The complex indirect tax structure in India gives rise to the problem of multiplicity of taxes, resulting in cascading tax burden for businesses. Differences in tax rates across the country create a huge trade barrier, specifically for those who run pan Indian businesses. Thus, the government felt the need to streamline the tax collection system across the country.
By Richa Chakravarty
Saturday, August 12, 2011: To provide a uniform tax structure for goods and services, most Indian states replaced sales tax with value added tax (VAT) from the fiscal year 2005. The white paper on VAT released by the former Finance Minister, P Chidambaram, had specifically assured businesses that on its introduction, there would be uniform rates of tax on different commodities in all states across the country, and the floor rate of the tax would not be amended or altered by any state. However, VAT is a state subject for which states are sovereign in making decisions. Thus, five years after its adoption, variations continue in the VAT rates across the country. “This encourages a grey market for electronic products like mobile phones. Small traders tend to source certain products from states where VAT is low and sell them in those states where the VAT rate is high,’’ says K Srinivasan, secretary, ELCINA (Electronic Industries Association of India).
However, Central and state governments are discussing the goods and service tax (GST) system that is proposed to be implemented in India from April 1, 2011. GST is a comprehensive VAT on goods and services. France was the first country to introduce this system and today 140 countries practice this tax system. In India, a dual GST is being proposed wherein a central goods and services tax (CGST) and a state goods and services tax (SGST) will be levied on the taxable value of a transaction. It is proposed that the CGST will subsume central excise duty (Cenvat), service tax and additional duties of customs at the central level and value added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the state level.
The combined GST rate is currently being discussed by the Centre and the Empowered Committee (EC). The rate is expected to be in the range of 16-20 per cent. Once the total GST rate is determined, the states and the Centre have to agree on the CGST and SGST rates. Today, services are taxed at 10 per cent and the combined incidence of indirect taxes on most goods is around 20 per cent.
The proposed tax system is supposed to integrate the country economically and also ensure cheaper goods and services once the multiple tax structure is abolished. The tax base is anticipated to be comprehensive, including virtually all goods and services, with minimum exemptions. However, some states propose to keep all 99 commodities present in the exempted list of SGST. But many states, including Gujarat, Madhya Pradesh, Punjab and Uttar Pradesh, continued to oppose the proposed constitutional amendment during the EC meeting. There has been no consensus so far. Union Finance Minister, Pranab Mukherjee, has been trying hard to seek cooperation from the states because if the draft bill is not tabled during this session, it will be difficult to roll out GST by April 2011. The government has already missed the previous GST deadline of April 2010.
GST is proposed to be a comprehensive indirect tax levy on the manufacture, sale and consumption of goods as well as services at a national level. Some are of the opinion that integration of this goods and services taxation would give India a world class tax system and improve tax collection. It would end the long standing distortions of differential treatment for the manufacturing and services sector. “We are waiting for the GST to come into effect from the next year. It will end all our suffering. It is expected to subsume various Central as well as state taxes, making it a lot easier for industries to do business in any part of the country,’’ adds Srinivasan.
Says Chandrajit Banerjee, DG, CII, “We are happy that there is a consensus between the centre and the EC on the design of GST. We see it as a very positive move. We hope that the necessary legislation and IT systems would be put in place soon to enable a smooth transition. CII expects that at the state and local level, all indirect taxes would get subsumed under GST.”
Defending GST, Kunwer Sachdev, managing director, Su-Kam Power Systems Ltd, says, “The imposition of GST in India will normalise the effective tax rate for many goods and reduce the cascading effect of multiple taxes. It will provide a common framework of laws with binding directives, which should facilitate uniformity in rates across states and reduce litigation. It should also add to the cost competitiveness of Indian manufacturers in global markets.”
However, some share a different opinion. Manpreet Singh Bhatia, director, Wings International, who has a manufacturing unit at Baddi in Himachal Pradesh, says, “Taxes often dictate a company’s decision on where to manufacture and how to distribute its goods. Tax free zones like Baddi will lose their viability once GST is imposed. In Baddi, we do not have to pay sales tax; moreover, VAT is 1 per cent lower compared to manufacturing plants located in other geographical locations. GST being an unbiased tax structure is neutral to business processes, business models, business substitutes and geographic locations. There will hardly be any benefit of setting up units in excise-free zones.’’
Experts say that prices of commodities are expected to come down in the long run as dealers would pass on the benefits of reduced tax incidence to consumers, by slashing the prices of goods. Whereas some feel that the impact on working capital could be significant as all transactions, including stock transfers, will be subjected to GST. “A company pays excise when it manufactures and ships its goods; and VAT when it sells them. When GST comes in, it will have to be paid as soon as there is a stock transfer. But the company will be able to claim credit on the tax paid only when it finally sells the goods, which could take months. The company’s money will be blocked during this period,’’ says Bhatia.
The government is likely to release the draft by October end in order to facilitate the implementation of this system by April next year. The introduction of the GST system is by far the most important tax reform in India. Consensus and coordination among states is required for it to succeed. Before it can be introduced, the Centre and states have to sort out issues like an agreement on GST rates, constitutional amendments empowering states to collect tax, taxation on inter state transactions of goods and services, drafting of CGST and SGST laws, etc. There must also be open consultation with all stakeholders, including trade and industry associations before finalisation. Besides, the administrative framework to implement the new tax regime should be in place and all other issues under discussion should be resolved.
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine