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GST is going to end our Tax Woes

By Vivek - July 13, 2016

This article has been co-authored by Prachi Patil

ATreatiseonGoodsServiceTaxNDAsCornerstoneonTaxation
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Disclaimer:Thisarticleisquiteheavyandwewouldrequestourreaderstohaveadetailedlook
atthewriteup.Thearticlegivesanoverviewofthecurrentindirecttaxregimeinthecountry
andwhatGSThopestoachieve.
AlothasbeendiscussedontheGoods&ServicesTax,andnowwiththetaxexpectedtobe
passedintheensuingbudgetsessions,weaimtoprovideourreadersadetailedoverviewofthe
CurrentIndirectTaxsystem,itschargeability,structureandcurrentchallenges.Thearticleis
segregatedinfollowingsections:

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Section1:OverviewofthecurrentIndirectTaxstructure

Section2:IssueswiththeIndirecttaxstructure
Section3:OverviewoftheGoods&ServiceTaxRegime
Section4:CommentaryontheGSTrate,specificallytheRevenueNeutralRate

SECTION 1: OVERVIEW OF THE CURRENT INDIRECT TAX

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STRUCTURE
Indiahaswitnessedsubstantialreformsinindirecttaxesoverthepasttwodecadeswiththe
replacementofStatesalestaxesbyValueAddedTax(VAT)in2005markingawatershedinthis
regard.However,GST(GoodsandServicesTax)Billhasbeenconsideredasfurthersignificant
breakthroughthenextlogicalsteptowardsacomprehensiveindirecttaxreforminthe
country.Consideredoneofthemajorhighlightsofthegovernmentsreformprogram,ithas
beenlongpendingandtrendingtopics.
Fornearlytenyears,IndiahasbeenonthevergeofimplementingGST.Butnow,withpolitical
consensusclosetobeingsecured,thenationisonthecuspofexecutingoneofthemost
ambitiousandremarkabletaxreformsinitsindependenthistory.Wethought,thiswouldbea
righttimetogiveasensetoourreaderswhatisthehooplaaroundGoods&ServicesTax.
Accordingly,wehavestructuredthewriteuptocover:
1.WhyGSTisimportantandhowaretaxsystemsinothernations
2.BirdseyeviewofIndiasIndirecttaxstructurecoveringcentral,stateandrelatedcotangled
issues
3.ProposedGSTmodel
4.Revenueneutralrateandkeyrecommendations
5.Issuesinimplementation
6.Concludingremarks
WhyGSTissohypedintogovernmentsreformprogram?
Well,inouropinion,implementinganewtax,encompassingbothgoodsandservices,
tobeimplementedbytheCentre,29Statesand2UnionTerritories,inalargeand
complexfederalsystem,viaaconstitutionalamendmentrequiringbroadpolitical
consensus,affectingpotentially22.5milliontaxentities,andmarshallingthelatest
technologytouseandimprovetaximplementationcapability,isperhaps
unprecedentedinmodernglobaltaxhistory.
ItiseasytooverlookthesignificanceandmagnitudeofGST.Acrosscountrycomparison,
especiallycomparisonwiththeotherlargefederalsystemsEuropeanUnion,Canada,Brazil,
Indonesia,ChinaandAustraliathathaveaVAT(theUnitedStatesdoesnothaveaVAT)will
helpinthisregard.AccordingtotheWorldBank(2015),over160countrieshavesomeformof
valueaddedtax(VAT),whichiswhattheGSTis.
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ComparisonofFederalVATSystems

Source:WorldBank(2015)andReportonRevenueNeutralRate

Asthetableabovesuggests,IndianGSTisexpectedtominimizethedisadvantagesof
completelyindependentandcompletelycentralizedsystems.Acommonbaseandcommon
rates(acrossgoodsandservices)andverysimilarrates(acrossStatesandbetweenCentreand
States)willfacilitateadministrationandimprovecompliancewhilealsorenderingmanageable
thecollectionoftaxesoninterstatesales.Atthesametimewillprovidetherequisitefiscal
autonomytotheStates,allowingthemtolevyadditionalexcisetaxesonsingoods(petroleum
andtobaccofortheCentre,petroleumandalcoholfortheStates).Eveniftheyarebrought
withinthescopeoftheGST,thestateswillretainautonomyinbeingabletolevytopuptaxes
onthesesin/demeritgoods.
BeforewegointodiscussionofwhatexactlyGSTisanditsproandcons,letsfirstunderstand
theproblemswithcurrenttaxstructurethatGSTwillsupposedlygetridof.

Current Indirect Tax Structure: bird eyes view

Currentindirecttaxstructureishighlycomplexwithseparate,sometimesoverlapping,taxes
administeredbyvariouscentral,state,andlocaljurisdictions.Indiafollowstwolayerstructures
ofindirecttaxescurrently.CertaintaxesareleviedbytheUnionGovernmentandcertaintaxes
bytheStateGovernment.Moreover,certaintaxesleviedbytheStateGovernmentareassigned
toLocalbodiessoastoprovidethemindependenceaswellasautocracy.Therefore,ineffect,
thereare3layersoftaxesinIndia.

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CHARACTERISTICSOFINDIRECTTAXATIONONCENTRALANDSTATELEVEL
ThetaxesatCentralandStatelevelhavefollowingkeycharacteristicsorissues,dependingon
eachofthepointbelow:

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SECTION 2 : ISSUES WITH EXISTING INDIRECT TAX

STRUCTURE
TheissuesinIndirecttaxesaresegregatedunderthefollowingheads:
1.MultiplicityofIndirectTax
2.Different/multipletaxationevents
3.Multipletaxablevalue
4.Multipletaxratesforsameproductsoverdifferentjurisdictions
5.Uncommonthresholdlimits
6.Challengesinexemptions&setoffs
7.Doubletaxationconflicts
8.Valuationissuesi.e.someactivitiestaxonbothVAT&ServiceTaxlevel
9.Litigations&Multiplecompliances
Theensuingsectionsprovidesinbriefoneachoftheaboveitems.

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Multiplicityofindirecttaxes:
MultiplicityoftaxesattheStateandCentrallevelshasresultedinacomplexindirecttax
structureinthecountrythatisriddenwithhiddencostsforthetradeandindustry.Firstly,there
isnouniformityoftaxratesandstructureacrossStates.Secondly,thereiscascadingoftaxes
duetotaxontax.
DifferentTaxableevents:
Taxableeventisthepointoftimewhenaparticulartaxbecomesleviable.Itmayalsobe
referredaspointoftaxation.Eachindirecttaxhasitsowntaxableevent.

Thefollowingfurtherprovidestheinformationinmoretechnicalway

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Becauseofdifferenttaxableevents,thesamegoodsattracttaxtwiceorthrice.Moreover,foran
enterprise,especiallyasmallormediumsize,itbecomesverydifficulttokeepatrackof
differenttaxableeventswhich,inturn,mayresulteitherincompliancelapsesorinover
paymentoftaxes.

MultipleTaxablevalues:
Taxablevaluesmeanthevalueonwhichtaxislevied.Thevaluesbaseonwhichtaxmaybe
applieddifferfromonetaxlawtoother.

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Moreover,certaintransactions,mayinvolvegoodsaswellasservices.Ifthepriceforthe
compositetransactionisquotedasonelumpsumprice,thesamemayresultintooverlapping
oftaxes.Thereasonbeing,twodifferentauthoritieswilltrytotaxlargershareofthecombined
price.Theissuesmayemergesometimes,evenifseparatevalueshavebeenprovidedforsuch
compositetransaction.
Differenttaxablevaluesanddifferentvaluationmechanismunderdifferentindirecttaxstatutes,
resultintodoubleandhighertaxationtoagreatextentduetowhichtheultimatecosttothe
endusergetsinflatedandtheconsumersuffersmerelyduetoabsenceofclarityonvaluation
principles.
Taxratesforsameproductsindifferentjurisdiction

