The GST Constitutional Amendment Bill is currently a work-in-progress in the Rajya Sabha. After it is passed there, the Bill will be debated and taken up for voting in the State assemblies.
While the States are worried about protecting the tax base, the Centre is concerned about the compensation it will need to pay to nudge the States towards faster implementation. In itself, compensation is critical enough to impact the very design of the GST regime.
This ongoing negotiation recalls a major standardisation and unification exercise undertaken in relation to local sales tax when value added tax (VAT) laws were introduced to replace the archaic sales tax regime in various States, a decade ago. Compensation was a serious issue then, and it is a serious issue now.
Simple in theory Practical experience underscores the need for a robust and comprehensive input tax credit mechanism such as GST in respect of all the items. All taxes paid on purchases should be subtracted from the sales tax collected on sale of goods and services, and the balance should be paid to the government. In practice, however, it is not so simple. Not all the goods will be part of the GST regime.
States generate a major portion of their revenues from levies on alcoholic beverages, land and buildings, petro products, stamp duties and municipal levies, and thus these levies have been kept out of the current GST design.
Petro products are part of the GST Bill but will be brought under the GST chain sometime. However, tax on alcoholic beverages has been carved out as an exception to the definition of GST itself. Accordingly, another historical and extremely laborious exercise of constitutional amendment and consensus building across India will be required to bring alcoholic items under GST regime.
State governments control the entire cycle of manufacturing, distribution, retailing and pricing of liquor. The output of liquor factories is subject to State excise duty and sales tax. All imported raw material and constituents are subject to customs duty on imports.
The liquor taxation policy in States is the single biggest source of opacity, political patronage, nepotism and corruption. Non-transparent systems, price distortions, illegal imports in the high tax States or those under prohibition, and systemic distortions are the other hallmarks of the current State specific regimes. The compliance mechanism, including return filing and processing, leaves much to be desired in terms of speed of disposal of assessments, appeals, and reduction of backlog; this is despite the introduction of electronic and computerised filing in many States.
In all such cases, manual filings and systemic processes leave a lot of scope for subjectivity, document pilferage and lack of audit trail. If State level levies such as alcohol excise and other taxes are brought under GST, there will be an incentive to make a complete record of all the manufacturing and trade in liquor. It is an open secret that much of the trade in liquor is off the books leading to wholesale leakage and unbridled corruption. This will also help reduce spurious liquor and law and order issues.
Alcohol under GST Interestingly, various reports indicate that organised domestic and multinational players themselves want the inclusion of alcohol under GST. Their argument is that leaving out alcohol creates distortion as all inputs and imports will suffer GST and outputs from factories will attract State excise and sales tax. In other words, the input tax credit chain will break leading to cascading and high prices. Incentives to continue major amount of trades in a parallel economy will be strong.
In the somewhat pro-socialist set-up of public policy discourse in India, it is difficult to talk about ushering in transparency and simplicity in a sector as ‘sinful’ as alcohol for human consumption. In fact, a usually safer bet is to advocate levy of exorbitant ‘sin’ tax on such ‘demerit’ goods.
However, key items cannot be left out of the reach of GST merely because negotiations on such items are complicated and involve a mutual give and take between the Centre and States.
The issue merits a debate with an open mind, given the changes in the consumption pattern of liquor in various States.
The writer is a partner at J Sagar Associates. The views are personal. The writer does not hold a brief for any alcoholic beverage player