State Governments should seriously initiate the first few steps to integrate services into the present mechanism of tax administration and policy to prepare themselves for the dual Goods and Services tax (GST) regime.
Dr N. Ramalingam and Dr C. S. Venkiteswaran of the Gulati Institute of Finance and Taxation (Gift), Thiruvananthapuram, have said in a paper that the identification of various services is an area that needs to be explored by the States.
NEW TAXING POWER
The dual GST system proposes a new taxing power to States, i.e. taxing of services along with the existing system of taxation of goods.
States would therefore need to familiarise themselves with various services (other than statutorily exempted services) produced locally, their sources, potential revenue and tax collection methods.
The success of the dual GST is to treat the country as a seamless unit in terms of indirect taxation, the authors said in a paper titled, ‘Towards GST-Issues and concerns at the sub-national level.'
Presently, there are breaks in the VAT (value-added tax) trail wherever inter-State sales of goods or stock transfers are involved.
NEW MODEL
This system is proposed to be replaced by a new model called Integrated GST (IGST) whereby the VAT trail would not be broken even in the case of inter-State transactions.
In the GST context, each State should estimate their potential revenue gain, loss, or blockages; methods of taxing inter-State transaction of services; reconciliation issues among States; and issues relating to real-time electronic exchange of data between States.
A comprehensive database on inter-State movement of goods is also indispensable for developing a just rationale for calculating compensation packages for the States, the authors said.
The dual GST ultimately boils down to the issue of tax rates at the Union and the State level.
MULTIPLE RATES
In this context, the authors said that it is but rare that a single rate for States, both for goods and services, would be adopted or would become acceptable.
Rather, it would be multiple rates (two or three rates) for the Union and States that would be acceptable.
As of now, neither the Empowered Committee of State Finance Ministers nor the Union Government has come to a conclusion on these rates.
In this context, the State would have to take the initiative to calculate the Revenue Neutral Rates (RNR) applicable to them.
DATABASE NEEDED
While doing this, they would need to take into account various permutations and combinations of rates for goods and services, the authors said.
A comprehensive database and a baseline study for RNR for each State under different rates are imperative since they have a direct bearing on its power to negotiate with the Union for compensation packages for the years immediately following the introduction of GST.