There are two very important tasks that are performed by the government namely collection of tax revenue and; vertical and horizontal devolution of such resources. Vertical devolution refers to distribution between the center and the states while horizontal devolution refers to inter-state distribution. Finance Commission, a constitutional body, recommends for the distribution of such revenues. But, when we come to collection of tax revenues, there are multiple ways in which tax is levied and collected. Restricting myself to the indirect tax regime, I may like to discuss the new indirect tax regime that may come into operation from 2010 that is Goods and Services Tax (GST).
The effort to introduce the new tax regime was reflected, for the first time, in 2006-2007 Union Budget Speech. The then Finance Minister Mr. P. Chidambaram remarked that there is a large consensus that the country must move towards a national level GST that must be shared between the center and the states. He proposed 1 April 2010 as the date for introducing GST. After successful introduction of Value Added Tax (VAT) in almost all the states and continuous increase in number of services under the service tax net, nobody must have any doubt of the Finance Minsters seriousness about GST. The present rates for service tax and CENVAT, that is most proximate to the global GST rate, and the continuous steps towards phasing out of Central Sales Tax (CST), clearly hints at the endeavour on the part of Government of India. Mr. P. Chidambaram once again referred to the new system and informed that there is considerable progress in preparing a roadmap for introducing the GST with effect from 1 April 2010. By 2010, revenue deficit may be completely eliminated as per the goals set out in the Fiscal Responsibility and Budget Management Act, 2003 (FRBM). Meeting with the FRBM target, may help in proper introduction of the new tax regime that is GST.
Once again, the Finance Minister took one step further when he announced that, Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a roadmap for introducing a national level GST with effect from 1 April 2010. In May 2007 Empowered Committee (EC) of State Finance Ministers in consultation with the Central Government, constituted a Joint Working Group (JWG), to recommend the GST model. Within 7 months of its constitution that is in November 2007, JWG presented its report on the GST to the EC. The EC has accepted the report on GST submitted by the JWG.
All these developments in the Indian tax Scenario, is quite evident of the governments incessant effort towards the successful introduction and implementation of the GST regime.
What is GST?
GST is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. GST is levied at every stage of the production-distribution chain with applicable set offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. To put at a single place, GST may be defined as a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.
It is seen as the panacea for removing the ill-effects of the current indirect tax regime, prevalent in the country. If adopted and implemented, GST may neutralise the existing problem of taxes being levied on top of taxes. For instance, when a shoe company produces a pair of shoes, the Central Government charges an excise duty on them as they leave the factory. At the retail level, the state where the outlet is located, charges VAT (different states charge different rates of VAT) without giving credit on the excise duty levied earlier (the state tax is levied on top of a Central tax). In the GST system, both Central and state taxes may be collected at the point of sale. Both components (the Central and state GST) may be charged on the manufacturing cost.
This system is basically designed to simplify current level indirect tax system. It integrates the union excise duties, customs duties, service tax and state VAT into a single levy known as GST. GST may be rightly termed as national level VAT on goods and services with only one difference that in this system not only goods but also services are involved and the rate of tax on goods and services are generally the same.
There are several models of GST, each with its own merit and demerit. A look at some of the models in circulation: (1)Australian Model: In Australia GST is a federal tax, collected by the Centre and distributed to the states. But India is a heterogeneous country and there is no chance that states may allow the Centre to collect all the taxes while they become just spending institutions; (2)Canadian Model: The GST in Canada is dual between the Centre and the states and has three varieties: (i)Federal GST and provincial retail sales taxes (PST) administered separately - followed by the largest majority; (ii)Joint federal and provincial VATs administered federally (Harmonious Sales Tax - HST); and (iii)Separate federal and provincial VAT administered provincially (QST) - only for Quebec as it is like a breakaway province.
The first variety is fundamentally the Canadian model, which is similar (though not the same) to the existing situation in India.
(3)Kelkar-Shah Model: This model of a unified GST, is based on a grand bargain to merge central excise, service tax and state VAT into one common base. Two different rates of tax are to be levied by the Centre and the states. The collection may be by the Centre. This is like the HST model in Canada;
(4)Bagchi-Poddar Model: This model, just like Kelker-Shahs, envisages a combination of central excise, service tax and VAT to make it a common base of GST to be levied both by the Centre and the states separately. This means that the Central Excise Act 1944 may be abolished and the goods tax may be only on the sale of goods. It may merge in it the service tax.
To put this in legal lingo, the taxable event for the GST may be the act of sale of goods and services. The concept of manufacture may simply vanish. The difference between the Bagchi-Poddar and Kelker-Shah models is that in the former, the collection is at two levels, by the Centre and the states, while in the latter the collection is only by the Centre. So while the Kelkar-Shah model is like the Canadian HST, the Bagchi-Poddar one is like the Quebec model. Although the model says that it is based on the Quebec model, it is actually not fully so as this model envisages collection both by the Centre as well as the states, whereas the Quebec model envisages collection only by the state of Quebec.
The Bagchi-Poddar model also clearly envisages that a Constitutional amendment is necessary to bring the taxing powers on goods and services under the concurrent list and to abolish the present division of taxing powers between the Centre and the states.
