“To accomplish great things, we must dream as well as act”
— Anatole France (1844-1924)
Anatole France was probably not thinking about implementing GST in India when he made that observation, but he couldn’t have said it better, if he had been. We have about six months to go for the most momentous tax reform in the history of independent India. Will it happen by April 1, 2010, or even by the second half of 2010? Well, let’s see what steps need to be completed by then.
To make this happen, the Empowered Committee needs to finalise the design of GST immediately, so that the bill for constitutional amendment can be placed before Parliament at the earliest, perhaps as soon as the winter session starts later this year. The design of GST requires a decision on a number of critical aspects. Among these, the most complex are the tax rates (both at the Centre and at the state level), the services that the states would be empowered to tax and the “place of supply rules”.
All these issues are critical and complex and need considerable deliberation. Deciding on the tax rates—the rate at which the Centre and the states would levy GST on all transactions— is the most simple conceptually, but probably the most contentious, with all the states on one side and the Centre on the other. One cannot imagine this being decided within a time frame of 1-2 months.
Secondly, what are “place of supply rules”? Quite simply, these are a set of rules that apportion the right to tax services among the states, and set out clearly the factors that determine which state will have the right to tax a given service.
For example, deciding the place of supply is clearly required for the services that have a cross-border implication (such as telecommunication, railways and so on). Even for services of a local nature (such as health and fitness services, hotels and restaurants, and so on) the “place of supply rules” will have to provide which state can collect the tax. Conventionally, in such cases the state where such services are performed would be empowered to tax the service. However, these services can also have cross-border implications.
A membership programme from a fitness centre can allow the members access to its branches across the country. Similarly, some restaurants have loyalty programmes where they collect a fixed amount at the beginning of the year, which gives their members benefits at all participating restaurants in India through the year. Thus, unless a comprehensive central legislation with place of supply rules for services is in place, there could be overlapping and multiple claims for taxation of the same service from more than one state.
In the past, when similar problems were faced with respect to taxation of goods by states, the Constitution was amended and Parliament was empowered to lay down the principles that determined the site of sale/purchase of goods. Consequently, the Central Sales Tax Act was enacted to lay down the place of supply rules for goods.
The exercise of amending the Constitution (for empowering the states to tax local services and the Centre to lay down the place of supply rules for such services) is a complex process. Such amendment not only needs support from the majority of the members of both the Houses of Parliament, but also requires acceptance by at least two-third of the members present and voting. In addition, it will also need ratification by at least half of the states. Given the current political scenario, both at the Centre and the state level, the task of bringing through the constitutional amendments required in a short time is not easy, to put it mildly.
After the constitutional amendment, all the states would need to enact their own GST law so as to levy tax on goods and the prescribed services. This kind of legislative action by the states would be at least as burdensome as enactment of Value Added Tax (VAT) laws for which states took five years, i.e., from 2003 (Haryana VAT) to 2008 (Uttar Pradesh VAT).
Thus, the path to GST implementation is long and winding and as of now the complete implementation of GST by April 2010 seems unlikely.
Instead, April 2010 could be the time when the actual implementation of GST would start. As the states will take time to enact their own GST law, the implementation is likely to take place in a phased manner.
Even if GST is implemented over a much longer timeframe than April 2010, this would by no means represent a failure of the government to deliver on a much-repeated commitment. The issues mentioned above are complex and have far-reaching implications. Therefore, stakeholders will lobby hard to ensure that their interests are fairly represented. Building a consensus will take considerable time, patience and outstanding political leadership.
If it is done right, the end result will provide a massive boost to Indian industry and be well worth the wait.
The views expressed in the column are personal views of the author, with inputs from Ernst & Young
Vivek Mishra is Tax Partner & National Leader (Indirect Tax), Ernst & Young, India