Description
The document describing the reasons for implementing GST.
REASONS FOR INTRODUCTING GST IN INDIA
Assignment on Indirect Taxation
Submission To: Professor C.A. Pritam Mahure
2009
INDEX
1. The Current Taxes and Their Shortcomings .............................. 3
1.1 Taxation at Manufacturing Level .................................................................................................... 4 1.2 Exclusion of Services.................................................................................................................................. 4 1.3 Tax Cascading .................................................................................................................................................. 5 1.4 Complexity ......................................................................................................................................................... 6
2. Objectives of Tax Reform ........................................................... 8 3. How will GST will in overcoming these limitations: ...................... 9 4. Views of the Chairman of 13th Finance Commission ................ 12 5. Other Economical Benefits ........................................................ 14 6. Conclusion ................................................................................. 15 7. References ................................................................................ 16
1. The Current Taxes and Their Shortcomings
The principal broad-based consumption taxes that the GST would replace GST are going to replace CENVAT and the Service Tax levied by the Centre and the VAT levied by the states. These changes are forced upon India because of their party to WTO agreement. Still these changes have removed great deal of complexity and created a kind of uniform structure required for the transition for the GST. These changes have yielded significant dividends in economic efficiency of the tax system, ease of compliance, and growth in revenues. Notable among the improvements made are: ? ? ? ?
The replacement of the single-point state sales taxes by the VAT in all of the states and union territories Reduction in the Central Sales Tax rate to 2%, from 4%, as part of a complete phase out of the tax The introduction of the Service Tax by the Centre, and a substantial expansion of its base over the years Rationalization of the CENVAT rates by reducing their multiplicity and replacing many of the specific rates by ad valorem rates based on the maximum retail price (MRP) of the products
These changes have yielded significant dividends in economic efficiency of the tax system, ease of compliance, and growth in revenues.
However, the design of the CENVAT and state VATs was dictated by the constraints imposed by the Constitution, which allows neither the Centre nor the States to levy taxes on a comprehensive base of all goods and services and at all points in their supply chain. The Centre is constrained from levying the tax on goods beyond the point of manufacturing, and the States in extending the tax to services. This division of tax powers makes both the CENVAT and the state VATs partial in nature and contributes to their inefficiency and complexity.
1.1 Taxation at Manufacturing Level
The CENVAT is levied on goods manufactured or produced in India which has given rise to various issues as follows: 1. Definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied 2. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax 3. Manufacturing itself forms a narrow base Moreover, the effective burden of tax becomes dependent on the supply chain as in taxable value at the point of manufacturing relative to the value added beyond this point 4. It is for this reason that virtually all countries have abandoned this form of taxation and replaced it by multi-point taxation system extending to the retail level
1.2 Exclusion of Services
The States are precluded from taxing services. This arrangement has posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which entail a transfer of the right to use goods without any transfer of their ownership.
The advancements in information technology and digitization have blurred the distinction between goods and services. Under Indian jurisprudence, goods are defined to include intangible s, e.g., copyright, and software, bringing them within the purview of state taxation. However, intangibles are often supplied under arrangements which have the appearance of a service contract. For example, software upgrades (which are goods) can be supplied as part of a contract for software repair and maintenance services. Software development contracts could take the character of contracts for manufacturing and sale of software goods or for rendering software development services, depending on the roles and responsibilities of the parties. The so-called ?value-added services (VAS) provided as
part of telecommunication services include supplies (e.g., wallpaper for mobile phones, ring tones, jokes, cricket scores and weather reports), some of which could be considered goods. An on- line subscription to newspapers could be viewed as a service, but online purchase and download of a magazine or a book could constitute a purchase of goods. This blurring also clouds the application of tax to transactions relating to tangible property. For example, disputes have arisen whether leasing of equipment without transfer of possession and control to the lessee would be taxable as a service or as deemed sale of goods.
