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GST: The taxman's perspective
December, 19th 2009

Mr. Pramod Chaudhary, Chairman, CII, Maharashtra State Council, Dr. Ajit Ranade, Chaiman, CII WR Economic Affairs, Mr. Prashant Deshpande, Mr. SM Kulkarni this is probably the first forum on which we have started a discussion on these lines.

The Confederation of Indian Industry (CII) and others have been asking me for the last one year to come and address such a conference because I have been fortunate or unfortunate in taking part in the original deliberation which started on goods and services tax (GST) for the last two years and there have been some working groups. There was a working group on service taxes, how the service tax principles will be incorporated, I was a convener of that and then there was an Integrated GST (IGST) group so I was involved in that as well. For the first time now I am officially speaking on all the issues that have been deliberated for the last two years.

I would also like to mention here that all issues are have not resolved yet, in fact some of the views which as Maharashtra representative, I have been expressing have not come in the first discussion paper. You may have also noticed that although empowered committee consist of state finance ministers but government of India representatives are also present in that. There is an advisor of finance minister, the additional secretary is present, the joint secretary is present and they have been present in all the deliberations but when paper came out; the paper came out as the first discussion paper of empowered committee of state finance ministers and not a joint paper. So that indicates that there are some issues today between GIO and the states also. I will go into each of these issues. I am going to give you my opinion, Maharashtras opinion on these issues.

In fact there was a deliberation on whether this paper should be brought out or not when a full consensus is not there yet then what Mr. Asim Dasgupta said was that lets open it to the public and some of the issues will probably get resolved when you people raise your voice. So that is another purpose with which I am here today. I am going to tell you my views in your deliberations you could probably form some views of your own which need to be conveyed to government of India and the empowered committee of finance minister.

GST is just a VAT

GST as you are aware is just value added tax (VAT) because when made a presentation to the chief minister this was an issue which I was asked - In three years you have somehow setup VAT and now you are talking about GST. I told them GST is VAT but two major more taxes are coming in but every other operation is like VAT.

So everything which we have done for VAT purpose is already there except there will be certain reforms in it. I want you to look at the last line of the slide; this is a major difference which is coming up in the GST, which probably is not there in the discussion paper. Sales tax and VAT for interstate transactions today were origin based that means when the tax is going it is the original state. The seller state tax rates which were getting incorporated, seller was collecting the tax for the interstate transaction part whereas in GST it is a destination state which is going to get the taxes, a major change on which we have had a lot of fights among the States.

GST and rates

Once the cascading goes the rates have to come down. Second reason for the rates to come down finally would be the widening of the tax base because service tax has a separate base, goods have today a separate base when they combine together the base becomes widened also whatever intelligence Centre has and whatever intelligence the State have when that also gets combines together the base widens.

Similarly simplify tax structure then possible reduction in prices finally this is what Mr. Kelkar has said and Mr. Satya Poddar (Tax Partner, Ernst & young) has also written 1.4% of gross domestic product (GDP) growth.

What does 1.4% amount to?

It amounts to more than Rs 50 lakh crore of growth in the economy with this coming in. Central taxes which are getting subsumed excise mainly central excise and its related taxes; service tax, additional customs duty, the CVD is part of this and all its surcharges and cesses these are the central taxes which are coming in. What are the State taxes which are getting into this VAT, entertainment tax, luxury tax, taxes on lottery, betting and gambling - State cesses and surcharges as along as they relate to goods and services; entry tax not in lieu of octroi; now this question of octroi when we discussed this octroi issue; this octroi issue does not remain in any other state. So they said that if we include octroi in this the Revenue Netural Rate (RNR) goes up tremendously. So Maharashtra was told that it is your problem, you have to solve it and it will not be part of GST because originally we had envisage that it will be part of GST but then it is just left in one State and on Octroi, I believe some work is going on separately which I am not dealing with that what is to be done about Octroi.           

Will Central Sales Tax (CST) be abolished?

CST will be abolished on the goods and services which are part of GST, whether the CST will continue on the balance is an issue. Then the taxes which are not getting subsumed under GST, customs duty, excise on tobacco, petroleum products this is very-very important. Petroleum is not part of GST. Excise duty on liquor, octroi, sales tax on petroleum products, natural gas is still undecided, stamp duty and taxes and duty on electricity. Purchase tax we have not been able to get consensus. We all wanted purchase tax to be part of GST. States like Haryana, Punjab have been opposing it. They are saying that their major contribution is coming from purchase tax. So we are trying to find a solution to that.

