For GST, learn from mistakes committed during VAT rollout
April, 02nd 2010
The finance minister in the Union budget reiterated the governments commitment to introduce the goods and services tax (GST). As expected, the implementation of uniform GST has been pushed to April 1, 2011.
It is important that the biggest tax reform of the century be implemented at the earliest; more importantly, it should be implemented successfully.
Deferment of GST is definitely not good news. However, this will give some breathing space to all the stakeholders, i.e. the government, industry and the consumers.
We all recognise and appreciate the positive measures both central and state governments have taken towards introduction of GST. The recent budget exempted most traded goods from 4% additional duty of customs and rationalised export of service rules so as to bring them in line with global mature GST or value added tax (VAT) practices.
The finance minister also partially rolled back the excise duty to 10% while maintaining the service tax and peak rate of customs duty at 10%, thus indicating that the likely rate of central GST would be 10%.
The white paper spelled out the novel concept of Integrated GST to suit Indias federal structure. An outlay of Rs 1,133 crore has been allocated for indirect tax administrations at the Centre and the states to revamp their internal work processes and IT automation. We all have to concur that the government is taking diverse steps to move towards an ideal GST regime.
However, we also have to agree that the above reforms are not enough, if the FM needs to keep his commitment of implementing GST from April 1, 2011.
Amongst others, the most important and elementary considerations are, knowing precisely what is to be taxed, including setting the right thresholds, the applicable tax rate, the need to create public awareness and education and in particular, to secure buy-ins from the business community, and addressing the transitional issues from the existing regime. These considerations are fundamental.
Unfortunately, however, even after several meetings of the empowered committee, there is no consensus amongst states on the rate structures and goods/ services which would be covered under the proposed regime. The budget was silent on the further reduction of CST rate, towards its phase out. There is still no clear road map except the D day of April 1, 2011.With only a year away, it is of utmost importance that businesses get acquainted with the future of Indian Indirect taxes at the earliest.
The last amongst the concerns listed above is transition from the existing regime.
The government needs to learn from the hurly-burly created during implementation of VAT and transition from the sales tax to VAT. Two years after Haryana implemented VAT in 2003, in 2005, the VAT empowered committee released the white paper to implement VAT from April 1, 2005. VAT was expected to move towards more efficiency, equal competition and fairness in the taxation system. However, the joy of having a unified system was never consummated as implementation was in a phased manner. Haryana was the first to come on board in 2003 and Uttar Pradesh last in 2008. The obvious victims of this mayhem were businesses and the consumers.
The misery continues as the blues of transition are still not over. The sales tax administrations of some of the states have still not fully smoothened out the existing VAT regime. Rather, even after 5 years of introduction of VAT, instead of moving forward from an ill-fated sales tax regime to a coherent VAT regime, we seem to be going backwards. The states have forgotten the basic principle of having standard tax rate across the nation. Most of the states have changed the agreed VAT rate of 4%/ 12.5% by either enhancing the VAT rate or toting up taxes in addition to VAT. Gujarat was the first state to increase the rate to 5% and 15%, followed by Andhra Pradesh, Haryana, New Delhi and the latest being Maharashtra.
The cause of worry is not the increase in rates but the inconsistency of VAT rates. For example, a TV now attracts 15% VAT in Gujarat, 12.5% in Maharashtra and 14.5% in Andhra Pradesh. On the other side, in January, tax authorities in Punjab have levied an additional tax of 1% on goods taxed at the rate of 4%. Within one week of this new levy, a supplementary surcharge of 10% was also levied. This in itself explains that the states are in a confused state of mind. The tax administration needs to sympathies with the feeble small traders who are not prepared for this rollercoaster ride. We have been talking and discussing about the GST, but in practice we have hit the reverse gear and are going back towards the old sales tax regime.
GST is indeed far more complex than the VAT. Moreover, for a rational GST, multiplicity of taxes and local levies and area-based tax incentives will need to be rationalised. The IT infrastructure for administering the GST; the tax identification number procedures, and other administrative setups including audit procedures will also require significant time once the GST Bill is passed and becomes Law. It is imperative that the government and empowered committee learn from the implementation of VAT and not repeat the mistakes committed earlier.
The casual approach to the GST design and implementation is indicative of serious deficiencies in Indias governance mindset. States running in different directions can be managed only by receiving strong collective buy-ins from all political parties. Strong commitment is required to ensure consistent law is implemented throughout the country. Acceptance of the fact that excise, VAT, service tax and other local bodies and tax authorities will have to coexist is vital. Feedback from tax experts, trade representatives and business leaders is also essential to enable better preparation before the nation embarks on GST.