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India's biggest tax reforms is coming
August, 12th 2009

The introduction of value added tax (VAT), in phases, from 2003 onwards was a move towards gradually adopting the goods and services tax (GST) model in India. The government, since then, has set a deadline of April 2010 for introducing GST in India.

Very recently, in his Budget speech, the finance minister once again reiterated the government's commitment to introducing GST by April 2010 and if required, even in phases. This means, businesses which till now were only cursorily reading GST related news would actually need to gear up to understand how this new tax will impact their operations, at least from a macro perspective to start with.

GST, if introduced, is tipped to be one of the biggest-ever tax reforms in India and should therefore be introduced in a manner which accomplishes the desired objectives. A recent study has indicated that GST implementation could lead India to gain as much as $15 billion annually.

If one were to pragmatically consider the state of affairs at the moment, it is important that the government lays down clear timelines to finish the outstanding items for putting in place a robust GST framework.

The constitutional amendment empowering the Centre and the States to concurrently levy and collect GST on both goods and services has only been a proposal and is yet to see the light of the Parliament. Hopefully, the government will table a Bill to this effect in the Parliament's winter session and the Bill will be ratified by the States. Drafting the GST legislation, which shall replace the federal levies of central excise and the service tax and the state levies of VAT and other local taxes, coupled with implementing a vigorous technology backbone and effective administrative machinery are the tasks only to be taken thereafter.

The working groups in the empowered committee are working on the GST rates and on the modalities of taxing the inter-state supplies of goods and services. It is expected that these groups shall finalise their recommendations by mid-August and a white paper on the proposed GST model shall be made public by end-August.

The GST being a tax which will have an all-pervasive impact, it is advisable that all industry players start doing their home work by conducting an impact analysis of how this new tax reform shall affect their business. Indeed, this will entail a thorough revamp of the existing business model not only in terms of the business strategies, including debate on continuity of the special exemptions presently availed, but even from a practical standpoint involving changes in ERP systems, invoicing mechanism, rate changes, movement of goods inter-state and depot transfers, etc. Each business should approach its respective industry association and start working more closely with them to not only underline the respective issues but even discuss and debate the draft GST legislations critically.

The FM was recently quoted as saying the deadline of April 2010 shall be sacrosanct, notwithstanding non-cooperation by some States. This is a laudable proposition, but one should not overlook the consequences of a partial implementation of GST. The industry has already borne the brunt of a partial VAT rollout and a similar rollout for GST may trigger nightmares for the industry.

Issues of how GST shall be levied on cross-border supplies of goods and services to states not having implemented GST could be a matter of concern. To illustrate, if a trader supplies goods from State A (GST implemented) to State B (GST not implemented), under the draft guidelines, the trader shall charge inter-state GST to the credit of State B. Since State B has not implemented GST, the importing trader as well as State B would not get credit of such GST, thereby invoking undesired consequences. Similar issues could arise for cross-border supply of services as well.

Whilst the issues surrounding GST are many, looking at some of the VAT/ GST legislations of the developed economies may be instrumental in addressing such issues. Certain concepts, if borrowed, could assist in laying down the framework for a seamless introduction and implementation of the GST.

Treatment of cross-border taxation of goods and services could be borrowed from the EU model, whose 28 member countries could be envisaged as the different Indian states, and the GST treatment could appropriately be followed in India.

Similarly, treatment of cross-border leasing, cross-border supply of services such as telecommunication, transportation, web-based services, etc could also be looked at and the best practices may be borrowed. The place of supply rules for taxing services based on the place of residence of the service recipient (i.e. destination-based model) vis-a-vis place of effective use and enjoyment is still debated in the EU and hence, adopting only the settled principles and using them in the Indian model may be helpful.

The concept of 'VAT grouping' prevalent in such developed countries is also an effective way to reduce tax compliances amongst related entities, whereby all related entities are VAT grouped and taxed as a single entity with VATable transactions inter se such entities outside the VAT net. The issues of taxing cross-charges inter se related entities under the current tax regime in India could, in a way, be resolved by adopting such VAT grouping mechanism. Adopting these tested concepts make the Indian model of GST a well thought out and an objective-accomplished tax reform.

With the intended deadline for introducing GST just round the corner and a white paper widely anticipated, all the stakeholders should make resolute efforts to work closely with the government and effectively use their industry associations for identifying issues and voicing them to the government. A proactive approach is the need of the hour before the white paper is finalised and we are left to gasp with an undesirable
GST regime.

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