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1.Taxratesincaseofdifferentstatuesforthesamegoodsmaybedifferent.
2.Aproductwhichmaybechargedat12.5%VAT/CSTinoneState,maybecharged@14%or
5%VAT/CSTinsomeotherState.
3.ThesameproductmaybeliabletoLocalBodyTax(LBT)@2%inoneCity,maybecharged
@5%inadifferentCity.LBTinanysinglecityhasmorethan5taxslabs.
4.AmanufacturersupplyinggoodsinvariousStatesandCitiesisrequiredtokeeptrackofall
thedifferentratesforhisproducts.Hewillbealsorequiredtokeepatrackofchangesin
rateseveryday,ifany,inthestates/citieswhereinheisdealing.
5.Thetaskofsuchsupplierbecomesherculeanwhensuchsupplierisdealinginmultiple
productsclassifiableunderdifferenttaxslabs.Onehastocarryoutclassificationexercisefor
eachStateandCitytoascertainthecorrectrateofVATorLBT.
6.Further,iftheproductcanbeclassifiedundermorethanonecategoryapparently,
department,asperhiswhimsandfancies,wouldtrytolevyhigherrateoftax.
7.Againanynoncomplianceisfraughtwithheavyinterest&penalties.F
Thresholdlimitsbreedcomplexity&corruptionseepage:
1.Mostoftheindirecttaxlawsproviderelaxationswithregardtotheapplicabilityofsuchtax
lawstosmallbusinessentity.
2.Insuchanevent,creditofinputtaxespaidonpurchasesisnotpermissible.Ineffect,such
smallbusinessentitycanavoidvariouscompliances.However,evenwithsuchbeneficial
provisions,duetovarietyofTaxlaws,thereareissues.
3.Thethresholdlimitsaredifferentunderdifferenttaxlawswhicharefurthersubjecttovarying
conditions,limitationsandexceptions.Tofindoutwhetheroneisentitledtoclaimthreshold
limitornot,isanexerciseinitself.Thecomplexitycreatestheroomformanipulationand
eventually,evasionaswellascorruption.
Exemptions,morelitigious:

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1.Exemptionsareevenmorecomplexastheycouldbebased
1.onvolume,or
2.onkindsupplierofgoods/servicesor
3.typeofrecipientofgoods/services,or
4.onthebasisofkindofgoods/services.
5.Certainexemptionscouldbeconditionalwhereas,therestcouldbeunconditional.
2.Itbecomesdifficultforanormalbusinessmantounderstandthenittygrittyofvarious
exemptionsandkeepatrackofthesame.Moreover,complyingwithconditionalexemption
complicatesthetask,leadingtoanunendingandeverincreasinglitigationbetweenthe
assesseeandtheDepartment,finallyleadingtonobodysgains.
Setoffs
1.Setoffsarenotseamlessanduncontroversialeither.Eachsetoffprovisionsavailableon
Statuteasonthedatecomeswithvarietyofifsandbuts.
2.Eligibility,reductions,retentionsandconditionsattachedtovariousinputcreditsmakesthe
setoffmechanismdespairedandineffective,furtherleadstoeitherlitigationorincreased
costoftheproduct.
Doubletaxationconflicts
1.Inviewofconfusionbetweenvariousindirecttaxauthorities,industrysetafunnypracticeto
collectbothi.e.VATaswellasServicetaxwhichresultsindoubletaxationandastrange
situationwherethesametransactionisconsideredassaleofgoodsaswellasprovisionof
services.
2.Itfinallyresultsintoahighercostinthehandsofendconsumer.
3.Forexamples,copyrightstransferredtoanotherpersonattractsVATwhereastemporary
transferorenjoymentofacopyrightisasubjectmatterofServicetax.
Valuationissues,especiallyworkscontractandrealestaterelatedtransactions

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1.TherearecertainactivitiesunderSalestaxlaws,whichbyvirtueofdeemingfiction,are
taxedasgoods.
2.Forexample,aworkscontract,whereinthoughthereisnosaleofgoodsinvolved,the
consumptionofmaterialstoexecutesuchworkscontractisdeemedtobesaleofgoods.
3.Itiscanvassedthatthetransferofpropertyingoodsinvolvedduringtheexecutionofworks
contractsisthesubjectmatterofsalestax.However,thesameactivityisalsosubjectedto
Servicetax.
4.Theserviceportioncontainedintheworkscontractistaxedunderservicetaxlawbyvirtue
oftheconceptofdeclaredservices.
Litigation:
1.Applicability,exemptions,valuation,classification,inputcredit,penaltiesetc.arefewreasons
tonameforeverincreasingandnonendinglitigations.
2.Duringthependinglitigation,theassesseissupposedtomakeapredepositwhichdiffers
underdifferenttaxlaws.
3.Undermajorcentralindirecttaxlaws,itis10%ofthedisputedamount,whereas,incaseof
LBTitisashighas100%.
Compliances:
1.Thequantumandcostofcomplianceisindirectproportiontothenumberoftaxlaws
applicableandcomplexitytherein.Withmorethanonetaxlawapplicableandinvolvementof
hugedisparityamongstsuchtaxlaws,obviouslyleadtoafairlyhugeamountofcompliances.
2.EachTaxlawcomeswithitsownrequirementspertainingtoregistration,statutoryrecord
maintenance,paymentoftaxes,returns,assessments,etc.leadingtohighmanpower
requirementandincreasedlegalsupport.
3.Thisaddstomereincreaseinthecompliancecostwithoutaddingasinglerupeeextratothe
coffersofpublicexchequer.
Withthisbackground,letsunderstandwhatGSTaimstoachieve.

The Proposed GST model

Asitsveryapparentfromthenameitself,GSTisacomprehensivetaxwhichwillbe
leviedonbothgoodsandservices.GSTismeanttobeasingletaxwhichwillinclude
alltheotherindirecttaxesonconsumptionlikecentralandstatesalestax,service
tax,valueaddedtaxetc.
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TheGSTisexpectedtoaffordauniqueopportunitytosimplifyandrationalizethe
currentstructureandalsoeliminatetheseseriousanomalies.
TheproposeddualGSTenvisagestaxationofthesametaxableevent,i.e.,supplyofgoodsand
services,simultaneouslybyboththeCentreandtheStates.Therefore,bothCentreandStates
willbeempoweredtolevyGSTacrossthevaluechainfromthestageofmanufactureto
consumption.

Salient features of proposed GST:

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StructureofRatesfortheGoodsandServicesTax
RevenueNeutralrate(RNR)andStandardRate
RNRreferstoasingleratewhichpreservesrevenueatthedesiredlevel.Thus,ifallgoodsand
servicesintheeconomyaretaxedatasinglerate,RNRwillpreservefiscalrevenue.
Nevertheless,giventhepoliticalandpolicyconsiderations,thereislikelytobestructureof
rates.
ThestandardrateundertheGSTregimeistheratewhichisappliedtomostgoodsand
services.Inathreetierstructure,thelowerbound,knownaslowrateandtheupperbound,
knownashigh/demeritrateornonGSTexcise,willbechargedtospecificcommodities.The
restofgoodsandservices,whosetaxationbasishasnotbeenexplicitlyspecified,willattract
thestandardrate.
Recommendationsforthetaxrate
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TheaimofthetaxrateisbeRNRi.e.RevenueNeutralRate,whichmeansfindingataxrateson
whichwouldensurethatthecurrentindirecttaxcollectionsremainthesame.The
recommendationsforTaxRatesaresegregatedontwowaysviz.,:
1.BasedonCEOpanelforRevenueNeutralRaterecommendations
2.BasedonNationalInstituteofPublicFinanceandPolicyrecommendations

1]ThepanelheadedbyChiefEconomicAdvisor(CEA)Mr.ArvindSubramaniamwas
presentedwiththreedifferentapproachesforestimatingtheRNR.

