How gst affects indian economy
“Introduction
Concerns relating to GST
Design issues:
The rate structure and value
Rules of Supply for goods and services
The framework for
exemptions, thresholds and composition
Operational Issues
Common Approach
Sharing of information
IT infrastructure
Checkposts
Impact on Small
Enterprises
A “Flawless” GST
Harmonisation
Common Procedure- levy,
assessment, collection, appropriation
Expanding the envelope
Benefits to State Government
Role of the Finance Commission
Conclusion on gst effects on indian economy
GST for Accelerated Economic Growth and Competitiveness
Text of the Speech delivered
by Dr. Vijay Kelkar, Chairman Thirteenth Finance
Commission on the occasion of ASSOCHAM 3rd National Conference on
“GST for Accelerated Economic Growth and Competitiveness”
“Introduction
It is indeed a privilege to be
present at this seminar on “GST for Accelerated Economic Growth and
Competitiveness” and share some thoughts on the Goods and Service Tax.
Over the past fifteen months, in my
capacity as Chairman of the Finance Commission, I have had the privilege of
visiting twenty five States in our country and discussing with the respective
State governments their views on our Terms of Reference and how the Commission
should go about its work. One important item in our Terms of Reference relates
to consideration of “the impact of the
proposed implementation of the goods and service tax with effect from 1st
April 2010 including its impact on the country’s foreign trade.” A number
of State governments have expressed their views on the GST to us while voicing
their own concerns. Independently, a
number of economists, practitioners and financial journalists have raised
issues and suggested options relating to the implementation of GST. I am
aware that the GST debate has so far
been dominated by the concerns of two of the three major players in this policy
triangle – the Central government on the
one hand and the different State governments on the other. The third group of
stakeholders – trade and industry should proactively seek to influence this
debate so that their concerns, needs and aspirations can be incorporated into
the GST design as well as the implementation protocols. I therefore
congratulate ASSOCHAM for organizing this seminar which will be addressed by
important policy makers and
implementers. I am confident that this seminar would result in a set of
concrete recommendations that can be forwarded both to the Government of India
as well as the Empowered Committee of the State Finance Ministers for their
consideration. As you will all agree, policy can be best influenced when it is
still malleable and I urge not only ASSOCHAM but also all the other trade
associations to closely study all possible
ways in which the GST will impact their membership and put forward
their views on the various issues as
early as possible in anticipation of,
rather than consequent to a draft
GST law which may be put up for discussion.
Much can and has been said on the merits of the GST. It will bring
about a phase change on the tax
firmament by redistributing the burden
of taxation equitably between manufacturing and services. It will lower the tax rate by broadening the tax base
and minimizing exemptions. It will reduce distortions by completely switching to
the destination principle. It will
foster a common market across
the country and reduce compliance
costs. It can provide a fiscal base for
local bodies to enable them to fulfill their obligations. It will facilitate investment decisions being
made on purely economic concerns, independent of tax considerations. It will promote exports. A recent study on the impact of GST on foreign
trade indicates that the rate of growth
of exports will be significantly higher
than that for imports. GST will also promote employment. Perhaps, most
importantly, it will spur growth. As I
have mentioned elsewhere, it has been estimated that the GST implementation
increased Canadian GDP by
1.4 percent. In India
Concerns relating to GST
Most concerns expressed about the
implementation of GST can broadly be
divided into three categories -
a. Design issues
b. Operational issues.
c. Infrastructure issues.
I
shall take these up one by one.
Design issues:
What
should be the design of the GST ? The broad framework of GST is now clear. This
is on the lines of the model approved by the Empowered Committee of the State
Finance Ministers. The GST will be a dual tax with both central and State GST
component levied on the same base. Thus, all goods and services barring a few
exceptions will be brought into the GST base. Importantly, there will be
no distinction between goods and
services for the purpose of the tax
with a common legislation applicable to
both.
However
a number of issues remain to be
resolved. These are presently under the consideration of the Empowered Committee under the
Chairmanship of Dr Asim Dasgupta, the distinguished Finance Minister of West Bengal .
These issues include :
The rate structure and value
The
primary concern of all State governments is protection as well as enhancement of existing revenue
streams. There are three
parameters which need to be balanced here – one is the range of
taxes presently being levied which will be subsumed into the GST. This
will determine the tax base of the GST. The other two parameters are the number of rates and
the numerical value of these rates
which will be applied to this base .
