There is hardly any doubt that India could have seen its prime indirect tax restructuring ever had the Goods and Services Tax (GST) come into force. Introducing GST with the help of the proposed 115th constitutional amendment in the 15th Lok Sabha could have attempted to strengthen the indirect tax arrangement in India besides enlarging the tax base by capturing value accumulation in distributive trade and probable intensification in compliance. But that was not to be. Is the dream of becoming a "one tax nation" fading away?
Currently the indirect tax structure in India calls for several taxes and thus necessitates a number of compliances. Broadly speaking, indirect taxes in India can be categorised as - central government taxes, state government taxes and taxes imposed by local authorities. Interestingly, a few taxes are levied and collected by same authority but there are some others that are levied and collected by different authorities. In addition, tax rates are not uniform across the country leading to additional complexities for tax compliers.
Having missed several previous deadlines, we may hardly be in a position to set a new targeted timeline to introduce GST, leading to gradual fading away of the dream of "one tax nation" for the time being. As a federal country, India has clearly defined powers of taxation in its constitution. Besides pulling together diverse taxes and maintaining the revenues, states and local authorities were often benefitted through a percentage of the central tax collected as per the state of affairs defined by Finance Commission. The existing indirect tax structure is neither friendly to consumer welfare nor does it get a hold on the loss to the exchequer due to institutional loopholes. In addition, there is the built-in complexity of the existing framework. Is it encouraging for industry?
GST, a composite tax on goods and services, is in fact a tax on value accrual at each stage. In an ideal GST framework, suppliers at each stage are permitted to set-off through a tax credit system. Every business action assumed at all stages from invention to consumption through distribution is subjected to GST at a particular rate. The concept of GST is a consumption based levy. It is expected that GST will be levied on the charge actually paid for supply of goods and services. At present, is there any instrument through which individuals can get a rebate on taxes paid at the preceding level of business? With the absence of any facility to offset the incidence of one tax with another, in most cases, the cascading effect gets incorporated into the business cost. Steps are yet to be taken to fetch the value added chain in the distribution trade underneath the manufacturing stage in the present indirect tax arrangement in our country. GST envisages trimming down the trouble of "tax on tax".
The framework of value added tax (VAT), recognized as GST as well in several countries, has been one of the major development in taxation structures worldwide over the last half century. More than 135 countries adopted the GST/ VAT framework effectively. In the background of liberalization, its impartiality towards international trade led its popularity as a substitute to customs duties. Obviously, there exist variances in the approach around the world. Over a comprehensive period there were improvements across the macroeconomic variables although there were short term hold ups. The results observed on revenue and current accounts were quite remarkable in three federal economies- Australia, Canada and New Zealand.
Looking into the know-how of European Union (EU), it is observed that EU endorsed the outset of an arrangement akin to the GST through a directive by proposing to build a regular composition of VAT applicable to all goods and services, except few, charging an amount proportional to the price of the goods and services. United Kingdom (UK), a member of EU Economic Community, has chosen to put into practice a nationalized GST structure dissimilar to the Dual Scheme likely to be set up here in India. Dual GST arrangement is intended to have distinct responsibilities in a federal system.
It is redundant to note that as one of the background preparations to bring in GST in India, VAT was introduced to put back pre-existing central excise duty and diverse sales taxation across the states. Even after such accomplishment, there were numerous inadequacies in the state-level VAT structures. Presently, several indirect taxes like luxury tax, entertainment tax etc. are yet to be included in different state VAT structures in India. State VAT structures in addition suffer from cascading effect of service tax. Again, CENVAT suffer from the inadequacy of non-inclusion of quite a few central taxes in the general structure leading to exclusion of manufacturers and dealers from the paybacks like that of comprehensive input tax and service tax set offs. GST must envision stepping into the broadening of base by considering value accumulation in the distributive business. GST must look forward to conquering the shortcomings of the VAT structure.
Even if GST intends to consolidate diverse indirect taxes underneath an overarching legislation, the effective tax load may bump up for certain sections and may down-surge for certain others. The effectual tax burden would definitely be conditional on stages of the goods or services in the delivery chain, aptitude of the purchaser to capture credit etc. Is GST going to be easy abridgment of VAT and service tax?
GST is projected to show the way to revenue gain for the government through enlargement of tax base and enhancement in tax compliance. The Empowered Committee suggested GST on the basis of 'negative list' approach. Only notable taxes which may not going to be listed through GST are- Stamp Duty, taxes and duties on electricity etc. At present, stocks of goods or services are not exposed to VAT/ CST or service tax which conversely, in the post-GST system, would turn out to be assessable through stock transfers. If GST rate is levied at Revenue Neutral Rate (RNR), actually there would be contraction in the effective tax weight on the customer through removal or lessening of cascading effect of taxes to assured level. Accordingly, decline in the general price level is quite expected. Simultaneously, it is significant to cite that the effectual GST rate is likely to be the input factor to conclude the typical price level. However, all-inclusive indirect tax structure is anticipated to save energy and resources to lead to supplementary improvement of GDP as a whole through multiplier effect.
Understandably, the introduction of GST necessitates constitutional modification recommending consent to the Centre to charge taxes ahead of the manufacturing point. Again, states should be allowed to levy tax on all services which were until now with the centre. At the same time phasing out of CST along with other state taxes will lead to revenue slaughter for the states on everlasting basis. Certainly, the contest of calculating pertinent compensation model for the states or optimal revenue sharing model will have to kick in. Besides these policy fundamentals, a strong IT platform across the nation is considered necessary to compose central and state indirect taxes management. Further, basic prerequisites should be taken account of - fundamental structure of GST law should be regular for all states, all states should put into operation GST simultaneously, single registration and identification for tax compliers, electronic filing platforms, harmonized nomenclature for product categorization etc.
So, are we ready? Or, are we still dreaming of becoming a "one tax nation"?
(The observations are entirely personal and have no connection with the viewpoints of the ministry and the funding agency (DFID), the author works for.)