While goods and services tax (GST) will leave the tax incidence on a vast majority of goods unchanged or lower, revenue secretary Hasmukh Adhia believes the enhanced input tax credit (ITC) flows will result in lower tax liabilities.
While goods and services tax (GST) will leave the tax incidence on a vast majority of goods unchanged or lower, revenue secretary Hasmukh Adhia believes the enhanced input tax credit (ITC) flows will result in lower tax liabilities for at least a section of industry. Adhia tells KG Narendranath and Sumit Jha bringing real estate under the GST may not add much to the tax base but would be a significant step against black money.
How much will the GST base expand if real estate is brought under the tax?
We will have to see but I don’t think it will make a big difference. Inclusion of real estate is more important in the context of ameliorating the black-money content in that business. Even in the GST regime, states will continue to charge a registration fee and a stamp duty on property registration. There is a case for levying GST on sale of land and other immovable property in the interest of letting free flow of input tax credit along the GST chain.
To gauge the potential of such a move on the tax base, one must take into consideration the fact that works contracts are even now subjected to VAT and service tax. There will be GST on them from day one and this is part of the base computed. Currently, if a company gets a building constructed by a contractor, then it will have to pay service tax on the works contract fee.
People who pre-book apartments from builders also pay VAT and service tax on the works contracts. However, if a firm or an individual purchases a readymade building, then no VAT/service tax is paid at present as land and buildings are not taxable supplies. So there is a disparity here. This is what will likely get addressed and the implications of such a move for the tax base and revenue estimates are unlikely to be substantial.
You have said GST rates would be closer to current combined centre-state tax rates in a vast majority of cases. But with a broader tax base and its potency to greatly mitigate the cascading of taxes GST was meant to allow lower rates… The rates could be the same but GST will enhance the benefit of input tax credit for businesses. Currently, a business-to-business taxpayer paying VAT, is not given credit for the excise duty content in the goods, as the Central VAT and state VAT chains are not integrated. The GST will combine the two streams and allow seamless input tax credit.
Under-utilisation of tax credit adds to costs, blunting competitiveness. If the output is taxed at a rate lower than inputs, taking full credit of the input tax paid becomes difficult if the value addition is not large enough to cover the difference. For example, a textile unit, which pays a 6% tax on its products but uses a chemical which attracts a 12% levy, will find it tough to get full ITC.
In the GST system, this issue would be resolved as everyone can get a full refund of input taxes. GST will effectively address the problem of inverted duty structure, except in the context of the basic Customs duty, which will remain outside GST. Also, while credit on countervailing duty on imports is not available now, the corresponding tax (integrated GST) will be fully creditable.
Similarly, GST paid on capital goods could be recovered in a year –as against 2-3 years taken to recoup customs/excise duties on them and would improve cash flows. For instance, an airline company could get full credit of the integrated GST paid on import of aircraft against its output (service) taxes. So the cascading impact might be limited to petroleum products and electricity duties being outside.
You have said GST won’t result in “rate shocks” or alter the fortunes of industries…
We don’t want to see any rate shocks and will watch the effect of GST on prices. While fixing the rates for items in the Consumer Price Index basket, we will be extra vigilant so as to ensure rates don’t go up. We are pretty sure GST won’t be inflationary.
Which are the items that could still see rate hikes?
Mainly services, which will move to 18% tax slab (from 15% now). In case of those few services which currently get abatement benefits, the rates, however, will be either 5% or 12% depending on the rates of abatement. Given the way GST is now designed many sectors and most certainly producers of oil and gas and solar power will face a situation where inputs are within GST but not all or some of their output. This could complicate the computation of input tax credit (ITC), besides raising chances of the non-availability or under-utilisation of credit. There is an entire chapter on the formula for input tax credit distribution and we hope it is pretty clear. For instance, what portion of input tax paid by an oil marketing company can be used to meet its output tax liability on LPG can be computed using the formula. The Place of Supply Rules, in the case of inter-state supplies, is also clear. We are open to discussing issues faced by sectors like solar power generators.
With integrated GST (a washout tax) replacing the central sales tax (CST) on inter-state sales and CVD/SAD on imports, how exactly will the system work?
Integrated GST (I-GST) is not a separate tax; it’s only an interim tax. What one essentially has to pay are the CGST and SGST (CGST and UT-GST in Union Territories). Of course, I-GST is paid when goods and sold/transferred from one state to another but when the goods are used in the second state, full I-GST credit can be taken to pay GST (CGST and SGST) to that state. (The state which collects I-GST transfers it to the one where the goods are moved using the GST’s IT network).
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If goods moves across more than two states, IGST paid at the first inter-state transfer stage can be used to pay I-GST for the second such transfer and so on. However, if a resident of one state buys a product in another state, takes it to his own state and consumes it, then IGST becomes equivalent of GST and adds to government revenue.
Is there any change in Rs 8.8 lakh crore tax base envisaged by the Arvind Subramanian panel following the deliberations at the GST Council meetings?
The base is the same, given the CEA had computed the base without petroleum products and real estate. We will know the exact value of transactions under GST only after it is rolled out. The revenue estimates will be clearer once the rates are fixed. The GST Council has estimated a 14% annual growth over the 2015-16 base for states and they will be fully compensated if revenues fall below the threshold in the first five years.
When will the five petroleum products and electricity, which are left out, come into the ambit of GST?
These issues will be reviewed every year. It was a conscious decision not to include electricity because states aren’t comfortable with taxes on it collapsing into GST.
There is a fear that taxes paid on a reverse-charge basis would hamper the business of unregistered (exempted) suppliers and increase the compliance burden on registered entities purchasing goods and services from them.
On the contrary, it will encourage more people to register for GST voluntarily. Even exempted suppliers can register to avail of input tax credit facility. Even if an entity is below the threshold of Rs 20 lakh/annum revenue, he can register. Had the tax collected at source (TCS) provision was not there, then a registered entity buying goods from an unregistered dealer would have paid full tax, without recovering it from the latter. That would have caused problems for the unregistered dealers too in terms of loss of business.
However, the TCS facility allows a registered unit to pay the tax on reverse charge basis and utilise it against its output tax liability. Since the registered entities are anyway filing his returns, their compliance burden is not going to increase much due to this measure.