1.3 Tax Cascading
Tax cascading occurs under both Centre and State taxes. The most significant contributing factor to tax cascading is the partial coverage Central and State taxes. Oil and gas production and mining, agriculture, wholesale and retail trade, real estate construction, and range of services remain outside the ambit of the CENVAT and the service tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits are allowed for the inputs of the exempt sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.
Tax cascading remains the most serious flaw of the current system .It increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets. It creates a bias in favour of imports, which do not bear the hidden burden of taxes of production inputs. It also detracts from a neutral application of tax to competing products. Even if the statutory rate is uniform, the effective tax rate (which consists of the statutory rate on finished products and the implicit or hidden tax on production inputs) can vary from product to product depending on the magnitude of the hidden tax on inputs used in their production and distribution. The intended impact of government policy towards sectors or
households may be negated by the indirect or hidden taxation in a cascading system of taxes.
1.4 Complexity
In spite of the improvements made in the tax design and administration over the past few years, the systems at both central and state levels remain complex. Their administration leaves a lot to be desired. They are subject to disputes and court challenges, and the process for resolution of disputes is slow and expensive. At the same time, the systems suffer from substantial compliance gaps, except in the highly organized sectors of the economy. There are several factors contributing to this unsatisfactory state of affairs. The most significant cause of complexity is, of course, policy related and is due to the existence of exemptions and multiple rates, and the irrational structure of the levies. These deficiencies are the most glaring in the case of the CENVAT and the Service Tax.
The starting base for the CENVAT is narrow, and is being further eroded by a variety of area-specific, and conditional and unconditional exemptions. A few years ago the Government attempted to rationalize the CENVAT rates by reducing their multiplicity but has not adhered to this policy and has reintroduced concessions for several sectors/products. The key problem with the service tax is the basic approach of levying it on specified services, each of which generates an extensive debate as to what is included in the base.
Ideally, the tax base should be defined to include all services, with a limited list of exclusions (the so-called ?negative list?).7 The Government has been reluctant to adopt this approach for the fear that it could bring into the tax net many services that are politically sensitive . The complexities under the State VAT relate primarily to classification of goods to different tax rate schedules. Theoretically, one might expect that the lower tax rates would be applied to basic necessities that are consumed largely by the poor. This is not the case under the State VAT. The lowest rate of 1%
applies to precious metals and jewellery, and related products—hardly likely to be ranked highly from the distributional perspective. The middle rate of 4% applies to selected basic necessities and also a range of industrial inputs and IT products. In fact, basic necessities fall into three categories: ? ? ? Exempted from tax Taxable at 4% Taxable at the standard rate of 12%
The classification would appear to be arbitrary, with no well accepted theoretical underpinning.
Another source of complexity under the State VAT is determining whether a particular transaction constitutes a sale of goods. This problem is most acute in the case of software products and intangibles such as the right to distribute/exhibit movies or time slots for broadcasting advertisements.
2. Objectives of Tax Reform
Important objective of tax reforms is simplification of tax administration and compliance, which is dependent on three factors: 1. Determining factor for simplicity is the tax design itself. Generally, the more rational and neutral the tax design, the simpler it would be to administer and encourage compliance. 2. If the tax is levied on a broad base at a single rate, there would be few classification disputes and the tax-specific record keeping requirements for vendors would be minimal. 3. The tax return for such a system can be as short as the size of a postcard. It would simplify enforcement, and encourage voluntary compliance.
3. How will GST will in overcoming these limitations:
The then Finance minister P Chidambaram had proposed that India should move towards a national level GST in the Union budget 2006-07, with the Centre and states sharing revenue. He had further proposed to set April 1, 2010 as the date for introducing GST.
Though the dual VAT (CenVAT and state VAT) removes some of the weaknesses in the Union excise duties and local sales tax (at the state level), it cannot be the last stage of reforms in commodity taxes in India, as dual VAT in a federal structure will continue to have some cascading effect.
To avoid such cascading effect as well as reduce the transaction cost for manufacturers, it is important that taxes on commodities and services are reassigned in such a way that the powers to levy both these taxes are assigned to the states.
This requires the Centre to withdraw from the field of these taxes for revenue purposes to allow the states levy a comprehensive state GST covering all goods and services. The levy of dual VAT causes vertical tax externality due to taxation of the same base by the two tiers of government. It is important to note the vertical imbalance in the assigned taxation powers under the Indian Constitution.
In the sharing of revenues between the Centre and states, states get only 35%. To remove this imbalance, it is important to rethink about the taxation powers, especially those related to GST.
For this reason, the dual VAT cannot be adopted as a long-term reform measure for domestic trade taxes in a federal structure in India. Thus a comprehensive state GST would be the most appropriate reform.
In India, there are governments at different levels with constitutionally assigned fiscal responsibilities. Fiscal responsibilities are shared by three levels of government —
central, state and local. Thus a tax reform by governments at one level can have fiscal consequences for the governments at another level.
Therefore, a tax reform requiring the introduction of VAT in a federation should have the following objectives: it should be revenue neutral between the governments; the tax base should be uniform across the country; the provincial and local governments should have the autonomy to set tax rates; the tax should be relatively simple to administer and to achieve complete compliance; and taxes on the international flows of goods should be based on uniform rules across the country.
Countries like Brazil, Canada, Germany and Mexico as well as the European Union are some of the federations that have adopted VAT. Brazil introduced federal VAT replacing wholesale tax and the state VAT replacing the state turnover tax in 1967.
The tax base for the federal VAT is industrial production. The tax base for the state VAT includes all goods with the exception of some industrial products, imports, agricultural inputs, food products and services. Agriculture, minerals and services are excluded from the tax.
Mexico implemented VAT regime in 1980 to replace 30 federal excise taxes and 400 municipal and state taxes. The tax base covers businesses connected with the sale of goods and services. Mexico has uniform VAT rates and bases across the states and it follows the destination principle. The tax may be regarded as a unified national VAT with revenue sharing.
The European Union (EU) has had a fully harmonised VAT since 1993. Initially it was achieved through the ‘approximation‘ of rates, i.e., by fixing a specified range within which VAT rates could vary.
The aim of commodity tax reform in India should be a comprehensive VAT covering value added by all business enterprises from the manufacturing to the retailing activities. The tax should be consumption based and follow the tax credit method to compute the net tax liability of a business firm. The tax liability of international and inter-state flows has to be computed by using the destination principle.
A more appropriate reform in India would be to impose a comprehensive state GST like in EU. That would require the Centre to withdraw from the field of VAT. The power to levy VAT rests only with the states. This scheme will avoid duplication by taxing authorities. Since state GST is a comprehensive VAT, including all goods and services (replacing both CenVAT and state VAT), its rate will be adjusted.
The Centre would be compensated this loss arising giving up collecting VAT by authorising the levy of sumptuary excises on a few select commodities.
A comprehensive VAT with the consumption base, tax credit method and the destination principle to determine VAT on international and inter-state flows can be an ideal commodity tax structure for India.
4. Views of the Chairman of 13th Finance Commission
It will provide stimulus to economy, create more jobs: Chairman of 13th Finance Commission Vijay Kelkar has pitched for the introduction of goods & services tax (GST), as it will provide a stimulus to the economy during the slowdown. ?A flawless GST emerges as a hugely attractive policy option in the Indian context. The present economic crisis portends a huge challenge; the only ?gain without pain‘ will come if we can improve the efficiency of the economy and thereby, our productivity and international competitiveness. In an open economy, international competitiveness implies improving the efficiency of our domestic industry vis-a-vis imports and of our exports vis-a-vis our international competitors. GST will help our economy in achieving it,? he said, delivering a lecture at the Indira Gandhi Institute of Development Research. Considering the high level of distortions in the indirect tax system, one can argue that the real output effect of a well implemented GST in India would be at least 1.4% of the GDP in Canada. This amounts to $15 billion annually, implying that the economic value of GST reforms would, at a modest 3% discount rate, be close to half a trillion dollars or 50% of the country‘s present GDP. More importantly, this means potentially creating an additional productive employment for as many as 4 to 5 million. The introduction of GST would also be a reform measure whose economic impact will rival that of the elimination of licensing in 1991, Kelkar added. According to Kelkar, the existing tax system introduces myriad distortions which favour some goods and services at the expense of others. Such distortions in our tax system are also adversely affecting the growth for manufacturers, particularly labourintensive manufacturers, who are extremely important in meeting the challenge of providing productive employment.