KeyrecommendationsoftheCEAledpanel:

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RNRof15.0%15.5%,withpreferenceforthelowerbound.Italsosuggestedathreetier
taxationstructurewithalowrate(ongoldandpreciousmetals)of12%,standardrateof
17%18%andsin/demeritrateof40%ofgoodsandserviceswhichcreatenegative
externalities.Therefore,ifthereisasingletaxrateforallgoodsandservicesintheeconomy
itshouldbepreferably15%,butgiventhepolicyandpoliticalconsiderations,astandardrate
of17%18%isrecommended.
Subramaniamrepeatedlyemphasisedtheneedandtheimportanceofreducingexemptions
asmuchandalsoassoonaspossible.InthecurrentGSTproposal,whilepetroleumproducts
havebeeninitiallykeptoutofGSTpurview,realestateandalcoholarecompletelyout.Not
onlyexemptionsleadtomultiplicityofrates(bybreakingupthevalueaddedchain),but
theyarepositivelyrelatedwiththestandardtaxandnegativelyrelatedtoGSTefficiency.The
broaderthescopeofexemptions,thelessertheeffectivenessofGSTandthehigherwillbe
thestandardtaxrate.
Thepanelalsosuggestedeliminationofalltaxesoninterstatetradeincludingthe1%
additionalduty.Aswehadstatedearlier,thebiggestbenefitofGSTisthatitwillmakeIndia
asingle/uniformmarket.Anysortofrestrictionsoninterstatetradedefeatstheentire
purposeofGSTandmakesitsefficiencydoubtful.
2]NationalInstituteofPublicFinanceandPolicy(NIPFP)proposedthatthestandard
revenueneutralGSTratecouldbeintherangeof2325%.
Thisratecouldbeintherangeof1819%ifthereisonlyasingleGSTrate,accordingtothe
institutescalculations.However,ifgoodsandservicesaretaxedatdifferentratesasproposed
atpresent,thestandardGSTratewillbeintherangeof2325%.
FeaturesandimpactofcurrentsystemwithanidealGSTregime:

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SourceReportoftheTaskforceonGST,13thFinanceCommissionReportoftheFourteenthFinanceCommission,
Chapter13,GoodsandServicesTaxFirstDiscussionPaperonGoodsandServicesTaxinIndia,TheEmpowered
CommitteeofStateFinanceMinisterPRS.Note:*CENVATdoesnotincludeadditionalexciseduty,additional
customsduty,centralsurchargesandcesses.StateVATdoesnotincludeluxurytax,entertainmenttax,taxeson
lottery,advertisements,entrytaxetc.CENVATappliesonlyatthemanufacturingstage,anddoesnotextenddownto
thedistributionstagetilltheretailsaleofgoods.**ExemptionsunderCENVATandservicetaxinclude:oilandgas
production,mining,agriculture,wholesaleandretailtrade,realestateconstruction,andotherservices.Understate
VAT,allservices,realproperty,agriculture,oilandgasproduction,andminingareexempt.

In

Conclusion
TheGSTattheCentralandattheStatelevelwillthusgivemorerelieftoindustry,trade,
agricultureandconsumersthroughamorecomprehensiveandwidercoverageofinputtaxset
offandservicetaxsetoff,subsumingofseveraltaxesintheGSTandphasingoutofCST.With
theGSTbeingproperlyformulatedbyappropriatecalibrationofratesandadequate
compensationwherenecessary,theremayalsoberevenue/resourcegainforboththeCentre
andtheStates,primarilythroughwideningoftaxbaseandpossibilityofasignificant
improvementintaxcompliance.Inotherwords,theGSTmayusherinthepossibilityofa
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collectivegainforindustry,trade,agricultureandcommonconsumersaswellasfortheCentral
GovernmentandtheStateGovernments.TheGSTmay,indeed,leadtothepossibilityof
collectivelypositivesumgame.
Provideditcanbereasonablywelldesigned,theIndianGSTwillbethe21stcenturystandard
forVATinfederalsystems.Itis,therefore,imperativetoensurethatthedesignand
implementationofthispolicyisdoneright.

Vivek
http://www.valueforesight.com

CharteredAccountantbyEducation.PassionateaboutPublicPolicy,Investment,EconomicsandMovies.

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