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The Big Picture – GST- Future and Implications

  • August 16, 2016
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The Big Picture- RSTV
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GST- Future and Implications

Background

The much delayed, much debated and much deciphered GST bill is set to see the light of the day. The bill was passed in Lok Sabha in May 2015 and has been passed in Rajya Sabha in August 2016. The government had worked out a compromise with almost all the parties with some give and take. The Constitutional Amendment Bill will enable the implementation of GST which will replace the plethora of existing taxes has been passed by both the houses. This legislation is considered one of the biggest financial sector reforms.

Incidentally, it was UPA-I which had originally mooted the idea of GST in 2009. The CA bill was introduced in LS in March 2011. However, due to opposition from then opposition party and its state governments, the bill lapsed. Now, finally the bill is set to become a law.

Just a start

This is just a beginning of the process when the GST bill has been passed. The bill which is passed is the constitution amendment bill which is enabling the central parliament to legislate on state taxes and similarly, the state legislatures will be empowered to legislate on the central taxes.

This is a basic constitution amendment as the constitution lays down the powers of the centre and the states with regards to the taxes that they can levy (Schedule VII). As this constitution bill is passed, it has made way for enacting a law which will put in place the GST which is the combination of central and state taxes.

As it is a constitutional amendment bill, therefore two-thirds majority is required in Parliament, and thus, opposition parties have greater political leverage to put pressure on provisions that will come into the law.

But there are many areas which yet are subject to many political differences as once the new law is framed by the government after the constitutional amendment bill is passed by Parliament and also by 50% of the state legislatures. Then only the centre will be empowered to frame a law on GST which will combine the central and the state tax. There are critical issue wrt to administration of GST- whether assessment powers with central government or state government, this is the area where lot of political power and patronage lies.

Reason for a year’s delay

The main opposition party was insisting that the cap be introduced in the constitution amendment bill. It would have been a very difficult process politically as every time, the GST rate had to be changed wrt to existing economic situations, the constitution had to be amended. The entire procedure of two thirds majority in Rajya Sabha and Lok sabha and 50% of the states’ approval had to be done every time.

However, the constitution does not with respect to any levy lay down what its limit should be. This is a power entrusted by the constitution to the executive of centre and state. For levy of the taxes, approval of Parliament or legislature is required. Hence, to put such a cap in constitution would have been setting up a wrong precedent.

However, this was not an entirely a political issue.

  • The GST empowered Committee of state ministers had asked for suggestions about the rate from NIPFP- National Institute of Public Financing and Policy. It suggested 27% as GST rate. That itself was found to be self-defeated because it would have not reduced the burden of taxation but probably enhanced it.
  • The Ministry of Finance had done an internal exercise with the Chief Economic Advisor being given the responsibility. According to CEA, 15-15.5% was fine.

So, there was a wide gap between both the estimates. Hence, the opposition was given enough ground apart from political reasons to oppose the GST bill. It feared that if the variation is so much, then the envisaged benefit when it was conceived in 2009 and introduced the legislation in 2011 to rationalize, reduce taxes and turn the country into a common market by taking away the cascading effect of every subsequent goods tax, would be lost. The solution found is the ring fencing.

Why is tax rate important?

There is a ‘Revenue Neutral Rate’ which means that what tax is collected earlier, it will the same under the new scheme of things, here it is the GST.

The revenue neutral rate is calculated by knowing the base which will be taxed.

  • No tax on agriculture, so it will be removed
  • Bulk of unorganised sector
  • Many important commodities like petroleum, liquor, cigarettes and other sin commodities.

The tax will be collected from balancing goods and services. Roughly, the indirect tax base from sales tax, service tax excise duty, countervailing duty etc. (Not custom duty) is 10% of GDP. So, the 10% taxes have to be continued to be collected under new GST.

How good is the GST now?

The imperfect GST is better than perfect GST because, if the legislators chase perfect GST, it wouldn’t be a realisable target soon. It is a workable options. The primary concerns of 1% of manufacturing has been overcome. The demand for cap on GST was also solved. The sense prevailed that the GST rate should be mentioned in the bill which is a finance bill, which can be changed as and when needed. These issues of exclusion and inclusion of item in GST, dispute resolution mechanism, question on how state and central GST will work, how ill the interstate GST network will work, how the taxes will be collected will be a part of GST finance bill.

Dispute Resolution Mechanism

It will deal with all the issues arising from the GST law implementation. It is an executive function and involving a HC judge was not a good idea from beginning. The GST resolution mechanism has to have the states and centre together on board. The states’ insist that the majority of states must be on board before any resolution comes out of the GST resolution mechanism. This will be an important aspect. It will be a part of main GST bill.

Many problems like exemption to the small scale sectors for 1.5 crore and above products, states like Uttarakhand has total exemption as a tool for development which the government has been using the tax policy for that purpose. These are now complex issues and how they are going to be resolved is a critical debate. The difficulty wrt to administration and assessment of the tax is also yet to be known. This will all be part of GST bill.

