Dealing with GST’s unfinished business

As I write the country has moved to a GST regime. This represents the culmination of a journey that began with the release of the first discussion paper on GST in November 2009. With all its warts, this is an audacious tax reform built on consultation and consensus of 29 States and seven Union Territories: truly a triumph of cooperative federalism and Team India.

In this journey, the GST Council has emerged as an important institution which, if properly nurtured, can strengthen Indian federalism. Lots of credit for this must go to the Finance Minister who has gone the extra mile to accommodate the views of the States. The question that now arises is ‘what next?’

The next step has to be to improve the design of GST by bringing in the sectors left out. This could be done after the transitional issues are sorted out and the revenue picture becomes clearer. Crude petroleum and petroleum products are part of GST but five items – crude oil, petrol, diesel, aviation turbine fuel and natural gas – have been kept out temporarily. The law provides that the items can be brought under the GST at any time with the approval of the GST Council. The Ministry of Petroleum has also supported this idea because the revenue hit for the petroleum sector is significant due to the sector getting fragmented into GST and non-GST segments. Even if this is not immediately possible natural gas could be considered for inclusion because this is an industrial intermediate and GST input credits can be passed on to the final products which are within the GST.

The other steps should be to include electricity and then buildings and real estate. Electricity is a very important item but the States have been resisting its inclusion in the GST on the mistaken premise that this inclusion would raise tariffs for the consumers. Even without any central duty the embedded taxes in the electricity stream are estimated to be around 8-9 per cent of the taxable value. This increases the cost of manufacture.

Bringing electricity into the GST net is easy as there are no legal impediments. Traditionally, electricity was part of the central excise tariff and a nil rate was prescribed in the tariff itself. Bringing electricity under GST would provide seamless credit of input taxes and also a clear idea of the true incidence of taxes on all segments in the electricity sector. This move may particularly benefit the renewable segment where a lot of new capacities are being set up and the capital investment are huge, with capital goods credit now available at one shot. This will also boost manufacturing and the ‘Make in India’ effort.

The other important segment left out is land and real estate. This is a glaring omission as its non-inclusion defeats the whole idea of GST, which is to transfer burden of taxation from intermediate and capital goods to final consumption goods. The collateral benefits of the inclusion are huge. It will clean up the land markets and strike a blow against black money. This can be done without subsuming stamp duty in the GST. Earlier it was presumed that inclusion of land and real estate would require an amendment to the definition of ‘goods’ in the constitution. The debates thereafter have brought much needed clarity on this. It is now clear that supply of land can be treated as a supply of services by treating it as a supply of the ‘right to land’.

Today an artificial distinction is made between ‘work contracts’ service and services related to ‘construction of residential buildings’. This artificial distinction prevents availing of tax credits on input materials such as iron and cement by developers. Today the levy of GST stops at the construction stage whereas logically it should be taken forward to the stage of final construction of residential buildings. This measure would require an amendment to Schedule III of the CGST law (entry incorporated here treats supply of land and buildings as neither a supply of goods nor supply of services). Further, an amendment would also be required to the input credit rules where there is a bar on availing input credit in relation to land and buildings. The revenue benefit may not be considerable on the GST side because the developer may declare a level of transaction just enough to utilise the tax credit available. The real benefit will come from enhanced revenues on the direct tax side. The monitoring is now facilitated by the fact that the GST registration number has embedded in it a 10-digit PAN code. Inclusion of land and building in GST by treating them as a supply of service will make what is now a good GST a great GST.

A very important institutional measure which can help to reduce disputes is the creation of a Technical Secretariat in the Centre and the States. A conceptual distinction needs to be made between “assessment cases” and “offence cases”. While “offence cases” can be left to field officers to adjudicate, assessment cases relating to classification, valuation and eligibility of input credits should be decided centrally and the instruction issued should be binding on the field officers. This will help in ensuring uniformity of assessment practices across the country. This will be especially beneficial to the States in the area of service tax, for States would require some hand-holding. (Hitherto service tax was only levied and collected by the Centre). The creation of a Technical Secretariat will help to bring Central and State officers together to discuss and resolve technical issues. It would forge the bonds of federal fraternity and also minimise the disputes across the country.

The measures to enhance the taxable base of GST by bringing electricity, petroleum and land and real estates would improve revenue buoyancy and also help the Government to reduce the number of rates. Revenue comfort can facilitate rate simplification. Similarly, the creation of a Technical Secretariat is an institutional innovation which can provide relief to the tax payers and this is eminently possible for the necessary legal backing which is already available in the GST legislation.

The writer is Senior Advisor, Tax Policy Group, EY. The views are personal

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