Baby steps to GST
Dated 16th March, 2016
The Budget has taken a number of small steps in the direction of a unified goods and services tax. It has brought exempted categories into the tax net and streamlined procedures. The first is particularly important if the standard rate of GST is to be in the region of 18 per cent, against the present norm of 25 per cent on most goods (12.5 per cent excise and the rest as State-level VAT) and 15 per cent on services (only levied by the Centre). As a result, readymade garment makers and jewellers have been brought under the excise net — they can either opt for a low rate of duty with no input credit or a higher rate of 12.5 per cent with credit built in. This dual system should be seen as an interim incentive, as the basic idea underlying GST is to create a comprehensive tax credit system. Applying a sort of presumptive tax of 30 per cent on builders and tour operators, against a range at present, will work to the advantage of both assessees and the tax administration. Starting this time with senior advocates, the provider of services, and not just the recipient, will have to pay service tax. These are moves in the right direction. However, the rates (with their break-up into Central and State levies) can be standardised only after the Centre and States agree on the exempted list and compensation for transition in the case of manufacturing States in particular — since GST is a destination-based levy.
Even though a consensus may take time in coming, the Budget has focused on how GST will pan out on the ground. A change to ‘Rule 6’ on Cenvat credit will aid manufacturers using both taxable and exempted raw materials. The new norms will allow producers to claim more input credit than at present by creating three input baskets — for exempted goods, taxable goods and a common one, respectively — against the existing practice of lumping all inputs into a common basket and applying a proportional rate. The Budget has also introduced an annual return for service tax (now, half yearly) for those above a certain turnover threshold, making tax assessment easier for the authorities. On the excise front, 27 returns have been reduced to 13 — 12 monthly returns and one annual return.
With the systems for GST gradually falling into place the onus is on the political class to expedite the transition. There can be no case for a separate non-VATable levy, akin to the existing central sales tax. The Fourteenth Finance Commission award seeks to address revenue concerns of the States. But the Budget should not cut back on its own untied transfers to offset the impact. If compensation for manufacturing States has to be worked out, it should be kept out of the GST model. GST has an important role to play in easing supply bottlenecks. More than baby steps are required to make it a reality.
(This article is published in The Hindu Business line on March 13, 2016)