?A well designed destination-based GST on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially ?sticks‘ on the final consumption within the taxing jurisdiction,? he noted. Introducing GST will do more than simply redistributing the tax burden from one sector or group in the economy to another. The introduction of GST will also bring about a macroeconomic dividend, as it reduces the overall incidence of indirect taxation and therefore the overall tax burden by removing many adverse features of the present sales tax system, Kelkar said. ?I hope they will ensure minimum number of rates and minimum exemptions to achieve the widest possible tax base and the removal of distorting state taxes such as entry tax, octroi and high stamp duties by subsuming them in the GST. This will help in achieving reasonably low GST rates, thereby ensuring nation-wide acceptability, high compliance and revenue gains to all members of the federation,? he said. Kelkar also noted that the effective revenue neutral rate at which GST can be implemented will be far lower than 30%, indicating a significant reduction in the effective tax burden on our economic agents. Besides, the comprehensive GST will fully eliminate the export of taxes and improve international competition. This in turn, will help in increasing the production and exports of labour-intensive manufacturers and also, boost employment in our economy.
5. Other Economical Benefits
GST, if introduced, is tipped to be one of the biggest-ever tax reforms in India and should therefore be introduced in a manner which accomplishes the desired objectives. A recent study has indicated that GST implementation could lead India to gain as much as $15 billion annually.
The integration of services with goods under GST system will lead to lowering cost of manufacture in India, which should also be one prime focus area to concentrate upon. The Government must clear its intent and should keen to embark upon in levying GST to improve the tax to GDP ratio, expand the taxpayer base, increase compliance and make tax administration more efficient and more transparent which is badly affected due to multiplicity of tax and multiple level of administration. It will be good for the Government to undertake measures to reinvigorate efforts to improve tax administration and disposal of contentious issues rather than making tall claims of hike in GDP.
6. Conclusion
The success of any tax reform is always evaluated by its penetration and its acceptance by the trade and industry and public at large. On both these counts, the imposition of GST in place of present taxes on goods and services is likely to achieve the objective. Bringing greater transparency in tax system and removing inequities amongst different taxpayers and bleaching ?gray economy‘ is a challenging task. Under the present scenario, it has become all the more necessary to have a Single tax on all goods and services. It would encourage voluntary tax compliance, discourage tax evasion, reduce compliance and transaction cost and improves the tax to GDP ratio. It will encourage expansion of tax base, rationalize tax structure and will improve efficiency of tax administration. Truly unified domestic common market is the ultimate object of tax reform process which can be achieved by simplifying the tax system and for this abolition of too many levels of tax slabs and integration of services under one umbrella of ?GST‘ is the only way.
Considering all these benefits and advantages, it will be a prudent decision for an economy like India to adopt GST as soon as possible. However care must be taken to make sure that implementation is smooth and hassle free. Operational issues are bound to occur but must be handled with responsibly and efficiently.
7. References
Articles:
? ? GOODS & SERVICES TAX (GST) IN INDIA TRADE – A Note, By Praveen Khandelwal, Secretary General, Confederation of All India Traders GST Reforms and Intergovernmental Considerations in India, by Satya Poddar Ehtisham Ahmad
Internet Articles:
? ? http://www.financialexpress.com/news/adopt-gst-it-will-providestimulus-to-economy-create-more-jobs-kelkar/420835/ http://www.stvat.com/strvat/pages/press/gstindia/roadmap_for.htm
doc_914575727.docx
The document describing the reasons for implementing GST.
REASONS FOR INTRODUCTING GST IN INDIA
Assignment on Indirect Taxation
Submission To: Professor C.A. Pritam Mahure
2009
INDEX
1. The Current Taxes and Their Shortcomings .............................. 3
1.1 Taxation at Manufacturing Level .................................................................................................... 4 1.2 Exclusion of Services.................................................................................................................................. 4 1.3 Tax Cascading .................................................................................................................................................. 5 1.4 Complexity ......................................................................................................................................................... 6
2. Objectives of Tax Reform ........................................................... 8 3. How will GST will in overcoming these limitations: ...................... 9 4. Views of the Chairman of 13th Finance Commission ................ 12 5. Other Economical Benefits ........................................................ 14 6. Conclusion ................................................................................. 15 7. References ................................................................................ 16
1. The Current Taxes and Their Shortcomings
The principal broad-based consumption taxes that the GST would replace GST are going to replace CENVAT and the Service Tax levied by the Centre and the VAT levied by the states. These changes are forced upon India because of their party to WTO agreement. Still these changes have removed great deal of complexity and created a kind of uniform structure required for the transition for the GST. These changes have yielded significant dividends in economic efficiency of the tax system, ease of compliance, and growth in revenues. Notable among the improvements made are: ? ? ? ?
The replacement of the single-point state sales taxes by the VAT in all of the states and union territories Reduction in the Central Sales Tax rate to 2%, from 4%, as part of a complete phase out of the tax The introduction of the Service Tax by the Centre, and a substantial expansion of its base over the years Rationalization of the CENVAT rates by reducing their multiplicity and replacing many of the specific rates by ad valorem rates based on the maximum retail price (MRP) of the products
These changes have yielded significant dividends in economic efficiency of the tax system, ease of compliance, and growth in revenues.
However, the design of the CENVAT and state VATs was dictated by the constraints imposed by the Constitution, which allows neither the Centre nor the States to levy taxes on a comprehensive base of all goods and services and at all points in their supply chain. The Centre is constrained from levying the tax on goods beyond the point of manufacturing, and the States in extending the tax to services. This division of tax powers makes both the CENVAT and the state VATs partial in nature and contributes to their inefficiency and complexity.
1.1 Taxation at Manufacturing Level
The CENVAT is levied on goods manufactured or produced in India which has given rise to various issues as follows: 1. Definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied 2. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax 3. Manufacturing itself forms a narrow base Moreover, the effective burden of tax becomes dependent on the supply chain as in taxable value at the point of manufacturing relative to the value added beyond this point 4. It is for this reason that virtually all countries have abandoned this form of taxation and replaced it by multi-point taxation system extending to the retail level
1.2 Exclusion of Services
The States are precluded from taxing services. This arrangement has posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which entail a transfer of the right to use goods without any transfer of their ownership.
The advancements in information technology and digitization have blurred the distinction between goods and services. Under Indian jurisprudence, goods are defined to include intangible s, e.g., copyright, and software, bringing them within the purview of state taxation. However, intangibles are often supplied under arrangements which have the appearance of a service contract. For example, software upgrades (which are goods) can be supplied as part of a contract for software repair and maintenance services. Software development contracts could take the character of contracts for manufacturing and sale of software goods or for rendering software development services, depending on the roles and responsibilities of the parties. The so-called ?value-added services (VAS) provided as
part of telecommunication services include supplies (e.g., wallpaper for mobile phones, ring tones, jokes, cricket scores and weather reports), some of which could be considered goods. An on- line subscription to newspapers could be viewed as a service, but online purchase and download of a magazine or a book could constitute a purchase of goods. This blurring also clouds the application of tax to transactions relating to tangible property. For example, disputes have arisen whether leasing of equipment without transfer of possession and control to the lessee would be taxable as a service or as deemed sale of goods.
1.3 Tax Cascading
Tax cascading occurs under both Centre and State taxes. The most significant contributing factor to tax cascading is the partial coverage Central and State taxes. Oil and gas production and mining, agriculture, wholesale and retail trade, real estate construction, and range of services remain outside the ambit of the CENVAT and the service tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits are allowed for the inputs of the exempt sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.
Tax cascading remains the most serious flaw of the current system .It increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets. It creates a bias in favour of imports, which do not bear the hidden burden of taxes of production inputs. It also detracts from a neutral application of tax to competing products. Even if the statutory rate is uniform, the effective tax rate (which consists of the statutory rate on finished products and the implicit or hidden tax on production inputs) can vary from product to product depending on the magnitude of the hidden tax on inputs used in their production and distribution. The intended impact of government policy towards sectors or
households may be negated by the indirect or hidden taxation in a cascading system of taxes.
1.4 Complexity
In spite of the improvements made in the tax design and administration over the past few years, the systems at both central and state levels remain complex. Their administration leaves a lot to be desired. They are subject to disputes and court challenges, and the process for resolution of disputes is slow and expensive. At the same time, the systems suffer from substantial compliance gaps, except in the highly organized sectors of the economy. There are several factors contributing to this unsatisfactory state of affairs. The most significant cause of complexity is, of course, policy related and is due to the existence of exemptions and multiple rates, and the irrational structure of the levies. These deficiencies are the most glaring in the case of the CENVAT and the Service Tax.
The starting base for the CENVAT is narrow, and is being further eroded by a variety of area-specific, and conditional and unconditional exemptions. A few years ago the Government attempted to rationalize the CENVAT rates by reducing their multiplicity but has not adhered to this policy and has reintroduced concessions for several sectors/products. The key problem with the service tax is the basic approach of levying it on specified services, each of which generates an extensive debate as to what is included in the base.
Ideally, the tax base should be defined to include all services, with a limited list of exclusions (the so-called ?negative list?).7 The Government has been reluctant to adopt this approach for the fear that it could bring into the tax net many services that are politically sensitive . The complexities under the State VAT relate primarily to classification of goods to different tax rate schedules. Theoretically, one might expect that the lower tax rates would be applied to basic necessities that are consumed largely by the poor. This is not the case under the State VAT. The lowest rate of 1%
applies to precious metals and jewellery, and related products—hardly likely to be ranked highly from the distributional perspective. The middle rate of 4% applies to selected basic necessities and also a range of industrial inputs and IT products. In fact, basic necessities fall into three categories: ? ? ? Exempted from tax Taxable at 4% Taxable at the standard rate of 12%
The classification would appear to be arbitrary, with no well accepted theoretical underpinning.
Another source of complexity under the State VAT is determining whether a particular transaction constitutes a sale of goods. This problem is most acute in the case of software products and intangibles such as the right to distribute/exhibit movies or time slots for broadcasting advertisements.
2. Objectives of Tax Reform
Important objective of tax reforms is simplification of tax administration and compliance, which is dependent on three factors: 1. Determining factor for simplicity is the tax design itself. Generally, the more rational and neutral the tax design, the simpler it would be to administer and encourage compliance. 2. If the tax is levied on a broad base at a single rate, there would be few classification disputes and the tax-specific record keeping requirements for vendors would be minimal. 3. The tax return for such a system can be as short as the size of a postcard. It would simplify enforcement, and encourage voluntary compliance.
3. How will GST will in overcoming these limitations:
The then Finance minister P Chidambaram had proposed that India should move towards a national level GST in the Union budget 2006-07, with the Centre and states sharing revenue. He had further proposed to set April 1, 2010 as the date for introducing GST.
Though the dual VAT (CenVAT and state VAT) removes some of the weaknesses in the Union excise duties and local sales tax (at the state level), it cannot be the last stage of reforms in commodity taxes in India, as dual VAT in a federal structure will continue to have some cascading effect.
To avoid such cascading effect as well as reduce the transaction cost for manufacturers, it is important that taxes on commodities and services are reassigned in such a way that the powers to levy both these taxes are assigned to the states.
This requires the Centre to withdraw from the field of these taxes for revenue purposes to allow the states levy a comprehensive state GST covering all goods and services. The levy of dual VAT causes vertical tax externality due to taxation of the same base by the two tiers of government. It is important to note the vertical imbalance in the assigned taxation powers under the Indian Constitution.
In the sharing of revenues between the Centre and states, states get only 35%. To remove this imbalance, it is important to rethink about the taxation powers, especially those related to GST.
For this reason, the dual VAT cannot be adopted as a long-term reform measure for domestic trade taxes in a federal structure in India. Thus a comprehensive state GST would be the most appropriate reform.
In India, there are governments at different levels with constitutionally assigned fiscal responsibilities. Fiscal responsibilities are shared by three levels of government —
central, state and local. Thus a tax reform by governments at one level can have fiscal consequences for the governments at another level.
Therefore, a tax reform requiring the introduction of VAT in a federation should have the following objectives: it should be revenue neutral between the governments; the tax base should be uniform across the country; the provincial and local governments should have the autonomy to set tax rates; the tax should be relatively simple to administer and to achieve complete compliance; and taxes on the international flows of goods should be based on uniform rules across the country.
Countries like Brazil, Canada, Germany and Mexico as well as the European Union are some of the federations that have adopted VAT. Brazil introduced federal VAT replacing wholesale tax and the state VAT replacing the state turnover tax in 1967.
The tax base for the federal VAT is industrial production. The tax base for the state VAT includes all goods with the exception of some industrial products, imports, agricultural inputs, food products and services. Agriculture, minerals and services are excluded from the tax.
Mexico implemented VAT regime in 1980 to replace 30 federal excise taxes and 400 municipal and state taxes. The tax base covers businesses connected with the sale of goods and services. Mexico has uniform VAT rates and bases across the states and it follows the destination principle. The tax may be regarded as a unified national VAT with revenue sharing.
The European Union (EU) has had a fully harmonised VAT since 1993. Initially it was achieved through the ‘approximation‘ of rates, i.e., by fixing a specified range within which VAT rates could vary.
The aim of commodity tax reform in India should be a comprehensive VAT covering value added by all business enterprises from the manufacturing to the retailing activities. The tax should be consumption based and follow the tax credit method to compute the net tax liability of a business firm. The tax liability of international and inter-state flows has to be computed by using the destination principle.
A more appropriate reform in India would be to impose a comprehensive state GST like in EU. That would require the Centre to withdraw from the field of VAT. The power to levy VAT rests only with the states. This scheme will avoid duplication by taxing authorities. Since state GST is a comprehensive VAT, including all goods and services (replacing both CenVAT and state VAT), its rate will be adjusted.
The Centre would be compensated this loss arising giving up collecting VAT by authorising the levy of sumptuary excises on a few select commodities.
A comprehensive VAT with the consumption base, tax credit method and the destination principle to determine VAT on international and inter-state flows can be an ideal commodity tax structure for India.
4. Views of the Chairman of 13th Finance Commission
It will provide stimulus to economy, create more jobs: Chairman of 13th Finance Commission Vijay Kelkar has pitched for the introduction of goods & services tax (GST), as it will provide a stimulus to the economy during the slowdown. ?A flawless GST emerges as a hugely attractive policy option in the Indian context. The present economic crisis portends a huge challenge; the only ?gain without pain‘ will come if we can improve the efficiency of the economy and thereby, our productivity and international competitiveness. In an open economy, international competitiveness implies improving the efficiency of our domestic industry vis-a-vis imports and of our exports vis-a-vis our international competitors. GST will help our economy in achieving it,? he said, delivering a lecture at the Indira Gandhi Institute of Development Research. Considering the high level of distortions in the indirect tax system, one can argue that the real output effect of a well implemented GST in India would be at least 1.4% of the GDP in Canada. This amounts to $15 billion annually, implying that the economic value of GST reforms would, at a modest 3% discount rate, be close to half a trillion dollars or 50% of the country‘s present GDP. More importantly, this means potentially creating an additional productive employment for as many as 4 to 5 million. The introduction of GST would also be a reform measure whose economic impact will rival that of the elimination of licensing in 1991, Kelkar added. According to Kelkar, the existing tax system introduces myriad distortions which favour some goods and services at the expense of others. Such distortions in our tax system are also adversely affecting the growth for manufacturers, particularly labourintensive manufacturers, who are extremely important in meeting the challenge of providing productive employment.