Some salient features of this GST model. A dual GST structure, we are aware and economist have also been telling us that ideally it should be one agency which should be dealing with it but we have a federal structure and there was a question of autonomy, there were other issues so therefore finally this double GST structure was adopted. Central Goods and the Services Tax (CGST) is the central GST which will be administered by centre, State Goods and Services Tax (SGST) with states.

This is an issue to third line, centre and state to have concurrent jurisdiction over entire value chain and for all tax payers. I have been personally opposing this. That what we have been suggesting is that one dealer should not have to go to more than one authority. If you give that dealer to the state then the state should be able to collect both the taxes. Because it is the same transaction it may be service or it may be goods it is the same transaction which is being taxed. This is going to create a lot of anomalies for the same transaction two agencies could have different opinions. So that is an issue which we will be discussing subsequently.

Implementation through multiple statues, although there are multiple statues but that multiple statue is going to be commonly decided.

Basic features of the law need o be uniform - this is one issue probably you also need to raise when you send your recommendations.

GST rate structure:

Maharashtra has been propagating a single rate because a single rate would have come to about SGST 8 and roughly CGST 8 or 9 so we could have about 16% roughly depending on the R&R maybe 9+9= 18 but probably not more than that if there was a single rate. This was not agreed to and because certain items, certain goods today have a lower rate and many states oppose this therefore a two rate structure was decided, a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. What is the result of this 8+8 or 9+9 would have been 16 or 18 or maybe lower if subsequently.

But if you have two rates let us say the lower rate is for the states 5% and the upper rate I have calculated my R&R my R&R varies from 13 to 15% with 5%. So if it is 15% or even 14% and if centre also comes up with 14% then you can see what upper rate is and it is a major issue which needs to be resolved.

Special rates for precious metals is the same 1% then a list of exempted items. Our Chairman did not want to open up ndoras-box we wanted to reduce this substantially the list of exempted items but then we said we do not want to open another front here so whatever even VAT will probably continue in the beginning.

The centres stand on all this is not yet clear whether they are going to have a single rate or whether they are going to have two rates is not yet clear. Probably they will be giving their opinion in the next 15 days or so.


States uniformly decided that the threshold will go up from 5 lakhs which we have today turnover to 10 lakhs and because 5-10 is not very-very material and except for the North-Eastern states they were saying but we do not have people who are above 10 lakhs so we wont have any revenues so them some special arrangement will be made. But CGST what will be the threshold but what the states have proposed is 1.5 crore government of India has not agreed and this also creates another problem. If you have two different thresholds SGST and CGST then IGST model becomes Inter State Goods & Service Tax (IGST) is the model for inter state transactions become a little more complicated. So a call needs to be taken on this and you need to raise this issue -CGST threshold for services to be appropriately high so this line is a very-very dangerous line in the first discussion paper which I have personally been opposing.

What does this indicate? It indicates that you will have to identify what is the service and you will have to identify what is goods. So what does that mean all your original problems of works contract, what part of that is service and what part of that is goods continue, all those problems continue so we have been opposing. What we are saying is that whatever is the rate for goods and services it should be the same rate; it should not be a different rate so that we do not have to identify what is a good and what is a service. The taxation of services both the centre and states have concurrent power to levy tax. Principle for taxation of interest rate and interstate has been formulated that is not come out in this paper probably in the next discussion paper we will be bring it out.   

The principal for taxation in interest rate has been formulated and that has not come out in this paper and probably in the next discussion paper we will be bringing it out. For interest rate transactions as you would be aware the IGST model, a lot of innovation has gone into this model, I must also tell you that Mr. Kulkarni is the part of our working group, we have a working group for Maharashtra in which whatever we used to discuss there it would come here and deliberate on that what are the problems and what stand we should be taking that is why he knows quite a bit about what is happening.

