Total coverage the essence of GST

The Goods and Services Tax, which has been in the making for over nine years, is undoubtedly the most significant and transformative piece of tax reform that India has seen since Independence. If India is to succeed in reaping the full benefits of GST, it is critical that we get the design right.

A crucial aspect of design that impacts on the efficacy of GST is the scope and coverage of GST.

Compelling arguments There has been a long contention between the Centre and the States about inclusion/exclusion of certain goods and taxes from the ambit of GST, with the States insisting on the exclusion of key sectors such as petroleum, tobacco, alcohol and real estate.

The States’ resistance to the inclusion of these sectors is primarily on account of fear of losing their fiscal autonomy and revenues from these sectors.

Historically, the petroleum, alcohol and tobacco sectors have been “cash cows” for government revenues. State exchequers rely heavily on taxing these sectors.

However, there are compelling arguments against the exclusion of these sectors from GST.

The most important argument against excluding these sectors from GST is that any exclusion will seriously hamper the advantages to be derived therefrom. GST is expected to provide the benefits of simplification of tax regime, broadening of tax base, elimination of tax cascades, enhancing export competitiveness, ensuring greater regional equity, and improvement in transparency.

A tax design characterised by comprehensive coverage is a prerequisite for realising these advantages.

At present, the Constitutional Amendment Bill covers all goods and services, except alcoholic liquor for human consumption. Further, in the case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of GST till a date notified on the recommendation of the Goods and Services Tax Council.

Therefore, it can be said that the alcohol sector has been explicitly put outside the purview of GST; petroleum and tobacco are likely to be covered in future; whereas there is absence of clarity on coverage of the real estate sector.

All the sectors to be excluded, that it, real estate, alcohol, petroleum and tobacco, are large sectors of the economy. Their exclusion would lead to an erosion of the tax base for GST, adversely impacting the Revenue Neutral Rate (RNR) and raising the tax burden on other sectors.

Hindering the objective The Report on Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (RNR Report) specifically mentions that there is a very strong association between ‘rate of tax’ and ‘level of compliance’. The report observes that a 1 percentage point increase in the standard rate worsens compliance by 1.22 percentage points.

Therefore, any increase in RNR due to non-inclusion of these sectors may hamper the level of compliance under GST and mar the very objective thereof.

Further, a key objective of GST is to curb tax cascading. The exclusion of any sector would result in distortion of the input credit chain of GST, resulting in a cascading of taxes and perpetuating the inefficiencies in the economy under the current indirect tax regime and making these sectors uncompetitive.

Another detrimental impact of excluding these sectors from GST would be on the transparency that can be instilled by introduction of GST. One of the key features of GST is that it can complement measures taken by government to curb black money.

The input credit mechanism proposed in GST has an element of self-policing as it will create a third party reported paper trail of transactions between firms along the entire supply chain. This, in combination with a moderate tax rate, promises to be the most effective deterrent to evasion.

A good opportunity It is well known that sectors such as real estate and alcohol are plagued by lack of transparency and are havens for tax evasion. For this reason, many international jurisdictions such as Australia, Canada, New Zealand and South Africa cover these sectors in their VAT/GST. It is important to note that Malaysia, which recently introduced GST, covers commercial real estate transactions within the ambit of GST. In this background, if real estate, alcohol and other sectors are left out of the purview of GST, then the opportunity of developing a transparent and clean tax system would be lost.

Conversely, including these sectors in GST will result in the many advantages GST is supposed to bring in. Hence, in the larger interests of the country, there is a need to reconsider the exclusion of these sectors from GST.

A GST that excludes major sectors will defeat the very purpose it is intended to serve. The concerns raised by States regarding loss of revenue and autonomy are misconceived. As observed in the RNR Report, it is possible to levy some basic tax on these sectors within GST and allow States to levy top-up sin taxes. Therefore, the concern of States can be addressed without hindering economic reform.

Deshpande is a partner and Bhide a manager at Deloitte Haskins & Sells LLP

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