No end to multiple taxes

The goods and services tax (GST) is projected to set a new dimension in taxes through a supposed uniform rate across the country, something any nation would want. Ideally speaking, it is all about treating all States as equals and ushering a comfortable regime.

Undoubtedly, the Central Government is pushing the Bill with this aim as it wants the entire country to turn into a tax-friendly regime. Indeed, this is welcome as it is projected to cascading effect of taxes, referred to as “taxes on taxes”.

Imagine a trader A sells goods to B after charging sales tax. B re-sells it to C after deducting ST. Now C pays a double ST – one paid by B and one sold by B. Bluntly, tax on tax. Pertinently, this was the situation till VAT (value added tax) replaced ST.

Primarily this system was introduced so that a dealer at every stage used to get credit of the tax paid at the earlier stage against his tax liability. Thereby, this reduced the overall liability of many traders and but had little impact on inflation.

Notably, a similar concept came in to force vis-à-vis the duty on manufacture ---- Central Excise Duty --- much before it was in regard to sales tax. The CENVAT credit scheme (earlier known as MODVAT) was also a welcome move by trade and industry where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods.

Moreover, this system was extended to service tax also with effect from 2004. Thus, to a huge extent, the problem of cascading effect of taxes was resolved by these measures.

However, since this did not solve all the problems, large industries particularly the multi-nationals lobbied for GST for the “ease of business” whereby this tax is expected to subsume all other taxes.

Namely - central excise, central sales tax, service tax, VAT and a State tax- for sale within the State.
Except the Basic Customs Duty which will continue to be charged even after the introduction of the GST. Other indirect taxes, such as stamp duties etc too shall continue.

There is no gainsaying that India is virtually adopting a dual GST, in other words, GST would be charged both by the Central and State Governments. Hence, it would be a slight variation of the present system.

Undeniably, GST is not elimination of multi-point taxation. Raising a moot point: Will it be complicated? It might be a little. But there are chances that overall taxes might not be low as is being projected.

Interestingly, at the meeting of State Finance Ministers with Union Finance Minister Jaitley, these issues came up in different forms. The crucial revenue neutral rate of taxation or capping of GST did not find favour with many States.

This included the Chairman of the Empowered Committee on GST, West Bengal Finance Minister Amit Mitra who underscored that the ground level work still remains. Adding, “At present, there is dissent among Opposition Parties regarding several issues. But the Centre will have to create an eco-system of trust and only then GST can be passed”.

The most contentious issue regarding GST’s roll out has been the revenue neutral rate i.e. the rate which allows the Central and State Governments to collect the same revenue despite changes in laws. Importantly, the States do not want the GST rate to be capped at 18 per cent or mentioned in the Constitution Amendment Bill. No matter that the Congress has been a votary for capping it.

Furthermore, on his part Mitra expressed two key concerns. One, the revenue generating capacity of States is protected during years of high inflation. Two, the tax rate should not add to the burden of the common man.

Plainly, what Mitra meant was that there would not be one rate across the country. And the States would be free to levy taxes as they deem fit. That is possibly Mitra’s concern as it is likely to be inflationary.

Besides, there is yet another concern: Of dual control of States and the Centre over taxing businesses. While large companies might have to pay both Central and State GST, smaller firms up to Rs 1.5 crores turnover might be freed from central GST. Simply put, those having a turnover up to Rs 5 crores qualify to be considered small, considering severe inflation since 2009 and erosion of the rupee value.

Realistically, whatever be the name, there are likely to be three kinds of taxes, not one as is being projected. There would be a State GST (SGST) to be collected by the State Government; Central GST to be collected by the Central Government and integrated GST to be collected by the Central Government on inter-State transactions.

Also, a transaction of sale within the State shall have two taxes: SGST and CGST. A transaction of sale from one State to another shall have only IGST. But it is not that simple. Arguably, if there is a transaction within the State before transfer to another State, the commodity might have to pay all the three taxes: SGST and CGST at the first stage and IGST subsequently.

Consequently, there would not be any elimination of taxes on taxes. The apprehension that GST might be complicated and inflationary might not be untrue. Today, nobody knows how much would be 100 per cent compensation for the States, how the Centre would bear it or if it would transfer to consumers.

True, conceptually, the GST is a very good tax. However, for its successful implementation all the States have to implement it together and that too at the same rates. Otherwise, it would be really cumbersome for businesses to comply with. Furthermore, the GST is a destination based tax, not the origin one. This would be difficult in case of services, because it is not easy to identify where a service is provided.

Significantly, one of the main benefits that the new GST regime promises is a reduction of multiple taxes. But the truth is just the opposite. Article 246A confers power on Parliament and every State legislature to levy GST.

Thus, we are likely to have one Parliamentary law and about 29 State legislations that levy GST. And there is no Constitutional requirement that all the State laws be uniform. As it stands, many States have entry tax. This might continue.

Add to this, the exclusion of petroleum products, electricity and real estate could result in a mangled Indian version of the GST. All in all, the GST has many challenges. But as it appears today, it does not ensure real uniform, one-point tax rate.

By: Shivaji Sarkar - INFA