The new GST: A halfway house

Dated 24th December, 2014

From a roadblock during the UPA regime, the incessant efforts of the BJP government have finally paved way for the introduction of the goods and services tax (GST). This would, no doubt, be a major reform in the existing indirect tax system of the country.

With a view to introducing the GST, Union finance minister Arun Jaitley has introduced the Constitution (122nd Amendment) Bill 2014 in Parliament. The new tax would be implemented from April 1, 2016. Both the government and the taxpayers will have enough time to understand the implications of the new tax and its administrative nuances.

Unlike the 119th Amendment Bill, which lapsed with the dissolution of the previous Lok Sabha, the new Bill will hopefully see the light of the day as it takes into account the objections of the state governments regarding buoyancy of the tax and the autonomy of the states.

It proposes setting up of the GST Council, which will be a joint forum of the Centre and the states. This council would function under the chairmanship of the Union finance minister with all the state finance ministers as its members. It will make recommendations to the Union and the states on the taxes, cases and surcharges levied by the Union, the states and the local bodies, which may be subsumed in the GST; the rates including floor rates with bands of goods and services tax; any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster etc. However, all the recommendations will have to be supported by not less than three-fourth of the weighted votes—the Centre having one-third votes and the states having two-third votes. Thus, no change can be implemented without the consent of both the Centre and the states.

The proposed GST would be a single levy. It would aim at creating an integrated national market for goods and services by replacing the plethora of indirect taxes levied by the Centre and the states. While central taxes to be subsumed include central excise duty (CenVAT), additional excise duties, service tax, additional customs duty (CVD) and special additional duty of customs (SAD), the state taxes that fall in this category include VAT/sales tax, entertainment tax, octroi, entry tax, purchase tax and luxury tax. Therefore, all taxes on goods and services, except alcoholic liquor for human consumption, will be brought under the purview of the GST.

Irrespective of whether we currently levy GST on these items or not, it is important to bring these items under the Constitution Amendment Bill because the exclusion of these items from the GST does not provide any flexibility to levy GST on these items in the future. Any change in the future would then require another Constitutional Amendment. From a futuristic approach, it is prudent not to confine the scope of the tax under the bindings of the Constitution. The Constitution should demarcate the broad areas of taxing powers as has been the case with sales tax and Union excise duty in the past.

Currently, the rationale of exclusion of these commodities from the purview of the GST is solely based on revenue considerations. No other considerations of tax policy or tax administration have gone into excluding petroleum products from the purview of the GST. However, the long-term perspective of a rational tax policy for the GST shows that, at present, these taxes constitute more than half of the retail prices of motor fuel. In a scenario where motor fuel prices are deregulated, the taxation policy would have to be flexible and linked to the global crude oil prices to ensure that prices are held stable and less pressure exerted on the economy during the increasing price trends.

The trend of taxation of motor fuel all over the world suggests that these items should not be used merely for raising resources. These items must be taxed according to the principle of ‘green taxes’. Therefore, the trend is to bring these items first under the GST and then levy additional taxes on them according to the quantum of pollution emitted by the vehicles. Keeping this in view, it seems to be a rational decision to put these items under the GST with zero rate. The levy of the existing taxes by the states and the Centre on petroleum and petroleum products, i.e. sales tax/VAT, CST and excise duty only, will continue in the interim period.

Both the Centre and the states will simultaneously levy GST across the value chain. The Centre would levy and collect Central GST (CGST), and the states would levy and collect the State GST (SGST) on all transactions within a state. In addition, the term ‘services’ is exhaustively defined as ‘anything other than goods’. This will not have any interpretational problem. The GST being a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming state.

The GST rates will be uniform across the country. However, to give some fiscal autonomy to the Centre and the states, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.

The Centre will compensate the states for loss of revenue arising on account of implementation of the GST for a period up to five years.

However, the compensation will be on a tapering basis, i.e. 100% for the first three years, 75% in the fourth year and 50% in the fifth year.

The interstate taxation on supplies in the course of interstate trade or commerce shall be levied through a destination-based integrated GST (IGST). It will be collected by the government of India and its yield will be apportioned between the Union and the states on the basis of the destination or in the manner as provided by Parliament by law on the recommendations of the GST Council. And, for this purpose, the supply of goods or of services, or both in the course of import into the territory of India, shall be deemed to be supply of goods or of services, or both in the course of interstate trade or commerce.

In spite of all the favorable features of the GST, it introduces the anomaly of having an origin-based tax on interstate trade. It proposes to levy a non-VAT able Additional Tax of not more than 1% on supply of goods in the course of interstate trade or commerce for a period not exceeding two years, or further such period as recommended by the GST Council. While this seems to be taking care of the revenue loss to the producing states and the quantum of compensation the Centre has to pay, the existence of origin-based interstate tax along with the GST makes the reform a halfway house.

(This article is published in The Financial Express on 24th Dec, 2014)