India’s indirect tax regime is based upon the federal political structure of the country. Dual taxing powers are enshrined under the Constitution of India, enabling both the central and state governments to levy taxes within the jurisdiction of their respective lists.
Among the key taxes, the central government is responsible for the levy and collection of taxes on the manufacture of goods (excise duty) and on the rendition of services (service tax). The central government is also empowered to levy tax on the sale of goods involving the movement of goods from one state to another (central sales tax). However, this is collected by the state governments where the goods originate.
State governments are empowered to levy and collect taxes on sales (VAT) and on the entry of goods within the limits of the state or municipal body (entry tax/octroi/cess). Various other taxes are levied by state governments such as luxury tax, entertainment tax, taxes on lotteries and more.
Why is there a need for change?
The existing taxation regime is marred by significant disadvantages:
- As business processes have evolved, the taxing lines between the state list and the central list have started to blur, leading to double taxation and extensive litigation;
- The central and state taxes are not fungible against each other, nor are the state taxes fungible inter-se, leading to a cascading effect;
- The disparity in the rate of taxes as levied by respective states has led to businesses structuring their transactions only to achieve a tax advantage;
- While the state VAT laws were conceptualised so as to have uniform application, over a period of time with various amendments made by respective state governments, each state’s law now has to be interpreted and implemented separately, resulting in a multiplicity of compliance requirements; and
- The current tax regime is an origin-based taxation system, as opposed to the destination-based system prevalent the world over, leading to significant disparities in revenue distribution to various states.
What is GST and what would it achieve?
The situation has led many to wish for a move towards a unified GST/VAT model as is followed by Canada, Australia and the EU. However, considering that India has a federal structure, an Indian flavor of GST has been proposed – the dual GST.
Under the contemplated tax regime, the central and state governments would be empowered to concurrently levy GST on both goods and services. The GST to be levied by the central government and state governments would be called central GST (CGST) and state GST (SGST), respectively. In the case of inter-state supplies (that is, supplies from one state to another), an ‘integrated goods and services tax’ (IGST) would be applicable.
The introduction of GST would not only lead to the simplification of the tax regime, but would help remove its inherent defects. Some of the critical flaws such as the multiplicity of laws and taxes, the cascading effect of taxes, the non-fungibility of credits between goods and services, the possibility for taxpayers to shift their base only to take advantage of a low tax regime, among other factors, would be addressed in due course by this new system. Also, there would be a paradigm shift from origin-based taxation to destination-based taxation, as is prevalent elsewhere. From a government standpoint, GST would result in a widening of the tax base, as well as increasing tax compliance and revenue collections.
The implementation of GST is being widely discussed as one of the most important pieces of economic (and specifically, tax) legislation in removing various distortions in the existing tax regime and bringing growth opportunities for businesses help India align its tax regime with international best practice.
What is holding back GST introduction?
While the Indian GST was first conceptualised in 2009, it is yet to see the light of day on account of the political quagmire. The GST law requires the passing of a constitution amendment Bill, which would empower both the central and state governments to concurrently levy taxes on goods and services. This requires its passage by the Lok Sabha [House of People] and the Rajya Sabha [Council of States] and ratification by all the states with a two-thirds majority.
In December 2014, the government made a major breakthrough by passing the constitution amendment Bill before the Lok Sabha and set a deadline to roll out GST by April 1 2016. The government thereafter showed alacrity by pursuing the GST Bill in every parliamentary session so that it could be cleared the Rajya Sabha, where the opposition party has a significant majority. However, the discord between the government and the opposition party continued over certain key aspects of GST. This was further complicated by various other political issues, resulting in the non-effective functioning of the parliament in this regard and hence the failure to pass the constitution amendment Bill to date.
Will GST become a reality?
While GST was originally meant to be introduced in April 2016, it has missed this bus. It may go through if the government is able to convince the opposition party to allow it to, or with the change in the numbers in the Rajya Sabha in April 2016, which is likely to give a two-thirds majority, enabling the government to pass the Bill (albeit with a very thin margin). However, this thin advantage will be useless if the opposition party, instead of voting on the Bill, chooses to protest. The passage of a constitution amendment Bill requires that the house be in order.
In the meantime, the government is working on the administrative groundwork for the smooth roll-out of the indirect tax regime. The IT infrastructure required for the GST regime is being developed. The joint committees created for formulating thoughts on various aspects of GST have until now issued reports on refunds, registration, payment processes and returns for stakeholder consultation. The draft legislation is being prepared and is expected to be issued soon for public comments. The upcoming Budget of 2016-2017 should also see the government taking some determinative steps to move closer to the GST regime, with the alignment of tax rates to the recommended standard rate of between 16% and 18% and the broadening of the tax base with fewer exemptions, while there could also be some liberalisation on the availability of set-offs.
While there is little clarity around when GST will become a reality, hopefully the government will be mindful of the fact that stakeholders need time to transition. GST is not merely a change of law, but a strategic business change. Stakeholders also need to be mindful of this fact and start preparing.
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