?A well designed destination-based GST on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially ?sticks‘ on the final consumption within the taxing jurisdiction,? he noted. Introducing GST will do more than simply redistributing the tax burden from one sector or group in the economy to another. The introduction of GST will also bring about a macroeconomic dividend, as it reduces the overall incidence of indirect taxation and therefore the overall tax burden by removing many adverse features of the present sales tax system, Kelkar said. ?I hope they will ensure minimum number of rates and minimum exemptions to achieve the widest possible tax base and the removal of distorting state taxes such as entry tax, octroi and high stamp duties by subsuming them in the GST. This will help in achieving reasonably low GST rates, thereby ensuring nation-wide acceptability, high compliance and revenue gains to all members of the federation,? he said. Kelkar also noted that the effective revenue neutral rate at which GST can be implemented will be far lower than 30%, indicating a significant reduction in the effective tax burden on our economic agents. Besides, the comprehensive GST will fully eliminate the export of taxes and improve international competition. This in turn, will help in increasing the production and exports of labour-intensive manufacturers and also, boost employment in our economy.
5. Other Economical Benefits
GST, if introduced, is tipped to be one of the biggest-ever tax reforms in India and should therefore be introduced in a manner which accomplishes the desired objectives. A recent study has indicated that GST implementation could lead India to gain as much as $15 billion annually.
The integration of services with goods under GST system will lead to lowering cost of manufacture in India, which should also be one prime focus area to concentrate upon. The Government must clear its intent and should keen to embark upon in levying GST to improve the tax to GDP ratio, expand the taxpayer base, increase compliance and make tax administration more efficient and more transparent which is badly affected due to multiplicity of tax and multiple level of administration. It will be good for the Government to undertake measures to reinvigorate efforts to improve tax administration and disposal of contentious issues rather than making tall claims of hike in GDP.
6. Conclusion
The success of any tax reform is always evaluated by its penetration and its acceptance by the trade and industry and public at large. On both these counts, the imposition of GST in place of present taxes on goods and services is likely to achieve the objective. Bringing greater transparency in tax system and removing inequities amongst different taxpayers and bleaching ?gray economy‘ is a challenging task. Under the present scenario, it has become all the more necessary to have a Single tax on all goods and services. It would encourage voluntary tax compliance, discourage tax evasion, reduce compliance and transaction cost and improves the tax to GDP ratio. It will encourage expansion of tax base, rationalize tax structure and will improve efficiency of tax administration. Truly unified domestic common market is the ultimate object of tax reform process which can be achieved by simplifying the tax system and for this abolition of too many levels of tax slabs and integration of services under one umbrella of ?GST‘ is the only way.
Considering all these benefits and advantages, it will be a prudent decision for an economy like India to adopt GST as soon as possible. However care must be taken to make sure that implementation is smooth and hassle free. Operational issues are bound to occur but must be handled with responsibly and efficiently.
7. References
Articles:
? ? GOODS & SERVICES TAX (GST) IN INDIA TRADE – A Note, By Praveen Khandelwal, Secretary General, Confederation of All India Traders GST Reforms and Intergovernmental Considerations in India, by Satya Poddar Ehtisham Ahmad
Internet Articles:
? ? http://www.financialexpress.com/news/adopt-gst-it-will-providestimulus-to-economy-create-more-jobs-kelkar/420835/ http://www.stvat.com/strvat/pages/press/gstindia/roadmap_for.htm
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