A noteworthy step has been taken towards the implementation of the goods and services tax (GST) in India with the passage of the 100th Constitution Amendment Bill by the Lok Sabha on May 6, 2015. This progress has taken place after much ado. Until now, the Bill has faced stiff opposition from the state governments for various reasons, ranging from loss in fiscal autonomy to actual revenue losses. Thus, despite being the obvious cure of issues affecting the current indirect tax regime in India, it was assumed to be some time away from implementation considering the opposition of various stakeholders. The passage of the Bill by the Lok Sabha has brought GST back in the realm of reality. As the next step, this Bill would need to be approved by the Rajya Sabha and also be ratified by one half of the State Legislatures, before receiving Presidential assent. Against the backdrop of the central government surpassing various tussles to reach this historic milestone, this write up provides insights on the imminent concerns on the road to GST implementation.
Today, the indirect tax structure in India is fraught with complexities, with certain taxes being imposed by the central government and certain taxes by the state government. The multiple levies have led to the cascading effect of taxes, as cross credits of the central levy, i.e. service tax is not available against state levies like VAT and other municipal levies. Further, there are several other levies in existence today such as central sales tax (CST), entry tax and octroi that form a cost to businesses, as they are not creditable.
The current indirect tax laws, especially VAT laws and service tax laws, were drafted in the context of more traditional brick-and-mortar businesses, and many principles contained in these regulations do not naturally apply to transactions in an evolving digital economy. As a result, today many supplies of goods and services have the ability to slip through the cracks of the current tax legislations and escape taxation. On the flipside, there are other transactions like supply of software, works contract, restaurant services, that attract the levy of both VAT and service tax, leading to double taxation. The indirect tax regime also faces several interpretation issues regarding situs, and lack in uniformity of tax rates across the country.
It is hoped that some of these rudimentary flaws in the current indirect tax structure of India will be tackled once GST is introduced. The GST regime seeks to replace excise duty, import duties (in lieu of excise duty and VAT), VAT and service tax regulations, along with other cesses and surcharges, with three separate legislations namely Central GST (CGST), State GST (SGST) and Integrated GST (IGST). It is understood that the CGST and SGST would together be levied in intra-state supplies and IGST would be levied in inter-state supplies. IGST is composed of SGST and CGST. At this stage, it is uncertain how place of supply rules for services will interplay with the levy of IGST on supply of services. As the draft legislation of GST has not been placed in the public domain yet, it remains to be seen whether the intricate anomalies present today will be suitably addressed in these legislations.
During the question hour in the Lok Sabha, the finance minister did seek to assuage the fears of the states and reiterated how GST will bring a uniform tax structure in the country with minimum cascading of taxes and seamless supply of goods and services, leading to a boost in the economic growth. The GST regime propounds minimum exemptions and subsumes almost all the central and state levies, with minimum exceptions.
It is expected that the implementation of GST would also add buoyancy to the economy as today the states do not have the power to tax services, and would gain such power in the GST regime. On this account, it is expected that the revenues of all the states will grow. A contributory factor is also the proposed revenue neutral rate (RNR), which is currently debated to be at approximately 27%. Although the finance minister has clarified in the Lok Sabha that this rate would be diluted as it is quite high, the prerogative to decide the appropriate rate lies with the GST Council. Accordingly, we would need to wait and watch as and when the rate is decided by the Council.
The states have been resisting implementation of GST in India on account of loss of revenues from taxing goods, especially the manufacturing states. As GST is a destination-based consumption tax, revenue from SGST/CGST/IGST would accrue to the consuming states and, therefore, the states where the manufacturing has been done or where the transaction has originated would suffer tax revenue loss. To counter this issue, a compensation clause has been inserted in the Constitution Amendment Bill, as per which the states would be adequately compensated for a period 5 years once GST is implemented.
An important aspect of the Constitution Amendment Bill is also the clause that envisages levy of additional tax of 1% on inter-state transactions. Going against founding principle of GST, i.e. destination-based consumption tax, the additional tax of 1% is envisaged to accrue to the state where the supply originates. Being no different in nature than CST, the finance minister did not afford any explanations on the cascading effect of this levy of 1% apart from the fact that it is meant to compensate the manufacturing states. The levy of additional tax was offered as a part of a reconciliation package to the manufacturing states that opposed GST that had concerns of revenue loss. It is expected that this levy would have a significant impact on smooth supplies of goods as envisaged in the GST regime.
Considering the three GST legislations, comprising CGST, SGST and IGST, are yet not made available for scrutiny, it is a wait-and-watch game with respect to addressing the anomalies of the current multi-dimensional indirect tax regime. The Bill echoes the finance minister’s assurance on cooperative federalism by allowing two-third membership to the states in the GST Council. However, the real impact of this composition on maintaining fiscal autonomy needs to be seen.
Given the majority with which the Bill has been passed by the Lok Sabha, the keenness of the central government to implement GST in the country by April 2016 is apparent. The fate of the Bill in the Rajya Sabha would determine the implementation of GST from April 1, 2016.
With inputs from Poonam Harjani, director, and Shreya Tripathi, manager
The author is leader, Indirect Tax, BMR & Associates LLP