This is something which is not there in your discussion paper but you should see that in the supplier services as well as goods for interstate transactions, two propositions were given and for all B to B transactions, this can be based on the place of registration and second was based on place of consumption, the consumption states wanted the second proposition and all others wanted the first one and in B to C transactions, Maharashtra wanted the first one, the consumption states wanted the second proposition, so this decision is not yet being taken but B to B when I go to IGST probably then you can answer to this question.

In B to B, if you have this first one that wherever you are claiming the ITC and at that place fund should travel, the ITC should be travel to that place then the first proposition is sound but the consumption states have been opposing it so the final decision could not be taken, this is a very important issue and I would like you all to be deliberate on this, what is B to B and how it should be handled and what is B to C because if we go for proposition two there are a lot of complications which you would be facing.

The IGST model, you would be aware that originally it started as a bank model and we want through about seven to eight models and in the working group with Mr Kulkarni and others also, a lot of deliberations took place and finally IGST came because the dealers said that you have to give us credit but otherwise what was happening and in order to have a better tax compliance what was suggested was that whatever interest rate stake sale takes place and whatever tax is of that state will have to be paid upfront and then you have to take a fund on the other side without getting any credit o the exporter side, you can get some credit on the importing side.

This was opposed by us also and therefore this IGST model came but now when you are making a transaction from the exporting side, whatever credit you have and already within the state can also be subtracted, so the ITC of the state or if you have IGST also some credit gets subtracted and you pay only the balance and finally on the other side or on the importing side and on that tax, you are getting full credit for that and in order to implement this, there has to a very strong clearing house mechanism, you know how states fight with each other for transfer of funds etc or the states the way fight with centre and here the automatic transfer of funds will have to take place based on what is given in the return.

There are a lot of FAQs also on this and probably then you could go deeper into this question but what we found was that it was very user friendly the system of IGST as long as the clearing house mechanism can handle it and finally we said probably the RBI will have to be brought in to oversee this whole mechanism.

This is again related to what I discussed on the services slide in the B to B transactions we have just given a very simple formula wherever the tax may get collected, it will flow to the state where the dealer claims the ITC, we may have 4-5 registrations the various states where every claims in the ITC the tax through the clearing mechanism flows to that state, so B to B no issue at all but B to C remained an issue that is because the C cannot be identified and in some cases or some services C can be identified, in some cases C cannot be identified so the final decision has not been taken but this was decided that tax will flow to the state of C if C is clearly identifiable and otherwise tax will remain in the state of B and this is a combination of what is happening today and the consumer based and now this is a complication which you need to deliberate on but today you need to pay the service tax to the centre where there are no such issues but once it becomes GST and you have to pay SGST on that all these issues crop up and a clearing house mechanism can resolve them but this is an issue. All interest rate dealers in this model will have to find an electronic return and an electronic payment in order to simplify the clearing house mechanism, the central agency has a major role to play, I have discussed this with the clearing house, the exporting state would transfer the credit of SGST used in payment of IGST then the centre transfers it to the concerned state that is the system with which it will flow.

The exporting state will transfer the centre the credit of SGST used for IGST then centre transfers it to the concerned state that is the system.

Exporters would be zero rated and similar benefits may be given to SEZ and such benefits will only be allowed in the processing zones of the SEZ and no benefit of sales from SEZ to domestic tariff ferry will be allowed and that is a crux of the zero rating of exports. GST on imports, now there will be like the CBD there will be a GST of standard rates on the imports and you will immediately get the credit for that and that is because of I-GST mechanism. The special industrial area schemes whichever are prevalent today will continue till the end, it has been decided that after this, the states whatever they want to give they should give subsidy which shouldnt become the part of GST that was another call which was taken.

Now I am coming to some of the issues which are the issues you need to deliberate on and write both to EC and Government of India, dual authority for each dealer, every dealer reporting to two agencies, we have opposed it, distribution of dealers and state with GOI could resolve this issue, states are winning in this but its the GOI which needs to be pushed. Separation of services and goods and threshold issues, if you do not have the common rate for goods and services you have to start identifying what is good and what is services which creates lots of complications and lots of legal issues, same rate probably. The two rate structure, we have made a lot of noise on that that it should be single rate so rate are lower but I do not know because a majority of states wanted two rates for the lower commodities but the result as I told you is that the upper rate is becoming very high.