The JWG of EC laid down various recommendations. Few of them are:
(1)The committee has suggested that GST, when it rolls out on 1 April 2010, have two componentsa Central tax and a single uniform state tax across the country;
(2)A tax over and above GST may be levied by the states on tobacco, petroleum and liquor; may likely help the report find favour with the states;
(3)The GST may not have a dual VAT structure but a quadruple tax structure. It may have four components, namely
(a)a central tax on goods extending up to the retail level;
(b)a central service tax;
(c)a state-VAT on goods, and
(d)a state-VAT on services.
Given the four-fold structure, there may be at least four-rate categories- one for each of the components given above. In this system the taxpayer may be required to calculate tax liability separately for the different rates of tax;
(4)The JWG report had suggested that states must tax intra-state services while inter-state services must remain with the Centre.
(5)Petroleum products, including crude, high-speed diesel and petrol, may remain outside the ambit of GST.
(6)The report had also mooted elimination of the area-based and sectoral excise duty exemptions that are being given by the Centre.
(7)Central cess like education and oil cess may be kept outside the dual GST structure to be introduced from April 2010. Besides central cess, the EC of State Finance Ministers has also recommended to keep purchase tax and octroi, which are collected at state and local levels, outside the GST framework;
(8)The working group had suggested including cess and surcharges, which are levied for specific purposes on taxes at central and state levels, and had suggested to meet the specific requirement through budgetary allocation;
(9)The report has also recommended keeping stamp duty, which is a good source of revenue for states, out of the purview of the GST. Stamp duty is levied on transfer of assets like houses and land;
(10)It has also suggested keeping levies like the toll tax, environment tax and road tax outside the GST ambit, as these are user charges; and
(11)The draft report has recommended that if the levies are in the nature of user chargers and royalty for use of minerals, and then they must be kept out of the purview of the proposed tax.
In addition to the above mentioned recommendations, one of the major recommendations given by Kelkar Task Force (KTF) was the implementation of a single union GST. It was contradictory to the recommendations given by most of the scholars and that given by the JWG. KTF recommendation may pose a lot of constitutional hurdles as it demands many amendments to the existing articles of our constitution.
(1)speeds up economic union of India;
(2)better compliance and revenue buoyancy;
(3)replacing the cascading effect [tax on tax] created by existing indirect taxes;
(4)tax incidence for consumers may fall;
(5)lower transaction cost for final consumers;
(6)by merging all levies on goods and services into one, GST acquires a very simple and transparent character;
(7)uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present;
(8)efficiency in tax administration;
(9)may widen tax base;
(10)increased tax collections due to wide coverage of goods and services; and
(11)improvement in cost competitiveness of goods and services in the international market.
Hurdles in Implementation of GST in India
Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is a Herculean task to say the least. The Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post- production levies rest with the states. The Centre levies duties of excise on manufactures and import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or entering in the state under various entries of the state list. Even if all Union-level levies are integrated into a single levy and all state level levies culminate in a single State level levy; this may still have two levies and the resultant cascading and administrative burdens may nevertheless remain to an extent, though this may go a long way in harmonising levies. A harmonised, integrated and full fledged GST calls for the following:
(1)implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. Such amendments may virtually transform the Indian federation into an economic Union much along the lines of the European Union. The various levies of the Union and the states are also to be harmonised. In the current scenario it is difficult to visualise constitutional amendments of such far reaching implications going through, more so in view of the fact that sharing of legislative powers is such an essential element of our federal polity and it may be perceived to be a basic feature of the Constitution;
(2)services have to be appropriately integrated in the tax network;
(3)constitutional amendments required for implementing GST is just one of the major road blocks. No less significant is the issue of an appropriate design and structure of GST. For instance, how the issue of inter-state movement of goods and services may be addressed. The phasing out of CST may go a long way in addressing the issue of inter-state trade and commerce in goods but the crucial issue regarding services originating in one state and being consumed in other state still remains;
(4)another contentious issue that is bound to crop up in this regard is the manner of sharing of resources between the Centre and the states and among the states inter se as also the basis of their devolution;
(5)apart from all these, there has to be a robust and integrated MIS dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and services; and
(6)finally, the contentious issue of taxing financial services and e-commerce is to be appropriately addressed and integrated.
From the above discussions, the advantages may be evidently laid out that is the increasing proximity of our tax system to the global tax system. In a way, it may boost our economy and enable us to compete at the global front. As a result, even our system may match the international phenomenon. This is the biggest advantage of such a system. But every system has its own intricacies embedded at the initial stages. Lower incidence of tax, reduced prices, a move towards the global concept, reducing cost of tax compliance, better revenue collection, an efficient and harmonised consumption tax system in the country all this looks good on the card, but is it really so easy to implement? Keeping the various constitutional, technological, procedural and political barriers, the job seems easier said than done.
Few critics do not even hesitate in remarking that such a system is the old wine served in a new bottle. Thus, the careful appraisal of the recommendation is needed. Various scholars must roll their think tank towards the future system, as it may play a crucial role.