All
indirect taxes on the supply of goods and services would need to be subsumed
into the GST. The Empowered Committee in its road map of Dec 2008 has indicated which taxes which
will qualify. The Finance Commission has appointed a Task
Force to advise the Commission on the implementation of GST.
For the purpose of computing the
Revenue Neutral Rate the Task Force assumed that apart from VAT, stamp duty,
vehicle tax, taxes on goods and passengers, taxes and duties on electricity,
entertainment tax, entry tax, luxury tax, taxes on lotteries, betting and
gambling, purchase tax as well as all State cesses and surcharges will be
subsumed into the State GST. Central
Sales tax will stand abolished. From the government of India side, Central
excise, additional excise duties, service tax, Additional Customs duty
(CVD), and all cesses and surcharges (other than educational cess) will be
subsumed into the Central GST.
There appears to be agreement that the best option
would be a bare minimum number of rates,
at best two, preferably one. We assume that a single rate structure will find favour with a very limited set of
exemptions available for basic foodgrains as well as basic education and health
services. This single rate will ensure low compliance costs, obviate
classification disputes, and ensure uniformity of approach amongst all players.
But to be attractive, a single rate cannot be too high. At the same time, the
rate must be high enough to address the concerns of States regarding revenue
neutrality.
Using
data from about 18.25 lakh business entities for the year 2007-08, the Task
Force has generated very interesting data relating to the GST
rate which will maintain the same level
of income for the centre and States
respectively in a minimal exemption regime. Their preliminary calculations
suggest that Revenue Neutral Rate will
be substantially below the combined Central and State rates. It is necessary that these and similar calculations which may have been made by other stakeholders be published for debate and examination. States also need to satisfy themselves that
not only will the GST rate applied be
revenue neutral nationally but also individually and wherever this is not
initially so, adequate compensation provisions are made. This public
scrutiny will thus ensure that
a reasoned view is taken on the rate to be applied as well as on the
exemption regime which should be adopted. The report of our Task Force will be
published on the Finance Commission’s website shortly and I hope that this will contribute to better awareness and
constructive policy dialogue.
Rules of Supply for goods and services
While
CST will be abolished in the GST regime,
the treatment of inter state sales will need to be carefully
thought through. It would be necessary
to guard against tax arbitrage where local sales which will be taxed could be
shown as inter state sales which will not. The CST Act provided for documentation to attest the
interstate nature of the sales. A number
of models are being examined by the Empowered Committee which will serve as
alternatives. Since the final model adopted would have a direct bearing on the
ease of inter state trade transactions as well as the compliance cost, I would
urge that all trade and industry associations involve themselves in this choice
through voluntary submissions of their views to the Empowered Committee.
Putting
in place the Rules of Supply for
the inter state provision of services will be
demanding. Services produced and consumed within the same State would not pose a problem as far as the
appropriation of taxation proceeds is concerned. However, some
services may be supplied
from one State, consumed in another and
paid for in a third State. A set of rules
to determine the taxation jurisdiction
and appropriation would need to
be worked out. There is adequate
international precedent for this but here again, trade and industry
associations could take proactive steps to suggest possible options.
The framework for
exemptions, thresholds and composition
The
existing sales turnover thresholds for
VAT taxation vary widely across States. Some small States have specified a threshold
turnover of Rs 2 lakhs per annum. Larger States have stipulated Rs 40 lakhs per
annum. The turnover range for composition
eligibility is equally diverse.
The list of exempted goods also differs across States. To allow for
uniform treatment of inter state transactions nationally, it may be necessary
that these variations be bridged so that
tax cascading is eliminated. However,
the concerns of smaller States need to be kept in mind. For this reason, perhaps such convergence
could be targeted over a certain period of time rather than immediately.
Operational Issues
Common Approach
For GST to be successful, all States
and the Centre should implement it in a
similar fashion. Only this will bring about the national common market which is
one of its goals. This will be possible when there will be a common law, a
common assessment procedure and perhaps even a common return. The Empowered
Committee can provide the required leadership to engender this uniformity of approach between all the States
amongst themselves and also with the Union government.
