The stage is set for the finance minister to unveil his first full-year budget and the expectations are of a truly bold and transformational budget with tax reforms that can galvanise investments, spur growth and create a transparent, non-adversarial tax regime.
With Make-in-India as one of the main policy thrust, this budget is expected to incentivise local manufacturing by addressing issues around inverted duty structure, tweaking custom duties to promote manufacturing in India and address issues around blockage of credits across the Cenvat chain.
But the most important reform for the success of Make-in-India would be the implementation of the much awaited Goods and Services Tax (GST) in April 2016. The tabling of the Constitution Amendment Bill in the last session of the Parliament was a good beginning, but its passage in both houses of the Parliament in this budget session would be crucial for timely implementation. A clear statement of intent by the finance minister in his budget speech on the passage of the bill would be clear signal of government’s intention to implement GST on April 2016.
The Constitution Amendment Bill (Bill) provides a macro overview of the potential GST structure and it is clear that we would start with a much less than flawless GST. In the spirit of cooperative federalism, the Centre has travelled more than halfway to cater to the states’ demands.
This is evident from the GST base envisaged with real property and alcohol for human consumption outside the Bill and petroleum, though in, to be brought into GST from a date to be decided by the GST Council. It is ironical that in the backdrop of a political discourse on black money and corruption, we have decided to keep real estate and alcohol for human consumption out of GST base. The truncated base also means we may not have the ability to administer a low GST rate. Having said that, in my view, the rates of 27% (both CGST and SGST combined) will not be a reality from a political standpoint, and the pragmatic range could be a merit rate of 12% and a standard rate of around 18-20%.
The real red herring in the Bill is the proposed 1% origin-based additional tax which will not be part of the GST credit chain and will apply to supplies of inter-state goods. The fact that this would apply to supplies instead of sale of goods is an important factor. Though the origin-based Central Sales Tax (CST) will be subsumed, this proposed 1% origin-based additional tax will continue to apply on inter-state supplies of goods in the GST regime. When the Centre has promised a compensation scheme to states for 5 years for any losses under GST, it is hard to fathom why this compromise was agreed to. This 1% tax, as per our understanding, will apply to all inter-state supplies of goods including inter-company transfers without any credit and could potentially be more damaging than the existing CST of 2% on sale of goods, including any denial of credits companies suffer on inter-state stock transfers. Any form of inter-state supply of goods in a supply chain will attract this 1% tax leading to large amount of cascading. This needs to be amended as this would dilute the GST regime. The 1% tax is potentially for 2 years but can be extended beyond as recommended by the GST Council, which is worrying.
Even the concept of applying Integrated GST (IGST) on supplies including inter-company stock transfers is unique to India. However, IGST will be part of the GST credit chain and may only create a cash flow impact depending on the ability of a company to utilise IGST credit towards further sale in the chain.
Another important aspect that needs immediate attention is the creation of a formal forum where industry can interact periodically with law makers around draft GST law, place of supply rules and the compliance structure being contemplated for the GST network (GTSN). While there are interactions by sub-committee members on place of supply with industry chambers, the structure can be more formal and periodic.
It is important that industry, an important stakeholder, be given an opportunity to provide inputs in the law-making process across sectors for bringing out a draft law and set of rules which have clarity and avoid interpretation issues leading to litigations in the future. Some key sectors like telecom, IT, financial services, e-commerce would require deliberations to understand business models and devise appropriate treatment that reduce ambiguities. The GSTN design on compliance and IT architecture is another key area which needs understanding and therefore requires deliberations with industry. IT systems in companies will have to undergo huge changes with GST implementation and it is important they are aware of what is expected of them in the GST compliance ecosystem.
GST is one of the most significant tax reforms post-independence, but this tax trigger will actually create a business transformation across industry and will have touch points across finance, supply-chain, IT, accounting, compliance and other organisations. So, it is important that the GST roadmap is transparent and consultative for industry to prepare well in time and leverage its competitive advantage.
By Harishanker Subramaniam
The author is partner & national leader (indirect tax), EY.
Views are personal