The Goods and Services Tax (GST), the most critical tax reform that India has been longing for, is stalled in the Rajya Sabha, where the ruling political party lacks majority. Despite all its efforts, the government failed to get the Opposition’s nod in the Winter session of Parliament which ended in December. Nonetheless, the government seems undeterred and continues to hold a positive demeanour. The release of multiple process reports—including the CAG report and the Goods and Services Tax Network (GSTN) report—stands testament to the government’s commitment to introduce GST as soon as possible.
While the original time-line of April 2016 is now far from being a reality, the government is likely to make serious attempts to push for the clearance of the Bill in the Budget session, beginning later this month. Even after the successful passage of the Constitutional Amendment Bill in the Rajya Sabha, the actual roll-out of nationwide GST will take its time, considering other critical steps required such as the formation of the GST Council, the approval of the CGST Bill through a simple majority in both the houses of Parliament, and the approval of SGST Bills in respective state assemblies.
During the third Union Budget of the NDA-led government, the industry expects significant amendments under the current indirect tax regime, which will pave the way towards a smooth transition to GST from the next fiscal year.
Increase in service tax rate and threshold limit
In December, a key panel on GST headed by the Chief Economic Advisor released its report, suggesting the revenue neutral rate (RNR) to be in the range of 15% to 15.5%, and to be converted to structured rates. The lower rate of GST on goods of special importance has been proposed at 12% and the standard rate at 18%. In addition, a higher rate of 40% has been proposed for sin/demerit goods such as luxury cars, tobacco products, aerated drinks, etc, and a special rate of 2-6% has been suggested for precious metals.
In line with the recommended GST rate structure, there is a possibility that the government increases the service tax rate from the current level of 14.5%.
The increase in the service tax rate will put additional burden on the taxpayers, especially in view of the uncertainty surrounding the time-lines on actual implementation of GST. In order to ensure that the taxpayers are not overburdened and to give respite to smaller taxpayers, it is expected that the government will increase the threshold exemption of service tax from the current level of R10 lakh. On one hand, an increase in the threshold exemption limit will keep small businesses outside the purview of service tax net, and on the other hand this increase will substantially ease the compliance burden on the tax authorities, permitting them to focus on larger taxpayers.
The government should also consider reducing the rate of Central Sales Tax (CST) from the current 2% to 1%, and reduce the tax cost on inter-state sale of goods.
Rationalising current tax concessions/exemptions
The proposed GST regime, which will subsume most central and state-level taxes, is expected to have a single unified list of concessions/exemptions as against the current mammoth exemptions and concessions available across goods and services under the tax regime. Therefore, it is expected that the government will prune down or withdraw some of the existing set of exemptions or concessions to take a step closer towards GST.
Amendments in CENVAT credit rules
The GST regime eventually seeks to have a single rate of tax both for goods and services, with seamless credit mechanism without any distinction between goods credit and services credit. The current CENVAT credit rules are restrictive and ambiguous; even the eligibility criteria for availment of credit vastly differs for manufacturers and service providers. It is expected that the government brings necessary legislative changes in CENVAT credit rules such as allowing credit on all expenses related to business without any corresponding nexus with output service/goods, and aligning the provisions for admissibility of credit on inputs/capital goods/input services so as to bring parity in credit availment across goods and services.
In addition, one of the industry expectations is that the recently introduced Swachh Bharat Cess (SBC), which is currently a cost in the hands of taxpayers, should be made CENVAT-able to maintain seamless credit chain.
Such a move will reduce the current level of litigations and provide a boost to the Make-in-India campaign, while also neutralising the effect of any increase in tax/duty rates.
IT preparedness for successful implementation of GST
IT infrastructure will be one of the basic requirements for successful implementation of GST. Based on the state government’s experience under VAT, it is evident that without an efficient e-governance, it is not possible to administer VAT regime effectively. The input tax credit, which is an important aspect under VAT, is difficult to monitor without a fully development computer system. A closer look at the proposed GST model suggests facilitation of a robust IT system with all necessary information for availment of credits available on the IT platform. In the upcoming Budget, the government should run a pilot project wherein the dealers can choose to avail credits based on the details uploaded by their vendors on the government tax portal.
It is now well accepted that due to logjam in Parliament regarding the passage of the Constitution Amendment Bill, uncertainty continues to hover in the minds of taxpayers and global investors. Having said this, it is highly probable that the government will make amendments in existing regulations to prepare enough to face the biggest transformation in the history of indirect taxation of India.
(Assisted by Kishore Kumar and Vidushi Gupta)
The author is partner, Indirect Tax, PwC India