Dr Parthasarathi Shome, has had an intense involvement with the finance ministry as advisor to the minister, in the planning and roll out of the country-wide VAT. The tax maven, who has advised on critical changes in the tax policies of a huge swathe of countries, including Brazil, was most recently the chief economist at the UK government?s revenue and customs office (HMRC), before taking over as Director and Chief Executive at Icrier. In a chat with Subhomoy Bhattacharjee, Shome describes why he is uncomfortable with the April 1, 2012 deadline for introducing the GST and DTC. Excerpts:
The union cabinet has cleared the constitutional amendment bill to introduce GST this week. What is your take on it?
The Bill will also sail through Parliament, I am sure, and then move on to becoming an Act soon. To me, however, the concerns of fiscal federalism and the questions of the balance of veto power by the Centre that are now being debated are less important than the need to get the structure of the GST right. The first set is important, no doubt. However, at this point, perhaps, even more important is the issue of the structure of the new Act, especially, in what ways we are improving the structure of VAT.
There are three or four points at which the VAT, for instance, cascades. There is the way in which the state VAT is calculated where the cenvat (central value added tax) comes in at the base. There is no offset credit for that. Similarly, the other one is the central sales tax, which also gives no tax credit for sales within the state. Then, there is taxation of services, for which there is a credit mechanism in central excise but not one against the state-level VAT.
Plus, there are some non-cascading problems too. These need to be sorted out. The exclusion of taxation of petroleum products from the entire VAT structure is a major lacunae. It is not a question of taxation of these products, but the chain should have been integrated within VAT. As it stands, this entire information chain is now lost.
So, looking at all these structural aspects, one feels the implementation of GST is going in a direction quite different from the global best practices. I feel adherence to those practices is much more important in the evolution from VAT to GST.
You are saying it would have been better to have delayed the timeline a bit more?
The major challenge is to structure a GST that runs close to international standards, rather than concentrating on the subject of cessation of powers of the state governments. Mind you, those are very important?for instance, the one on the central government?s veto power on which the states had justifiable concerns. But now I understand they have moved away from this, which is a very good development. I agree these are important, but the structural issues are even more important.
The states have complained about tax buoyancy reducing and the impact of the Sixth Pay Commission.
I think the understanding part is a bit exaggerated. But in order to arrive at the right structure a delay might have been better to get an improved solution. For instance, ironing out the problems on petroleum taxation needed to be done as well as sorting out the cascading issues. As far as the Pay Commission issues are concerned, they were always there.
The issue of whether the GST will be worse than VAT in terms of revenue is something that the states have bargained on pretty well to save their revenues. I remember during the VAT negotiations earlier, they had bargained and got R5,000 crore towards revenue loss on account of the switchover to VAT and then for a small drop in percentage of central sales tax they had got another R12,000 crore. So, the revenue fears are a bit exaggerated. Enough deliberations have completed on the sovereignty part and the states have more or less come out quite okay.
What about the disquiet on the IT preparations?
This is important. The reality of tax administration is not as automatic as one thinks. There are daily complications, and each state has its own IT structure, which is often different from others. In the finance ministry, whenever one wanted to be specific about these, I found these troubles very difficult to pin down as one was not able to get full information.
The other is a somewhat Indian trait that we do not deconstruct the post-introduction stage of a policy. Not much has been done post-VAT and without that we are jumping into GST. By now, a lot of analysis should have been done. This is unreflective of global practices. What is the impact of VAT, the loss of revenue? What has happened to the customer, i.e., the tax payer? Have business decisions become more seamless, has resource allocation improved? Have refunds become easier to administrate, and have zero-rating of exports improved? A lot of things can be done like statistical research, probit analysis etc. All these are usually done by countries as part of a post-reform analysis.
Is this reluctance because many of the institutes are state or central government-funded?
From what I understand, enough money comes from non-government sources as well, so funding is not a problem. I think we still get away in India without using statistical analysis as an intrinsic tool to form policy. In several countries, before making a change in tax measures, these are analysed and presented to Parliament, especially the impact on those affected. There is nothing like that in India.
In the original DTC, MAT was based on your recommendations (on assets). But after the dilutions, how useful is it?
Many fundamental changes were made as part of the original DTC that I worked on at the finance ministry. I hope those will not be allowed to peter out. But, my fear is if you just make a presentation, change the language but smoothen out the fundamental changes, then a scribe could have written it.
What about the reforms on MAT?
It is not well understood as to how MAT stabilises corporate tax revenue sources to give a stable revenue. MAT is actually a tool to improve corporate tax revenue structure. If you look at the distribution of corporate tax contribution by companies in India, it is very skewed. The effective corporate tax for small corporate firms is the highest. Then it becomes a U-shaped curve for bigger firms. Then there is a small relative increase, mostly for firms from the financial sector.
We had removed the surcharge from the smaller firms to reduce the U a little bit. I suppose it?s still U-shaped. So MAT attempts to use a presumptive tool to smoothen the U. If you have invested in assets in the medium term, you must ensure a minimum rate of return?a 40% tax rate on a 5 % return on assets (assumed) gives you a 2% minimum tax rate based on your gross assets. There are enough carry-forwards and carry-backwards built in to ensure you always pay 2% tax rate on your assets. Over 5-10 years, this flattens the skew in corporate taxes.
