The introduction of GST will not only remove the negative effects of cascading taxation but also address the other major distortion in the indirect tax system as it stands, which discriminates against domestic producers and gives preference to imports by exempting them from consumption taxes. Removing this anomaly is especially important, as India has already concluded a few free trade agreements, which will now significantly encourage more zero duty imports. In fact, India is all set to become the leading FTA hub in Asia.
India?s efforts to neutralise the indirect tax bias against domestic producers have so far been limited to the levy of countervailing duties, additional duties and extra additional duties. While countervailing duties on imports are meant to compensate for the excise duty levied on domestic producers, the additional duty sought to neutralise the disadvantage of the state taxes, like the sales tax that are levied exclusively on domestic producers. But the impact of these measures has not been very encouraging as the customs duty exemptions continue to go up each year. Most recent estimates show that customs collection forgone has gone up from Rs 1,53,593 crore in 2007-08 to Rs 2,25,752 crore in 2008-09. And this has pushed up the share of the customs revenue forgone from 26% to 36% during the period.
And the additional duty rates levied to compensate for the bias against domestic products is also too low. For instance, while the special additional duty (SAD) on imports charged by the Centre in lieu of state taxes is at a flat 4%, the VAT rate on the products varies from zero to 12.5% or even higher.
And now the effort to levy additional duty and extra additional duty to compensate for the disadvantage faced by the domestic industry on account of state taxes is facing greater resistance from trading partners. For instance, just a few years ago, the US raised a dispute at the WTO over the levy of such duties on liquor and other agriculture and industrial products, which ruled that the additional duty and extra additional duty are inconsistent with Article 11:1 (b) to the extent that they result in imposition of duties which are in excess of the limits set in India?s Schedule of Concessions. Such disputes will only increase in the coming years.
The introduction of GST would go a long way in removing these anomalies if the new tax would shift from the origin to the destination principle as recommended by the task force on GST set up by the 13th Finance Commission. With the implementation of this international norm, the tax base shift from the value added through domestic production to the value added on all products consumed domestically would ensure that both domestic and imported goods & services are taxed at the same rate. The report goes on to suggest that both central GST and state GST should be levied on all imports, irrespective of whether the products are manufactured in the country or not.
Providing such a level playing field on the tax front is of critical importance as India moves forward with greater liberalisation on the trade front through free trade agreements. Improvements in the competitiveness of the economy and the growing confidence of industry have encouraged India to tie up new FTAs with a growing number of big economies. The success of the early agreements with smaller economies like Nepal and Sri Lanka has encouraged the country to tie up with larger economies like the Mercosur countries and Singapore. So far, the biggest stride has been the Asean FTA, which has forced domestic producers to face serious competition for the first time.
The country has chalked out an even more ambitious plan by starting negotiations with much larger economies. The most important among them are the China-India Regional Trading Arrangement, India-European Free Trade Agreement, India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement, India-Egypt Preferential Trade Agreement, India-Korea Comprehensive Economic Partnership Agr-eement and Japan-India Economic Partnership Agreement.
Other new FTA proposals include the India-Australia Free Trade Agreement, India-Indonesia Comprehensive Economic Cooperation Arrangement, India-Israel Preferential Trade Agreement, India-Indonesia Comprehensive Economic Cooperation Arrangement and the India-Russian Federation Comprehensive Economic Cooperation Agreement.
A positive conclusion of these deals would further open up the domestic economy to imports and potentially worsen the impact of the current indirect tax policies that discriminate in favour of imports. The destination-based GST favour-ed in the task force report will remove this anomaly and provide a more level playing field for domestic producers.
?p.raghavan@expressindia.com