By K R Girish, Partner, B S R & Co and National Leader Indirect Taxes
With a majority Government back in power, India is all set to
transition to a unified indirect taxation regime in the form of GST.
The prospect of a regime with uniform taxes across states which is
supposed to remove cascading of taxes with simplified compliances, has
made the industry both excited and anxious about the timely transition
to GST.
Although the Finance Minister recently reaffirmed the original
timeline of April 2010 for GST implementation the enterprising factor
argue that the proposed implementation may have to be deferred by
another year. Political reasons apart, the time required to get the
entire implementation infrastructure in place could trigger the delay.
This may not necessarily be dire news, as it gives the Government
sufficient time to iron out various structural issues that would
accompany the transition.
A lot of deliberation has already happened at various levels on GST,
and the focus so far has been primarily on the broad contours, such as
a concurrent dual GST system, uniformity of rate at State and at the
Central level. Needless to say these are the building blocks of any
tax regime, and any flaws in the overall design would be a nightmare
for all stakeholders. Though the attention to the basics is well
justified, it does not, in any manner, undermine the need for
addressing the granular details of GST implementation, such as the
taxable event, place of supply rules, cross credit mechanism, taxable
value, etc. Each of these would have a significant bearing on
taxpayers and hence, need to be thought-through.
For instance, currently Excise duty is levied on the manufacture of
goods even though it is payable at the time the goods are removed from
the factory. Further, Service tax is levied on the provision of
taxable services, and is also payable on advance payments. As for
other levies such as VAT, the taxable event is not linked to the
receipt of consideration. Under GST, there would be a common taxable
event and triggering events for deposit of tax. In most other
countries, GST is applicable on supply of goods or services. A similar
common event (i.e. supply, as opposed to manufacture/ receipt of
consideration) would need to be devised for India. Further, the fate
of existing registrations and compliances associated with the other
existing events (e.g. excise on manufacture) would also need to be
decided.
Taxable base is another aspect that merits consideration. Currently,
while the taxable consideration under most levies is derived from
transaction value, the specific valuation provisions differ across
levies. For instance, consideration received in kind (e.g. goods) is
not liable to VAT, whereas the service tax laws provide for special
valuation principles in such cases. Also, unlike Excise, under
service tax and most VAT laws there aren't any special provisions for
valuation in case of related party transactions. Thus, the valuation
mechanism under GST would have to be devised taking into account the
divergent provisions existing today for the different levies.
It appears that the Empowered Committee has suggested discontinuance
of location and industry based exemptions, and conversion of existing
exemption schemes to cash refund schemes after collection of tax.
However, there is no clarity on how some of these incentives would
continue to be relevant for the companies after transition to GST.
For instance, as discussed earlier, if the taxable event of
manufacture (for levy of excise duty) is replaced with supply of goods
under GST, then the existing excise exemption in States like Himachal
Pradesh, Jammu & Kashmir, etc. will become redundant. Therefore, the
Government would need to come out with a scientific basis of reworking
such benefits in alignment with the proposed GST regime.
Similarly, if the Central Sales Tax (CST) is phased out and replaced
with some form of destination based tax, then the fate of CST existing
exemption/ concession, being offered by most States to companies
setting up new manufacturing units or undertaking substantial
expansion, will have to be revisited. It may be noted that the MoUs
signed by some of the companies recently with the State agencies
oblige the latter to protect the incentives upon transition to GST!
However, the mechanism for making good the same has yet to be
deliberated upon.
On the administrative front, while the authority to levy/ collect tax
may be allocated between Center and States as part of the blueprint of
GST, extensive time and resources would also need to be spent on
training, organizational restructuring, etc. Successful
implementation would also require lot of interpersonal skills, in
order to change the mindset of the authorities at the ground level and
help them embrace the new regime.
The issues highlighted in this article are just the tip of the
iceberg. There are several other important issues that are
fundamental to the GST framework, and are yet to be deliberated with
all the stakeholders. These include cross credits between Central and
State GST, coverage of sectors (such as hospitality, entertainment,
legal) which currently have limited exposure to service tax/ VAT,
treatment of works contracts, etc. While it is important to stick to
and work towards the proposed timeline of 2010 for GST implementation,
inadequate attention to the details of GST framework cannot be used as
an excuse to justify the implementation.
To conclude, a comprehensive, well thought out GST regime is far more
important than a hastily introduced GST regime that requires extensive
patchwork for every issue encountered ! Industry will be more than
willing to wait for another year where the draft of the law is
thoroughly debated and then introduced, no hasty action please !!!
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