Lesser the number of exemptions, the better it will be as each exemption distorts structure of the tax regime says, Najib Shah, Chairman of Central Board of Excise and Customs in a CNBC-TV18 special series, in association with Ministry of Finance, on how GST will impact the economy and our lives.
The Chairman of the Central Board of Excise and Customs (CBEC) Najib Shah is batting for minimal exemptions for Corporate India under the GST regime.
In a CNBC-TV18 special series on how GST will impact the economy and change your life in association with the Ministry of Finance, Shah said lesser the exemptions, the better it will be as each exemption distorts the structure of the tax regime.
The GST Council will discuss exemptions at the next meeting.
Below is the transcript of Najib Shah’s interview to CNBC-TV18’s Shereen Bhan.
Q: As I said, there is a lot of question on what the goods and services tax (GST) will mean eventually as far as the end consumer is concerned, what it will mean for industry and so on and so forth. Let me ask you about the broad question what happens now as far as the budget in itself is concerned, because that’s what everybody used to wait for to know what happens on the direct tax side and on the indirect tax side. Post the GST that power really rest with the GST Council, so what happens to the budget, how meaningful is the budget going to be?
A: Like you rightly mentioned the budgetary process as far as the direct taxes go and the customs part of the indirect taxes go will continue to be in place. What the GST does in effect it subsume other indirect taxes, other than customs. So, yes let’s wait and see how the budget itself will hold for this year, the GST Council obviously will be playing a key role in determining all the rates, so we will wait and watch how this year goes.
Q: So speaking of waiting and watching, you already put out the draft rules for the GST. In fact, there has been an early release of the draft rules in a bid to make sure that from the finance ministry side you are prepared and now it is a question of industry sort of falling in step. The next meeting of the GST Council is on the September 30, what continue to be the big issues that require the attention of the GST Council and also take us through the issues that have been resolved by the GST Council so far. Where does that leave the negotiation?
A: The key issue which I addressed in the last GST Council meeting in itself where threshold until which you will have no tax, which was after a lot of debate and discussion determined to be at Rs 20 lakh. The composition which means that you pay a flat rate and you don’t get to the rigours of having to maintain any records, you also don’t get any input tax credit, but then it is a huge facilitation measure and that has been determined to be at Rs 50 lakh.
We then had various discussions on how the compensation in itself should go, which was inconclusive. We also had discussions about the sharing itself of the indirect taxes between the states and the centre and the rules which each administration have to play. So a lot of ground was covered in the first meeting. It was a huge success in my opinion because there was a lot of convergence on multiple issues.
There were meeting which is now being scheduled for September 30 will obviously have to answer lot more issues which are pending. We will have issues on exemptions, how they will treat exemptions itself in the days to come by, rates of course is a big ticket item which will have to be discussed at some point of time. There are a lot of issues which still required to be resolved, but yes the road is very, very clear and we should be in a position to resolve them.
Q: Let me start by asking you about compensation, because that’s one of the key questions that come into us. The fear in states is that this is going to lead to a loss of revenue. In fact, individual states have put out different figures. The state of Tamil Nadu for instance claims that it will lose almost about Rs 9,000 odd crore, but as part of the constitutional amendment bill, the government is guaranteed compensating states for 5 years. So you said that the discussion of the negotiation on compensation was inconclusive, but what should we understand in terms of the levers that will be exercise or the calculations that will be made by both sides in order to arrive at the methodology and the formula?
A: These are all matters of details which are still being discussed. As the government has committed and the Constitutional Amendment Act has put in place, this is a clear guarantee that the government will be compensating for the next 5 years. That something which will be completely honoured obviously and what will be the extent of compensation are matters of details which I haven’t got like to into at this point of time. We said that these are being examined very, very closely and in close coordination with the states themselves.
Q: Let me then move to the other issue that you just spoke of and you said that that is likely to be addressed in the next meeting of the GST council and this is a big demand from industry, what happens to exemptions? The Finance minister has also made it very clear that you will have to prune down significantly the list of exemptions or you are just going to have to deal with a GST rate that will be unviable. In that scenario what could the options be as far as exemptions are concerned?
