The proposed switchover to the goods & services tax (GST) regime would be a path-breaking reform in Indias indirect tax system, characterised by a shift from the existing origin-based taxation to a destination-based one. GST implementation would bring about sweeping changes in the way business is carried out in India. It would mean entrepreneurs would now base their business decisions on operational efficiency rather than tax considerations. Industry wholeheartedly welcomes and looks forward to the much-awaited reform.
The existing regime is fraught with a multiplicity of tax types and rates. Tax statutes differ across states, adding to the cost of compliance. The GST regime is expected to simplify the tax structure by reducing the number of statutes and tax rates. This would result in removing the cascading effect, which would go a long way to enhance the competitiveness of goods and services.
The Centre recently released its comments on the first discussion paper, issued in November 2009 by the empowered committee of state finance ministers. The Centre favours a single tax rate for all goods and services. This is certainly welcome. Another comment that would find favour with industry is subsuming electricity duty, octroi, purchase tax and taxes levied by local bodies under GST.
However, industry would prefer bringing royalty on minerals also under GST. So far, none of the official documents have made reference to this levy. Industry appreciates the Centres suggestion to include crude petroleum and natural gas in the GST net. It is also against leaving diesel, ATF and motor spirit out of GST, as it would pose practical difficulties.
Though differences of opinion exist between the Centre and states, it is hoped that all these differences would be resolved to set the ball rolling. It is now clear that GST wont be implemented from April 2010. So, industry would prefer its implementation from April 1, 2011, rather than from mid-year.
It is expected that the GST regime would propagate seamless and unrestricted input-tax credits, unlike the existing CenVat and Vat regimes, which are characterised by restrictions.
Industry looks forward to sufficient time subsequent to the release of statutory provisions to align itself with the new regime. Switching over would require revamping the way businesses are managed, along with appropriate changes in supply-chain management, IT infrastructure, ERP and accounting systems.
The second major reform is the Direct Taxes Code, which proposes to replace the Income-Tax Act. The finance minister unveiled DTC on August 12, 2009. Various good initiatives are taken up in the DTC, such as carry forward of losses for an unlimited period, reduction in tax rates, change of base year for capital gains, etc.
However, some of the DTC provisions need review, which has already been noted by the government. The levy of MAT based on gross assets with no carry-forward option will have a severe impact on corporates. This will have a cascading effect, unintended hardship and will tantamount to a wealth tax. An investment-linked incentive may be counterproductive if the set-off of a specified businesss loss is disallowed against other income.
The DTC casts onerous responsibility on the directors of companies and proposes to hold them personally responsible for the payment of their companys tax liability. The securities transactions tax has been well understood by the market and its abolition will have a negative impact. We hope many of these issues, already submitted to the government, will be sorted out.
The direction is set and now it is a matter of speed. It will be in the interests of all stakeholders if the reforms are implemented early and, particularly, in a transparent manner. While resorting to these fiscal changes, there is need to ensure that laws are clear and unambiguous so that litigation and use of discretionary powers is reduced substantially.