With the passage of the Constitution 122nd Amendment Bill in the Rajya Sabha in August 2016 and the setting up of GST council, many hoped that the design and structure of Indian GST will be taking shape soon. However, instead, the basic structure of GST has weakened with the proposal to levy multiple GST rates and cess. Like earlier instances, decisions of the GST council are not disclosed in the public domain by the Council and there is hardly any informed public debate on these issues. This level of secrecy is not conducive for tax reform like GST which will touch upon day-to-day economic activities of all sectors of the economy.
Some highlights on issues related to GST design and structure, rates and administration is provided here which will have far reaching impact on the performance of the forthcoming GST. This discussion is completely based on information which is available in various media reports and newspaper articles, and it is expected that ultimate design of GST may differ from the ongoing discussion on the issue.
There is discussion in the GST Council that there will be a separate cess on demerit goods and environmentally harmful goods. The objective behind imposition of cess is to generate revenue to compensate the states on account of any revenue loss due to introduction of GST during first five years of implementation of GST. It is not clear whether the cess will be imposed with a sunset clause or it will continue as an additional source of revenue for the Central Government. Moreover, imposition of cess without provision for input tax credit (like Swachh Bharat Cess) will result in cascading of taxes and it will go against the fundamental advantage of introducing GST i.e. the removal of cascading of taxes. Earlier, Opposition Parties in the Parliament opposed imposition of 1 percent additional CST-type tax on inter-state movement of goods, as it would have resulted in substantial cascading of taxes. It is expected that the proposal to levy cess will receive similar opposition in the Parliament when the recommendations of the Council are taken up for approval.
As far as inter-state supplies are concerned, it is proposed that the Centre will levy and collect Integrated GST (IGST) and the importing dealer can claim input tax credit for IGST paid on these goods against taxes payable on subsequent transactions. Inter-state sales will attract IGST and the due input tax credits (on account of SGST) will be transferred to destination (importing) state, so that the SGST liability of the importing entity could be settled in the destination state. However, the input tax credit pass through mechanism for inter-state business-to-consumer (B2C) transaction requires clarification. It is not clear whether the input tax credit of the SGST part on account of B2C transaction will also be transferred to destination state. If not, then revenue generated by retaining ITC on account of B2C inter-state transaction could be substantial, given the growth in e-commerce/e-retails. The revenue so generated could be utilized to compensate the states on account of loss of revenue (if any) arising due to implementation of GST. The states which are already collecting tax on e-commerce (e.g., Assam) will be deprived of revenue.
It is expected that with the imposition of GST, there will be no legal provision to levy entry tax on those commodities which are kept outside of the GST system. State governments collect substantial revenue from entry tax and CST on goods like petrol, diesel, ATF, crude oil, natural gas and alcoholic beverages for human consumption. The imposition of GST may result in loss of revenue on account of withdrawal of entry tax from these items. It is expected that the Central Government will compensate states for this revenue loss. There is no doubt about these taxes being distortionary since due input tax credits are not allowed.
It was discussed in the Council meeting that GST compensation to states will be decided on the basis of net revenue, excluding revenue accruing from non-GST items. This is a substantial improvement from the earlier discussion on allowance of GST compensation to states based on gross revenue collection. The Council also discussed that GST compensation will be decided based on 14 percent nominal growth of revenue across all the states with respect to revenue collection of 2015-16.
There is also a proposal to utilize the proceeds of Clean Environment Cess (earlier known as Clean Energy Cess) for giving GST compensation to states. Clean Environment Cess is a specific purpose cess on coal, lignite and peat (both domestic and imported). The objective of the cess was to finance and promote clean environment initiatives like funding research in the area of clean environment or for any such related purposes. If the proceeds of the cess are used to provide GST compensation to states, this will be a deviation from the stated objective of the cess and it will also go against the basic principle of environmental taxation. It is expected that proceeds of the Clean Environment Cess could play a pivotal role in achieving ambitious objective of the government to diversify the energy basket of India as well as increase the share of renewable and alternative energy in total energy generation. Sustaining expenditure on R&D for alternative and renewable energy could play an important role to achieve the objective. However, diverting the cess proceeds may lead to drying up of fund for innovation of alternative energy sources.
Present discussion on GST tax rate shows that there will be four different tax rates ranging from 5 percent (on gold and precious jewellery) to 28 percent (on demerit goods like luxury cars, tobacco and tobacco products). Present discussion on two standard GST rates (12% and 18%), a lower rate (5%) and a higher rate (28%) in addition to exemptions will make the design of GST complicated and increase the cost of compliance as well as cost of tax administration. It is expected that, if accepted, the proposal will open up floodgates of classification disputes and there will be always be a tendency among businesses to demand lower rate for their good or service. Already voices are raised to put plantation crops (e.g., tea, coffee), labour intensive manufacturing (e.g., leather), infrastructure inputs (e.g., cement) and air fares under lower tax bracket. It is expected that the higher the differences among the tax rates the larger will be the scope for litigation. The benefits of removal of cascading of taxes will be balanced by higher cost of compliance, as a result the expected benefits of introduction of GST may not be achieved.
The emergence of common market in India will be contingent upon harmonization of GST rate across states for a specific commodity. Any deviation from the common rate by any state may lead to higher compliance burden for businesses having pan India operation. Harmonization in rules and regulation as well as GST rate is desirable from business point of view. Tax incidence of GST will largely depend on assignment of tax rates/slabs to goods and services. Therefore, a careful assignment of tax rates across commodities is expected from the GST Council.
In the present system, Central Sales Tax (CST) on inter-state sales is administered by the State tax administration, whereas, in the proposed system taxes on inter-state sales will attract Integrated GST (IGST) and it will be administered by the Central tax administration. This is an issue of contention between Central and State tax administrations which requires consensus. Though the GST Network (GSTN) will work as a clearing house for seamless movements of input tax credits across states, the emergence of cooperative tax administration under the proposed GST regime will be contingent upon mutual trust among tax administrations and cross empowerment for all taxes (CGST, SGST and IGST).
The GST Council has decided to set the threshold for GST registration at INR 2 million. Businesses with annual turnover of upto INR 5 million would get the option to opt for composition/ compounding scheme. For central tax administration, registration threshold in the present regime is INR 15 million. There is discussion that 90 percent of the registered entities (including service providers) having annual turnover up to INR 15 million will be assessed by the State tax administration and the rest by the Central tax administration. For taxpayers having annual turnover above INR 15 million there will be equal distribution of assessees between State and the Central tax administration. The proposed system is expected to reduce compliance burden for small taxpayers and also encourage cooperative environment in tax administration. However, there is no clarity on the criteria for selection of cases / assessees for assessment under State or Central tax administration. There is also discussion that uniform criteria (risk parameters) will be applied across all states for selection of cases for scrutiny assessment. Some states have developed extensive methods for selection of cases for scrutiny assessment; it would be desirable that GSTN will incorporate the expertise in the development of general system. There are also some contentious issues related to assignment of assessment authority which require consensus – e.g., IGST cases with contentious place of supply provision, high sea sales.
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