Still a long way towards full-fledged GST regime

After nearly a decade of discussions and negotiations, the states are finally on board to implement what is being touted by Finance Minister Arun Jaitley as the single biggest tax reform since Independence: the Goods and Services Tax (GST). An indirect tax that will subsume all other indirect taxes on goods and services, the GST aims to usher in a unified tax regime across India.

The broad-based consumption taxes that the GST would replace are CENVAT and Service Tax levied by the Centre and the Value Added Tax (VAT) levied by the states. India is set to move to the new tax regime from April 1, 2016. A Constitutional Amendment Bill to facilitate the GST was introduced in the Lok Sabha on December 19 and will be taken up in Parliament in the next session.

While India Inc is relieved, on the political front this is the one thing that the government can be proud about in what was largely a dull winter session. But in doing so did it give away too much, maybe dilute the concept of the GST? Perhaps so.

The base of the GST has been reduced to exclude alcohol. While petroleum products have been kept within the purview of the GST, these will be taxed at zero per cent for the initial two-three years to ensure smooth transition to the GST regime. GST on petroleum products has been a vexed issue as the states get nearly 30 per cent of their tax revenues from these goods. Tobacco, however, has been included.

The new Bill also provides for compensation in the initial years - full compensation for the initial three years, 75 per cent for the fourth year and 50 per cent for the fifth year. Finance Minister Jaitley has already decided to release Rs 11,000 crore to states towards Central Sales Tax (CST) compensation. Shivraj Singh Chouhan, Chief Minister of Madhya Pradesh, told Business Today that concerns about compensation for revenue loss and tax-sharing mechanism have been addressed.

The Centre has also given in to the demands of the BJP-ruled states such as Maharashtra, Haryana and Gujarat to impose an additional levy of one per cent on supply of goods in inter-state trade for two years. A YES Bank analysis shows that states with higher rate of VAT on petroleum products or states where petroleum products account for bulk of revenues will be adversely impacted. It includes Madhya Pradesh (28.27 per cent), Andhra Pradesh (31 per cent) , Maharashtra (27.62 per cent), Gujarat (25.46 per cent) and states which have VAT above the mandated 12.5 per cent.

"With the concessions that the Centre has made, they may have sown the seeds of a more watered-down GST. There is still the potential to broaden the base and design a clean GST, but I am not very optimistic," says Satya Poddar, Senior Tax Partner, EY India.

The GST is supposed to be a destination-based tax, with tax at the final point of retail. By allowing manufacturing states to levy a tax at the point of origin, the Centre has tried to bring in the GST with concessions and also keep the elements of the CST, which the GST was supposed to replace. "This is like levying income tax and expenditure tax. It is a confusing tax system," says Vivek Mishra, Leader, Indirect Tax, PwC.

It was expected that the Centre would be able to build a consensus, especially among the BJP-run states, on the salient features of the Bill. But it was those states that bargained hard for the one per cent additional levy.

Sushil Kumar Modi, former chairman of the empowered committee of state finance ministers on the GST, recounts that he had almost built a consensus on keeping the petroleum products within the ambit of the new tax. "We will have to see what the rate would be...," he had told Business Today in November. The committee has suggested a Revenue Neutral Rate for GST implementation with Central GST rate at 12.77 per cent and a state GST rate at 13.99 per cent, which is higher than the current combined Centre and State VAT rate of 26.5 per cent (CENVAT of 14 per cent and VAT of 12.5 per cent). A near-27-per-cent tax rate would be one of the highest in the world, making compliance an issue.

"A good GST is one with a broader base and lower rate; 27 per cent rate is just too high," says Poddar. But with the GST, we are looking at a monumental mind-shift from origin-based tax to destination tax for the manufacturing sector. Even in its current form, it will reduce the number of touch points on taxes. "In a perfect world, there is one-tax GST. What we have currently is the most receptive system in the world," says Rajeev Dimri, Head, Indirect tax, BMR Advisors. "Whatever is being proposed is falling short of global standards but it is a huge step forward. And remember compromises have to be made."

After the constitutional amendments are passed by both houses of Parliament, half of the state legislators will have to ratify them. This will be followed by a discussion on the GST in both houses of Parliament. State legislators will also have to table and pass their own GST Bills. It is still a long way towards a full-fledged GST regime.

With inputs from Anilesh S. Mahajan