutral GST rate of states may be worked out based on this decision.
The Empowered Committee has maintained that all entry taxes should be subsumed into GST except the entry tax levied in lieu of Octroi, the proceeds of which go to local bodies. If such entry taxes are subsumed into GST, the states would incur substantial revenue loss. Hence, the committee broadly felt that entry taxes in lieu of Octroi should be exempted from GST.
If this, however, is subsumed under GST, then all the states must be permitted to levy any cess, surcharge, additional tax in lieu of Octroi, on behalf of local bodies, and these should be kept out of the ambit of GST.
The Standing Committee of Parliament had recommended that since the destination-based interstate GST (IGST) model favours the consumer states more than the producer states, the revenue concerns of the latter need to be factored in and duly addressed. Thus, GST should not act as a dampener or as a disincentive for states with a strong manufacturing base.
The states are incurring huge revenue loss under the proposed GST regime due to the destination-based taxation principle. The revenue losses are mainly due to removal of CST, subsumation of a number of indirect taxes and the removal of the cascading effect. The proposed IGST model has to address the issue of revenue loss. Therefore, we suggested a modification in the proposed IGST model itself to meet the requirement upfront and provide for independent compensation to the states.
As per this proposition, there would be an upfront deduction of 10% (assuming GST rate of 20%, this would come to 2%) of the total output IGST amount of all the dealers in the state in a given tax period. The said amount would directly be credited into the account of respective exporting state. This amount will take care of loss on account of abolition of CST.
There will be a further deduction of 10% of the total output IGST amount of all the dealers across the country in a given tax period and the said amount will be kept separately in an escrow account with the GST Council. The Council should be empowered to distribute the said amount among the states in proportion to their GST loss. This will take care of the concerns of all the states including exporting states and also take care of the independent mechanism for compensation to states.
If we adopt this modification, the IGST input tax credit chain will not be affected as the dealer in the importing state gets full tax credit while the importing state gets full revenue. Accordingly, the central government revenues would be curtailed to the extent of percentage set aside for the Compensation Fund/retained by the exporting state from IGST revenue.
The author is minister, planning and energy, Government of Gujarat
GST has been pegged as the most radical tax reform in India. It is estimated that its introduction would lead to additional growth of anywhere between 0.9% to 1.7% of GDP. That is, only if it is based on principles of simplicity, equity and minimal exceptions/ distortions.
From the very inception of proposed GST framework, inclusion of petroleum products and alcohol under GST net has been a matter of intense deliberation. The states have been opposing this on the ground that these two streams are major revenue-earners and the states stand to lose substantially if these are brought under GST. It is important to point out that both petroleum products and alcohol are heavily taxed products and there are huge variations in tax rates across the states.
The Centre has been in favour of inclusion of both petroleum products and alcohol under GST. The Parliamentary Standing Committee report submitted to the central government in August 2013 also states that these should not be constitutionally debarred from ambit of GST. This move also finds unequivocal support from all leading trade bodies and industry in general.
However, in a recent meeting, the Empowered Committee of State Finance Ministers reiterated that these should not come within the ambit of GST. Therefore, it means that existing taxes on these products should continue to apply even under the GST regime. These include excise duty, sales tax, cesses on petroleum products and state excise duties on alcohol.
A parallel tax regime on these would substantially distort the GST framework. While there would not be any GST on these products, the inputs (raw material, capital equipment, labour, etc) would continue to be taxed under GST. Take for example, setting up of a refinery, which requires huge capital expenditure. The GST incurred on this expenditure would also become a cost substantially increase the overall cost of the project. The exploration-and-production sector would continue to suffer high incidence of taxes, more so because tax on services is likely to increase under GST (from the current 12.36%) which will again be a cost to the industry. Similarly, the tax paid on Aviation Turbine Fuel (ATF), a major cost for airlines, would not be available as a set-off against GST to be paid on air fare. It is one of the reasons why most international airlines today choose to fuel their aircrafts outside India.
Currently, the alcohol industry is bogged down by high taxes, particularly in the case of imported spirits. This hampers free movement of these products from one state to another, leads to inefficiencies in supply chain and incentivises illegal trade (including the sale of spurious products). If it is kept outside the GST net, then the challenges would remain. This would trickle down to allied sectors. For example, hotels and restaurants serving alcohol that sell both GST and non-GST items would have to deal with administrative complexities.
However, it does not mean that the concerns of the states about potential impact on revenues are completely unfounded. These can be addressed by having a higher rate of GST on these products or providing a recourse in additional non-credible levies, as suggested by the Standing Committee and also the task force constituted by the 13th Finance Commission. This would be in line with international practice in several counties like Australia, Canada, Singapore and Brazil. Specific rules could be made to ensure that concerns such as potential misuse of GST credits are addressed. For example, it could be provided that credit would only be available to industrial customers and not to individuals. An effective compensation mechanism for the states which suffer revenue loss would also go a long way in persuading them.
It is imperative that there are no constitutional restrictions to include these products under GST. This is because even if there is a consensus between Centre and the states later, amending the Constitution is a very complex and time-consuming process.
The country has waited long for GST. The exclusion of these products from GST is certainly not desirable.
The author is partnerIndirect Tax, KPMG in India