Goods and Services Tax: How helpful will it be?
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| Courtesy: Shiprocket.in |
In India, the structure of Indirect Taxes (IDT) is complicated, confusing and time-consuming. Taxes like Excise Duty, Service Tax, Sales Tax/Value Added Tax, Luxury Tax, Octroi and Entertainment Tax are all levied on goods and services provided (in addition to the various cesses that are added and named quite ingenuously) by the government. Issues of double taxation and reporting to multiple authorities are also prevalent.
The Economist points out that according to the World Bank, India ranks 157 out of 189 countries for simplicity in taxes. With differences in the huge numbers of taxes and their rates between different states and the centre, manufacturing in State A and selling in State B involves a fair amount of paperwork and complications with queues of lorries idling at state borders.
But will the launch of the GST lead to India’s 1.3 billion-customer, $2 trillion-economy becoming a single market?
It is hoped that it will streamline different indirect taxes and cesses to implement a “single taxation system”. This would enable one or two rates for all products and services across the country, making it simpler for industries and services and reduce revenue leakages. State politicians and bureaucrats have expressed the concern that they will lose revenue by giving up the right to collect taxes, leading to the Centre guaranteeing reimbursement of potential revenue loss for five years. This is compounded by the fact that revenue data is poorly recorded and both the centre and states are anxious to ensure they are not affected by the GST. The GST Council has been witness to this struggle for administrative power in the collection and enforcement of GST.
The situation stands thus:
In their anxiety not to lose out revenue, the states have insisted on not bringing highly lucrative and rent seeking sectors (Alcohol, Petrol, Diesel, Real Estate) under the ambit of the GST. While a lot of taxes will now not be applicable, the dream of a single tax regime of 12-14% for all products and services is now four tiers of tax slabs with 5%, 12%, 18% and 28% plus an additional cess on demerit (sin) goods like cars, aerated drinks and tobacco products. The work for fitting the thousands of goods and services in these slabs is now on and the Government wants to implement GST from July 1, 2017.
So we eventually could have about 10 or more different rates depending on the cess levied. The government has said that it would remove cesses after five years, as it would no longer need to compensate States for any losses in revenue after that, but historically, no Government has ever removed a cess so far, only renamed or subsumed, elsewhere.
The implementation is likely to be challenging and troublesome. According to reports, service providers who operate nationally under a single centralised registration of service tax at present file three service tax returns in one year. In the GST era, they will have to file 61 returns per state, per year, after registering in each state in which they have presence.
With what looks like an administrative nightmare with complications in implementation, launching the GST on July 1, just three months away, seems like a race against time.
But will the launch of the GST lead to India’s 1.3 billion-customer, $2 trillion-economy becoming a single market?
It is hoped that it will streamline different indirect taxes and cesses to implement a “single taxation system”. This would enable one or two rates for all products and services across the country, making it simpler for industries and services and reduce revenue leakages. State politicians and bureaucrats have expressed the concern that they will lose revenue by giving up the right to collect taxes, leading to the Centre guaranteeing reimbursement of potential revenue loss for five years. This is compounded by the fact that revenue data is poorly recorded and both the centre and states are anxious to ensure they are not affected by the GST. The GST Council has been witness to this struggle for administrative power in the collection and enforcement of GST.
The situation stands thus:
In their anxiety not to lose out revenue, the states have insisted on not bringing highly lucrative and rent seeking sectors (Alcohol, Petrol, Diesel, Real Estate) under the ambit of the GST. While a lot of taxes will now not be applicable, the dream of a single tax regime of 12-14% for all products and services is now four tiers of tax slabs with 5%, 12%, 18% and 28% plus an additional cess on demerit (sin) goods like cars, aerated drinks and tobacco products. The work for fitting the thousands of goods and services in these slabs is now on and the Government wants to implement GST from July 1, 2017.
- The GST Council has now approved a ceiling on the cess over and above the highest GST rate of 28% on sin products like pan masala and chewing tobacco but Beedis have been kept out of the cess net altogether to avoid political friction.
- The cess on colas and cars is at 15%, with total tax incidence at 43% (Tax 28%+ Cess 15%)
- Cess on Pan masala is at 135% implying that tax incidence cannot exceed 163%
- Cess on cigarettes and chewing tobacco is at 290%
So we eventually could have about 10 or more different rates depending on the cess levied. The government has said that it would remove cesses after five years, as it would no longer need to compensate States for any losses in revenue after that, but historically, no Government has ever removed a cess so far, only renamed or subsumed, elsewhere.
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| Courtesy: Financial Express |
The implementation is likely to be challenging and troublesome. According to reports, service providers who operate nationally under a single centralised registration of service tax at present file three service tax returns in one year. In the GST era, they will have to file 61 returns per state, per year, after registering in each state in which they have presence.
With what looks like an administrative nightmare with complications in implementation, launching the GST on July 1, just three months away, seems like a race against time.
Appreciate the clarity in this piece.
ReplyDelete-Multiple tax slabs will be a challenge, with classification disputes likely to come up.
-Leaving out bidis means not adequately disincentivizing consumption of one of the worst forms of tobacco.
-India has always faltered on implementation of good regulation, and compliances need robust infrastructure which may be a question mark.
-Tax evasion has always been rampant in India. Simple effective tax structures & rules are required, and it remains to be seen whether the GST proves effective.
Will watch for your further follow up on this subject in your blog.