Introduction of Goods and Services Tax (GST) and a Direct Taxes Code (DTC) are expected to be path-breaking steps in Indias tax reform journey. They would be potent instruments in the move towards an economically efficient, effective and equitable tax system.
DTC implementation would trigger better compliance, resulting in reduced tax incidence. However, there are some areas of concern to the Industry: MAT on asset base, lack of clarity on sunset clause of tax incentives, etc.
The code proposes a lower corporate tax rate, but with the abolition/dilution of many tax holidays, the effective tax burden could be higher for some industries.
There are some other issues too. The continuation of Dividend Distribution Tax (DDT) coupled with the proposed MAT of 2% on gross assets would increase the overall tax liability of many companies, especially capital-intensive industries. Even loss-making units would be saddled with a tax burden.
The stringent Anti-avoidance Rules will bring greater uncertainty.
The wide discretionary powers given to Commissioner rank officers will reduce first level transparency and trigger avoidable litigation. This could deter foreign investment, too.
As a destination-based tax on consumption of goods and services with an input credit mechanism, GST must subsume all indirect taxes and bring simplicity across the value chain. The broadening of the tax base and simplifying tax procedures will bring in transparency and encourage investments in the organised sector. There would be, perhaps, for the first time, an incentive to join the organised sector!
The value chain for almost all industries will be simplified and streamlined as a result of harmonised taxes across the nation, negligible cascading impact and removal of inter-state tax barriers. This could yield significant dividends for the economy in terms of increased output and productivity. This may contribute handsomely to the national income.
Better management of supply chain across various states (fast movement of goods, speedy disbursement of tax refund, quick assessments) will help achieve the macro-economic goal of GST introductionimproving the GDP by 1 or 2 percentage points.
GST will spur higher tax compliance and ultimately a lower effective tax rate. Cross-credit mechanism and supply chain consolidation will help eliminate non-value adding structures and reduce costs. For example, the companies presently deploy the C&F / depot mechanism in most states to avoid the CST levy. GST will reduce logistics costs and enable industry players to reduce pricesthat will in turn spur consumption.
All indirect taxes should be subsumed under GST- There should be no indirect tax left outside the purview of GST.
The GST legislation should be as simple as possible, with a single rate at least for CGST. Classification of goods and services should follow the HSN system, so that there are no fresh interpretation issues. The entire system should move with speed- classification, levy, collection and refunds all should move fast.
Doubts about ability of any State Government to make GST refunds should be covered by Central Government through suitable assurances.
GST exemptions should not be arbitrary. There should be few simple ground rules, such as relevance to common man, inflation potency and collection efficiency. Items of daily necessity for the common man such as food grains, sugar, edible oils etc are sensitive items. They can generate emotive issues. They command a high proportion of price indices and have a high inflation-potency.
Cost of collecting tax should not be high. Net tax collected should be high enough. Exemptions should continue where the value per transaction is low and the cost of levying GST is highfor instance, commodities like food grains or edible oils. While GST could be a great macro economic step, it will need very efficient execution. For this, grass-root level official machinery should be educated and on this the industry can also play a part.