GST, by another name
Dated 12th November, 2015
After the Bihar elections, the passage of the goods and services tax (GST) bill in the Rajya Sabha looks increasingly uncertain. In any case, the time available does not permit implementation of the GST from April 1, 2016. This impasse provides an opportunity for the Centre to initiate the GST incrementally by taking three steps. First, mimic the GST at the Central level from April 1. Second, rework the GST bill. Third, integrate the GST implementation experience from Malaysia. By doing so, the Centre can bolster the confidence of industry while signalling to the states its commitment towards the GST. The Centre is empowered to impose a Central GST by merging the excise and service tax regimes. To be sure, nothing prevents the Centre from virtually integrating these two taxes by making them mimic the GST.
Without comprehensively revising these laws, their levy can be made consistent with each other and the requirements of the GST through simple amendments by way of money bills and notifications. The various types of excises being levied today would need to be consolidated. The impact of this mimicry would be that a de facto Central GST (hereafter DGST) would be in place, providing tangible preliminary benefits to industry, while the two taxes retain their nomenclature.
Four important changes required for the DGST are identified below. First, excise duties applied today range between 1 per cent and 14 per cent. Service tax is applied at 14.5 per cent, with abatement up to 70 per cent being allowed for specified services like transportation and hotels. Thus, both taxes are effectively applied at multiple rates. It should be possible to put in place a three-rate structure — 1 per cent for precious metals, a concessional rate (say 4 per cent), and the standard rate.
The finance minister has recently announced his intention to phase out direct tax exemptions to the corporate sector. The budget documents estimate these exemptions at Rs 62,398 crore for 2014-15. The corresponding excise exemptions, on the other hand, are estimated at Rs 1,84,764 crore (three times the corporate direct tax exemptions and comparable to the total excise revenue of Rs 1,85,480 crore). If these indirect tax exemptions are significantly reduced (as is in any case required under a GST regime), the standard rate can be brought down appreciably. At the same time, the vestiges of specific rates in the excise regime need to be transformed to ad valorem rates.
Second, presently there is an asymmetry in the application of input tax set off between excises paid and service tax paid. Service tax paid can generally be set off against excise dues. The converse is not true: Excise paid is not always allowed to be set off against service tax dues. This asymmetry needs to be addressed so that excise duty and service tax are treated comparably.
Third, the excise tax base is determined through a positive list, while service tax depends on a negative list. Service tax, which was originally on a positive list basis, shifted to the negative list only in 2014. There is no reason why the excise also cannot follow suit, so that a consistent approach is adopted for the DGST.
Fourth, the Central government has in place a number of cesses on excise and service taxes to fund special initiatives. A cess is an anathema to the GST. The Centre may need to withdraw the cesses and seek additional resources by suitably adjusting the tax rate.
Malaysia implemented the GST on April 1 this year. Like India, it has had an overly extended debate on the GST since 2005. There is much to learn for India from this tumultuous Malaysian journey. The most significant lesson is the importance of undertaking a comprehensive information, education and communication programme on the GST directed at the tax department staff, trade and industry representatives and consumers, prior to implementation. In India, too, thorough and effective preparation is necessary to ensure that the DGST is implemented from April 1, 2016 and the GST is implemented from April 1, 2017.
(This article is published in The Indian Express on 12th Nov, 2015)