The Hindu Business Line : Transition to GST regime

The indirect taxation system has undergone a sea change in the last two decades — with Modvat, Cenvat, service tax and VAT. The concept of value addition with input set off facility has come to stay. But still the issues of cascading effect and multiplicity of tax rates persist in some pockets. Added to this is the existence of number of taxes administered by various authorities resulting in duplication and distortion.

In this context, introduction of Goods and Service Tax (GST) by April 1, 2010, is a welcome step, which is expected to eliminate all these anomalies and flaws in the existing system and will centre around an efficient and harmonised consumption tax system in the country.

Roadmap in place

The roadmap is in place. The reform process has started. The CST (Central Sales Tax) rate was reduced from 4 per cent to 3 per cent last year and is likely to be phased out totally by April 1, 2010. The Central Government compensates State Governments for the consequent loss. Integration of Cenvat and service tax had happened at the manufacturing level. VAT is in place throughout the country with inter-State transactions out of the purview.

State Governments agitate that they are not compensated adequately for the loss on account of VAT implementation/reduction in the CST rate. The Government’s suggestion for a bigger share of the service tax revenue to States and even empowering State governments to levy service tax on certain services have not been received well, as States have been enjoying complete sovereignty in tax administration which they would not like to part with.

Constraints, alternatives

Introduction of GST is an uphill task. A clear picture on the design and necessary infrastructure for implementation is required. In fact, the incidence of taxation is no more manufacture or sale or service, but supply. Some of the features of the system proposed, including the constraints and alternatives available, are discussed herein.

Though a dual GST system is likely to be in place to begin with, in the long run, there is a need to evolve a single unified GST. It is proposed that the unified GST can be administered by the Centre with a revenue sharing arrangement with States. To empower the States (as well as the Centre) to levy and administer their respective GST, the Government has to make constitutional amendments wherever required.

The Empowered Committee of State Finance Ministers can be given statutory recognition as a quasi judicial governing body with authority for issuing guidelines, resolving disputes, administering and enforcing agreement between States and the Centre.

The rates for goods and services across the States have to be uniform.

Hence, tax rates should first be rationalised. Classification of products may be based on Harmonised System of Nomenclature (HSN) for uniformity. The tax rates should be fixed scientifically to ensure total elimination of cascading effect without distorting the production or distribution mechanism.

It is important to have a full set of Input Tax Credit (ITC) with minimum exemptions in place. ITC should be extended for all transactions, including inter-State transactions. Criss-cross utilisation between Central GST and State GST should be made available.

Creation of a strong information exchange system should be built to facilitate availability of intended benefit to trade and industry and to check misuse of the scheme, thereby ensuring the protection of the Revenue’s interest.

Border controls

Foreign trade transactions should be covered under GST where imports can be subject to tax and exports zero-rated. Total abolition of border controls should be done as the whole system is to be based on trust and faith. A comprehensive audit system should be framed to check possible misuse of the scheme and to provide comfort to the Centre and States, safeguarding their revenue interest.

Legislation should suitably cover provisions encompassing unique transactions such as captive consumption, branch transfers. The procedural requirements need to be properly framed to facilitate utilisation of ITC without hindrance, payment of tax at source, claiming of refunds, including applicability of documents/forms like CT3, C-Forms.

It is necessary to follow a single-window facility for all tax payments/compliance under GST. One unit should pay all taxes to only one authority.

This is already in practice in excise and service tax areas with the advent of large taxpayer unit (LTU).

The Government is on the move and has fixed April 1, 2010, as the date for GST implementation. There can be no doubt that with GST, industry will grow and, in turn, enhance the country’s competitiveness.

(The author is the Co-Chairman of Policy Sub-Committee, CII – Southern Region.)