Sharing of information
Recent experience relating to
revenue collections from the Central Sales Tax have raised the issues relating
to tax arbitrage. It appears that local sales
under the VAT regime are being shown as lower taxed CST sales leading
to revenue loss. Some States have expressed concerns and referred to tax
evasion in developed countries
which have a VAT in place. They have sought reassurance that revenue leakage
would be effectively checked in the GST system.
Apart from putting in place a comprehensive IT network, sharing of tax
related information and coordination amongst all the States will be crucial for
this. Perhaps the Empowered Committee could
set up a coordination mechanism to address such concerns. Trade and
industry bodies also have a strong role to play in curbing such malpractices.
Infrastructural Issues
IT infrastructure
A simple system for inter-state
verification of dealers and transactions
is essential to ensure tax compliance
and check avoidance. It will also be essential for enforcing the rules of
supply discussed earlier. Given the volume of such transactions, this
system necessarily has to be IT based.
The present system Tax Information Exchange System (TINXSYS) does not appear to be fully operational
across all States. There are asymmetric
benefits to States in putting in place such infrastructure and this appears to be affecting
their incentives to do so. We need to put in place a system which will
uniformly incentivize all States to participate in and contribute to the
verification system. Or alternatively, one central agency could be charged with
maintaining this system. Both the alternatives available are challenging, but this needs to be done.
Checkposts
Most States have put in place a
system of checkposts on its road borders. Apart from other verifications which
may take place, these checkposts verify
and document inter-state sales of goods carried by the vehicles which cross
these borders. These details are then
cross verified with the VAT returns of the importing dealers. The need
for such an arrangement to continue in the GST regime has been emphasized,
especially in view of the abolition of CST and the possibility of tax
arbitrage. However , the fact remains that such checkposts by the very nature
of their operations, generate enormous delays in road traffic, sometimes upto
three hours per checkpost. A freight
truck travelling by road between
Delhi
It may be difficult to eliminate
checkposts given the valid concerns of State governments which may extend beyond collection of taxes and movement of goods to
vehicle fitness examination, prevention of trafficking, collection of local cesses, etc. But what appears to be egregious is that the same vehicle has
to pass through two checkposts while crossing one border – the exporting States
checkpost and the importing States checkpost. Both these checkposts are often
located within a couple of
kilometers of each other and a vehicle driver has to spend
considerable time in both. Perhaps, it may be possible for both the States to
put up a combined checkpost. Officials of both States could sit together and
conduct their verifications in one checkpost. Or one State could handle traffic on one direction and the
other State in the other direction. But essentially there would be only one
check per border for a goods vehicle. Such an arrangement will significantly
reduce travel time. The Finance Commission is prepared to support creation of
such checkposts if the respective State governments are willing to operate jointly.
Impact on Small
Enterprises
The impact of GST on small enterprises is often cited a concern.
On the State GST component, the
position will be exactly the same as
under the present VAT regime. There will
be three categories of small enterprises
in the GST regime. Those below the
threshold need not register for the GST. Those between the threshold and composition turnovers will have
the option to pay a turnover based tax or opt to join the GST regime. Given the
possibilities of input tax credit, not all small enterprise may seek the
turnover tax option. The third category
of small enterprises above the turnover
threshold will need to be within the GST
framework. Possible downward changes
in the threshold in some States
consequent to the introduction of GST may result in obligations being
created for some dealers. In such cases
suitable provisions could be made to provide
direct assistance to the affected
small enterprises if considered
desirable .
In respect of Central GST, the
position is slightly more complex. Small
scale units manufacturing specified goods are allowed exemption of excise up to
a turnover of Rs 1.5 crores. These units, which may be required to register for
payment of GST, may see this as an additional cost. We welcome suggestions from
trade bodies on how this issue can be addressed.
A “Flawless” GST
Ideally
the GST would subsume all the major State Level taxes, use a single rate, allow
for only essential exemptions and eliminate all barriers to trade. This flawless GST will feature the following characteristics.
Harmonisation
For
GST to be effective, there should be
identical GST laws across States as well as at the Centre. I propose that not
only the law but also the
methodology relating to levy,
assessment, collection and appropriation of the GST should be similar across
States and the centre. Such a unified
approach will simplify procedures, eliminate bottlenecks and
drastically reduce transaction costs for
dealers, enabling them to leverage cost
and time gains from the new taxation
system. Necessarily, such an approach requires that tax rates for most goods
and services be common across the country as should be the list of exemptions
and thresholds. These considerations
would need to be kept in mind while
considering fiscal autonomy of States.