The issues of implementing the laws once they have been put in place and probably even judicially tested, the arrangement have to be looked at many areas. If Rs.1.5 crore is the threshold limit of the states, the states want to assess them as well as scrutinise, adjudicate etc.

An overall change in tax collection architecture?

Now that the constitutional amendment is passed, there should not be in a hurry to try and implement the GST arrangement very quickly. There is a danger that any imperfect drafting can lead to judicial intervention and the whole process could be struck out. The three legislations will follow the constitutional amendment

  1. The national GST bil
  2. The state GST bill
  3. The interstate GST bill

All these legislations have to go back and learn how courts have in the past interpreted the taxation matters.

For example- so far the goods were in purview of particular body, services were within centre’s purview. The courts over the years have brought out a new category called ‘deemed goods’. So, all the issues and small provisions have to be reoriented by looking at the 60 years’ rulings of Apex Court, High Courts on how they have changed and defined different things and then incorporate them.

The rulings given on these matters in one state should not be at a large variance from a similar ruling in other state or central government tax department ruling says. Otherwise, there wouldn’t be a common market. Hence, there will be many unanticipated things.

History of VAT– 1978, the indirect tax committee report had proposed VAT. But they said it can’t be implemented as there is a large number of small scale sectors where it is impossible to do it. So, they suggested ManVAT- Manufacturing VAT. But, even that couldn’t be implemented as large amount of inputs is taken from small scale sectors, supplying to small scale sectors etc.

So, the ModVAT was suggested in 1986 as a long term fiscal policy. It was to being with large scale sector and slowly spread it to small scale sector. And then later on, there was CENVAT and VAT. The implementation has been difficult. And hence, the administrative structure has to be ready for various challenges arising out of implementing GST.

No doubt, the tax system administration machinery over the last many years is prepared for such challenges. There will challenges yet there are chances of it being rolled out in April 2017. Once the tax structure and legislative framework is out in public, there will be an implicit incentive in the system to be part of the system. If one is not, then one is not in the value chain. So, the concern about small scale industries can be handled with incentivising and by encouraging it to become part of the value chain, this is a system which will bring under its ambit a large number of organisations which have till now not been covered under any taxation network.

The GST technology backbone is ready to be rolled out by September end. They need to have a five month testing period and a six month time after September will help in GST assessment. The central government has done sufficient homework in this area:- a separate autonomous body has already been created and the vendor has been selected who will run the technology backbone.

The technology will be backbone of the implementation. There is going to be a need for lot of training of staff at central and state levels for implementation. The NSDL has done a pilot programme which has been tested has given positive reviews. Ofcourse, there are still going to be lot of complexities when actually implemented on a large scale, but system is slated to be ready for it.

Possible glitches?

Impact on inflation

The prices will go up in short term. The benefit of taking credit at every stage of value addition will be changed. The professionals like doctors will have to pay the revised taxes because they will not be taking credit for various inputs they are using for equipment and all.

Delay in rolling out GST

There are chances of possible delay in implementation of GST. It may be largely political as GST may spike inflation, the government has important elections coming up next year, so it may not be entirely economic and administrative reasons but can be political reasons coming in way.

Black money gets defeat

Everyone is going to benefit is not true. States will benefit, consumer will benefit, centre is going to benefit.

But, there will be someone who will lose and those will be persons who use black money to buy things at last point of sale. So, this is where money which is being lost to the state will be recovered and that will be shared with centre, state and consumers and others. This will be one of the major hidden advantages of the system that it will reduce avenues for generation and also spending of black money.

This is part one of two RSTV debates on GST

Key Words

Ring fencing: A ring fence is a protection-based transfer of assets from one destination to another, usually through the use of offshore accounting. A ring fence is meant to protect the assets from inclusion in an investor’s calculable net worth or to lower tax consequences.

Here, the government has opted for ring fencing. It means:

  • A government may attempt to set regulations that force the ring fencing with certain industries to provide protection to the consumer.
  • For example, a government may want to separate the traditional consumer banking services from the associated investment activities within a financial institution.
  • This would protect the more stable banking activities, such as consumer deposit account activities, from the riskier activities that are more likely to result in losses or potential bank failure.

Money Bill

  • Under Art 110 of constitution
  • imposition, abolition, remission, alteration or regulation of any tax
  • only at union and state level, not local level
  • a speaker decides if a finance bill is money boll or not
  • can be introduced only in LS/LA of state
  • needs prior Presidential recommendation
  • only a government bill, not private bill
  • no joint sitting on money bill
  • President can withhold assent, but not return money bill

Finance Bill

  • In a general sense, any Bill that relates to revenue or expenditure is a Financial Bill.
  • Finance Bill- I= has provision apart from money bill. For eg: creation of a fund in which proceeds from tax imposition and withdrawal is managed.
  • Finance Bill-II= it has provision of involving expenditure from Consolidated fund, but not anything from art 110. For eg: Pension of President is done vide an Act. However, there is no such mention of it in art 110.
  • The finance bills are ordinary bills once it is passed by LS. The RS can reject it and also have a joint sitting on it.

Refer:

GST legislation & Issues

Goods and Service Tax (GST) Logjam: GST by another name

FAQ- GST

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