India needs simple and compliance friendly indirect tax regime
March, 08th 2014
India is standing on the threshold of an opportunity to streamline its indirect tax regime in the country. The framework of indirect taxes is presently, complex, not only for the trade but also for the government. Today, a multitude of taxes govern the indirect tax framework. At times, a simple transaction attracts two or even more different taxes resulting in higher tax burden and leakages.
Multiple indirect taxes have the adverse consequences of higher indirect tax burden, amplified compliance requirements, higher degree of monitoring of operations by authorities through frequent audits conducted under each of the legislations and hence increase in litigation.
The policy makers of India have, in the past few years, looked at the dream of creating a common Goods and Service tax which will assuage most of the problems listed above. However, the dream remains a dream as political considerations influence economic stands taken by various stakeholders.
India being a strong federation, the goods and service tax has touched the basic tenet of fiscal autonomy of the states and accordingly, there has been a lack of consensus on the basic structure of GST. There have been innumerable reports and discussions and as stakeholders strike compromises to satisfy political whims, the structure of GST suffers and so will an honest tax payer when the GST is, if it is, introduced.
That however, is not the path we want to tread today. We want to create a vision for an ideal indirect tax regime for 2020. Such a regime would be efficient, responsive and buoyant.
The key building blocks to achieve such a vision would be the following:
A unified GST instead of the proposed dual GST model User friendly compliance requirements supplemented by efficient online compliance tools Broad base of the indirect tax levy A robust control mechanism for audit and investigation Streamlining process to receive export benefits
Proposal to introduce GST as a substitute to central and state levies is a key initiative towards making indirect tax regime simpler. The proposed dual GST model (CGST, SGST and IGST for interstate supplies) would not be free from inefficiencies and administrative roadblocks on account of multiple compliance levels, exclusion of key products etc.
The unified GST would further simplify the statutory compliance requirements i.e. single registration, consolidated returns etc. A unified GST will have a single GST which would be jointly implemented by states and center. One possibility could be that while the chain of supply of goods may be administered by states, the center may administer the service sector for collecting GST. There can be other possible options but the basic principle should remain that each unit should be administered by either state or center but not both.
The solution to sharing of tax revenues would lie with the Finance Commission and with the creation of GST Network, it would be easy to gauge the financial activity in a state, which can be the basis of the award by the Finance Commission. In addition, the vision should be towards having a user friendly compliance mechanism supported by efficient online tools through which periodic compliance should be done by the trade. To achieve this, it should be ensured that the compliance formats on introduction of GST are simple and standardised. The compliance should be 100% on-line, minimizing interface between tax departments and tax payers in relation to day to day mundane matters.
Worldwide the VAT regimes have moved from a reactive to proactive approach, where the taxpayer is valued as a person collecting tax on behalf of the government and paying to the exchequer. In such an approach, the tax administration is friendly and does not seek to initiate litigation for each dispute. The tax payer has an option to explain his business processes and understand the implication.
The tax payer can take a ruling in most cases to have an undisputed tax position. This is the approach we seek to have in India for the indirect tax administration in the future. The approach should be to have minimum litigation and wherever possible disputes may be settled through arbitration. There should be a uniform interpretation of statutes across jurisdictions and laws should be amended to accept settled jurisprudence.
While the technology has been used to increase online payment, return filing, registration etc. the human interface is substantial. Similarly obtaining refunds and other benefits on account of export of goods and services involves substantial time and cost. Simpler mechanisms like drawback of goods and services need to be introduced and the same need to be processed online for reducing transaction costs.
The indirect tax law has been in vogue since independence but has matured substantially in the last ten years. It is time that it keeps pace with the developments in other countries and also with the growth of the Indian Economy. At least in 2020 we can dream of an indirect tax utopia where tax administration and tax payers work seamlessly to create a harmonious environment and where indirect tax is collected across jurisdictions under one efficient tax regime.