Some States have proposed a mechanism which ensures that in future,
changes in the essential elements of GST are made only with the concurrence of
all States and the center. Such a mechanism will provide stability of the
taxation regime and suggestions from trade and industry would be welcome on how
to move forward on such a proposal.
Common Procedure- levy,
assessment, collection, appropriation
For industry to reduce its
transaction and compliance costs, it is necessary that apart from a common law,
the implementation of the law be also similar across States. All stages of the
taxation chain from the levy of the tax to its assessment collection and appropriation should be
similar. This would involve similar rules across States dealing not only with
assessments, audit, refunds but also more basic issues like registration,
filing of returns, treatment of transportation of goods etc. A common dispute resolution mechanism as well
as a mechanism for giving advance rulings would further facilitate trade and
industry. Here too, associations can
play a very useful role by providing advice and suggestions on the modalities to be followed.
Expanding the envelope
The
broader the tax base, the lower will be the GST rate. I therefore return to an issue raised in the 2003 FRBM
Task Force report – the taxation of real estate. The construction sector is a significant
contributor to the national economy. Housing expenditure dominates personal
consumption expenditure. Further, the present piece meal taxation of this
sector encourages perverse incentives. Raw material is charged CENVAT, the
works contract is charged VAT and stamp duty is levied on the sale. With no provision
of input tax credit in place, there is little incentive to record such
transactions either at the
construction stage or at the sale stage at their correct value. This leads to
substantial loss of tax revenue and fuels the parallel economy. I am aware that the present discussions on
the GST configuration do not consider the inclusion of this sector. However,
given the potential long term benefits to the economy and to a successful GST,
I would urge that the construction and housing sectors be included in the GST
tax base, either immediately or during a
subsequent phase.
Another possible
step to expand the GST tax base will be the inclusion of the rail
sector. This will be necessary if a level playing field is to be provided to
the road and air transportation
sectors which will be subject to this
tax. This inclusion will also ensure that all
inter state transportation of goods can be tracked through the proposed
IT network. The railways themselves will
benefit from this by availing input
tax credit on the significant purchases
made by them.
Benefits to State Government
A few
State governments have recently indicated their opposition to the
implementation of GST at the present juncture. While their objections need to be carefully examined, it
must also be recognized that while implementation of the GST is aimed at being
revenue neutral to the States, it will be budget positive for the
government. This is because governments
are large purchasers in the market for their own consumption and their cost of
procurement will come down significantly with the implementation of GST. Apart from these static benefits, dynamic
benefits will be generated in the medium term through more economically efficient
production, improved competition and more importantly greater employment.
Role of the Finance Commission
It is
possible that some States may want assurances that existing revenues will be
protected when they implement GST. The
Commission is willing to consider providing for compensation in order to
advance the implementation of a “flawless” GST.
Next Steps on how gst affects
I have shared with you my views on
what should be some of the goals of the Goods and Services Tax. I am acutely
aware that there has been as yet no
agreement on which of these goals will be adopted and how then will we reach the selected goals. The two major players – the Empowered
Committee and the Government of India are discussing these issues. As I mentioned earlier, the policy on GST is
still malleable and industry and trade associations can play a valuable role
in forging it. I would urge that ASSOCHAM and all similar promotional
bodies study some of the issues highlighted above and present their suggestions
to the Empowered Committee and the State governments. In particular, they could
work on the appropriate treatment of inter state sales of
goods and services; the thresholds, composition and exemption regime which
should be adopted; the treatment of
small industry; the assessment and audit regime to be adopted; the inclusion of
real estate in the tax base and even a draft GST law.
Conclusion on gst effects on indian economy
During
his recent interaction with State Finance Ministers, the Finance Minister has
encouraged State Governments to implement GST from 1st April 2010
noting that this was a critical part of the government’s economic reforms
program. This is a strong signal. The agenda is vast. All stakeholders need to
and must contribute to the present debate. Once GST is introduced, outreach
efforts by all agencies will be equally important
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