We have been hearing about GST (Goods and Services Tax) off and on. Year 2010 has been promised as when GST will dawn upon us. Meanwhile, Business Line caught up with Mr S. Madhavan, Executive Director, PricewaterhouseCoopers Pvt Ltd, on the implications of the proposed scheme of taxation.

Why GST?

The consumption tax system in India is complicated and multi-layered with levies both at the federal and State levels. Taxes on goods are levied by the Centre at the manufacturing level through CENVAT, on services through the Finance Act, and on sale of goods via the Central Sales Tax Act. States levy tax on the sale of goods independently, under their own laws. Though some degree of uniformity has been arrived at after the introduction of the Value Added Tax, differences do persist. Tamil Nadu and Uttar Pradesh are yet to implement the VAT.

GST is a part of the proposed tax reform that centres around evolving an efficient and harmonised consumption tax system. GST will replace the multiple taxes with a single tax which would operate at various stages of the supply chain. This would do away with the cascading effects of multiple taxation. Further, GST operates on a negative list, that is, all goods and services are subject to GST unless specifically exempted. Although the sales tax regime operates on a similar principle, service tax operates on a different basis, where only services that are specifically prescribed under the Finance Act are taxable. The GST regime will operate differently, thus ensuring a wider tax base. At the same time, GST will reduce the extensive number of exempted goods, thereby preventing leakages and ensuring a moderate rate of tax.

In addition, GST would end the long-standing distortions arising out of the differential treatment of the manufacturing and service sectors. The world over, goods and services attract the same rate of tax. GST will also significantly bring down the cost of compliance as it promises simplicity compared to the task of administering exemptions and identifying taxable goods and services under the current sales tax and service tax regimes.

What difference will it make to consumers, manufacturers and revenues?

At the very outset it must be understood that GST is not simply a tax issue but has an impact on the whole supply chain. In terms of the applicable legislation on date, the Central Sales Tax (CST) is not integrated with VAT. Thus, the CST paid on inter-State procurement is not eligible as a credit and continues to be a cost of doing business till the time it is completely phased out.

Similarly, manufacturers are unable to avail themselves of credit of miscellaneous taxes, such as entry tax, octroi, etc., and these become added costs along the supply chain. Under GST, manufacturers would be entitled to input tax credit of all inputs and capital goods purchased from within the State as well as inter-State, from a registered dealer for setting off the output tax liability on the sale of their finished products. Similarly, distributors would also be able to pass on the duty burden to their customers. This would ensure that there is no cascading effect of taxes and would result in a reduction in the cost of doing business.

This is likely to result in a reduction in the prices of commodities in the long run as manufacturers and distributors would pass on the benefits of the lower costs of carrying on their businesses to the consumers. As discussed, under GST, all goods and services would be subject to tax, unless specifically exempted. Further, it is also anticipated that the number of exemptions would be significantly reduced. Accordingly, the total revenue collections can definitely be expected to go up. Another significant point is that small businesses would be kept out of the purview of GST. Hence, the cost of administration is also expected to go down while compliance would go up.

Thus, GST promises to have a positive impact on all stakeholders.

What has been the experience of other countries?

More than 130 countries have introduced GST in some form. It has been a part of the tax landscape in Europe for the past 50 years and is fast becoming the preferred form of indirect tax in the Asia-Pacific region. It is interesting to note that there are over 40 models of GST currently in force, each with its own peculiarities. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. It is only recoverable on goods used in the production process, and GST on fixed assets is not recoverable. There is a separate business tax in the form of VAT.

At the same time, it must be noted that GST is a more structured and transparent form of indirect taxation. It has proven itself as the most efficient and effective method of providing revenues that governments need, while encouraging economic growth and efficiency.

Is 2010 too optimistic?

We have been moving towards a GST regime slowly and steadily since 1986, when Modvat was introduced for goods. Modvat has since been replaced by CENVAT and duty rates continue to be rationalised every year. The last two financial years have seen India take significant steps with the introduction of cross credits of input taxes for services and goods and the implementation of VAT in a majority of the States.

Given that much work has already been done in terms of integration of the goods and service tax, at the input credit stage, it is reasonable to expect this integration to conclude by 2008.

Independently, the integration of the State taxes, along with the phased elimination of the CST, must also commence. Here also, it is reasonable to expect that this process would conclude by 2009. Consequently, it is fair to suggest that India would be in a position to implement the GST on a national basis by April 2010. Indeed, one could go so far as to suggest that given the present state of readiness, it would have been possible to target an even earlier introduction of the GST.

What are the prerequisites for GST?

The first task for the Central Government is to take immediate and rapid steps towards integrating CENVAT and service tax into a single Central VAT. While the two taxes, service tax and CENVAT, are currently integrated to the extent that the input tax credits are entirely fungible across these two taxes, there is nevertheless much work yet to be done in terms of enacting, firstly, a service tax code on a standalone basis, independent of the Finance Act of 1994, under which the service tax provisions are currently in operation, and to thereafter integrate the Central Excise Act and the service tax code into one Central VAT code.

It is only when this work is done that the remaining task of integrating this Central VAT with State VAT can be taken up to achieve the objective of the introduction of GST by April 2010.

At the same time, one of the critical factors for implementing GST effectively the world over has been the early identification of the issues to enable sufficient time and attention to be given for coming up with solutions. Given the lead time and challenges of GST implementation, it is vital for the Indian Government to begin the process early.

D. M.