High GST rate at RNR and because of the two rates the upper rate is becoming very high so as a state representative I am saying the CGST rate could be lower so the total is workable. Compensation; because its very difficult to calculate the need for revenue neutral rate today lets say in Maharastra I am getting 27,000 crore on this that is VAT and taxes going into this, if I do not get 27,000 crore tomorrow then I have problem so RNR the rate has to be based on this system but then assumptions come in what is going to be the growth and how much will come from services, what about VAT of those services and how much would be more VAT when goods and service become VAT with each other, so all those assumptions are there in this, so some of this we will have to see on a practical platform and some composition mechanism should be used to resolve this but states like Maharashtra are saying okay there will be compensation but we cant survive on compensation, it will have to be some rate where you are almost there and that is an issue. High GST rates are already discussed. Then this automatic fund transfer under IGST that ITC gets transferred from it to wherever he is claiming and shifts from one state to another through an automatic route and today it doesnt exist so a strong computerized clearing house under the RBI is the solution, also the computerization requirement, under IGST the major requirement is the centre because the interest rate dealers will be filing electronic returns and that goes to the centre, the clearing house mechanism. But states will also be giving their own credit they will also have to come to a particular stage of computerization, the centre will have to probably play some role in this, Maharashtra doesnt have problem because we are way ahead of everyone else in the country you are aware that we have done returns of about 100%, the registration we have done and the interstate forms that we have done and within the next two months the e-payment is coming so in the next four months before GST comes we will be all absolutely prepared.

Constitutional amendments are a major issue. I think probably CIIs legal people will have to because we also want GST to come. I am part of that constitutional amendment committee and we have not been able to resolve this issue. Goods are in, goods after the manufacturing stage are in the state list, services are in the central list, manufacturing state goods are in the central list. Question is whether it should come in the concurrent list, if it comes in the concurrent list, you know what is concurrent list, if there is a dispute centre has the sway states are not agreeable to that so what is the solution. We are all trying to find a solution to that probably your legal people should also tell us what to do. 

This deadline of April 1, 2010 in my opinion, personally opinion not possible at all - you have to build up the IGST model, you have to resolve all this issues which I have mentioned and atleast for Maharashtra we do not want a half break solution.

Somethings come and then we are in a fix, we are neither near nor there so we would like everything to be done properly, proper computerisation, do it and then by April 1, 2011 bring it. In fact the mistake which we have encountered earlier, in VAT you would be aware that Maharashtra is the only state which shifted from geographical jurisdiction to functional jurisdiction. Other states are still continuing with that what is geographical jurisdiction. There is a sales tax officer he has a particular jurisdiction, he has a ward so he looks after that area. We shifted from that to functional jurisdiction; nobody has one to one relationship. Without computerisation that became a huge issue for us. For first year we were facing a lot of problems now when the computerisation is taking place and it is come to a particular stage functional is much better- all other states are coming forward and doing it. We do not want to commit the same mistake again. Let us have some level of computerisation. Let us have those year returns processing areas, processing methods and then by April 1, 2011 let us do it.

Second thing is that as Kulkarni said within the part of the year you cant do it in October, you cant do it in September some people have been giving those suggestions. This is a huge reform. Central taxes getting combined with state taxes as a single tax, I do not think it is going to work. You started in October or November it has to be in the beginning of the year. Then also with clear prior notice, we should resolve most of the problems by April 2010 and then set up the system upto April 2011 so that we can start. That is my personal opinion.

Subsumation of purchase tax:

This is another issue which I told you Haryana, Punjab even UP they have been fighting over it and solution has not merged.

After these discussions because all these discussions are going all over the country now - whatever are your recommendations they should go to EC as well as to the government of India and then EC is going to meet again, have deliberations, have some working groups and they will come up with second discussion paper. That is presently the roadmap.

Natural Gas we have not been able to decide yet. We are now of the opinion it can remain out of GST like the petroleum products. Exemption of goods for local importance many states have been saying that some small-small goods should be allowed. We have been telling those states that once we have raised the threshold to 10 lakhs your issue gets over but some states are not agreeable to that. But if somebody wants to lower the rate it should be decided by the FMs council that is everyone together. Principles for supply services I have already proposed, proposition one.

This is what I wanted to convey to you. A lot of things which I have mentioned in this are not there in the first discussion paper.

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