A: You should wait for September 30.
Q: What are the options on the table?
A: Every exemption distorts the structure and on that there is a complete agreement and consensus. The lesser the exemptions the better.
Having said that everybody is aware of the fact that there are several exemptions which have long gestation period which will continue to be there, so how do we address them? We could address them through multiple routes, we could address them by phasing them out over a period of time, we can address them by perhaps giving extra funds, those are decisions which the GST council will be taking and you will get to know soon.
Q: What would the preferred route be as far as the ministry of finance is concerned? I understand that the final decision will be one of the GST council but for instance on the issue of grandfathering what is the preferred view of the ministry?
A: I will be second guessing in this aspect if I were to make any mention of this, suffice it to say that the GST council will be briefed, the GST council will be taking a call on this.
Q: Let me then talk to you about the third issue that you mentioned and that of course is the all important one on rates. Again it is upto the GST council and the negotiation between the centre and the states. The centre has made it very clear that it would like the rate to be according to the recommendations made by the Subramanian panel and that is what the Congress party has also suggested. States clearly would like something higher. How would you explain the rationale behind an 18 percent or 19 percent or 20 percent rate. To a consumer who is watching this program, explain to us the rate structure and what that would eventually mean as far as the viability of the GST itself is concerned?
A: Obviously rate is of key importance for all players in the entire scheme. What the governments, both the state and the centre would expect ultimately is that the GST collects what it is collecting thus far. So, the rate which gives you that amount is what everybody is looking at. What this also presupposes is that the lesser the number of exemptions the better or lower the rate will be.
Remember also that the GST by its very definition means subsuming multiple taxes, ensuring credit is given, so you are looking at the common man. We are looking at a situation where the tax on tax situation will no longer be there and that should help also in determination of the rates itself. So, it is of key importance for all players.
Q: A lot of viewers writing into us, asking us, should we hold off purchasing a car because perhaps car prices could come down very significantly. I understand that it is premature to talk about what the price of a car will be on April 1 2017 if the GST were to rollout on that date. However broadly in your assessment as far as manufactured goods are concerned what could the implications be in terms of reduction?
A: Complete flow of credit which means whatever taxes have been paid on inputs at every stage will now be available. It means that the tax on tax situation which is there in most sectors will reduce considerably. This in effect should mean a reduction in prices. How this will all unfold we will have to wait and see. However this is what we are expecting.
Q: You believe that it will be significant reduction in prices?
A: I believe there will be a reduction in prices. How significant it will be I do not know but there should be reduction in prices and that should be a matter of great relief for all concerned.
Q: As per the recommendations of the Subramanian panel there is a demerit rate and one can understand alcohol, cigarettes and so on an so forth but the question then also becomes that what qualifies as a luxury good, would SUV qualify as a luxury good and hence the 40 percent tax rate there, bad news for consumers of those products, what would your response be?
A: Wait and see. These are matters of detail. What the Subramanian committee report has indeed in effect told, is that there should be a mean rate and there are some items which can suffer a higher rate, these are the recommendations.
Even now in the scheme of things you have commodities which have a higher rate tobacco for instance, higher in vehicles. So, it is not as if they don’t suffer a higher rate now. So, perhaps that scheme will continue. The GST council will debate and determine the rates itself of such commodities.
Q: Here we were talking about how the prices of goods will come down once the GST were to rollout but on the flip side on the service tax front we are going to see an increase. Explain to the consumer what that will mean?
A: What he service tax rate would be in the GST regime one should not speculate. Having said that again you have a situation where the credit itself will be available on the inputs which go in the delivery of a service. So, we do believe that though the rate maybe whatever it is, the flow of credit will be much more and that should in effect mean a lesser final burden on the consumer.
Q: So, you are saying that, that will in fact be offset. Let us assume that it were to be 18 percent at this point in time but you are saying on account of the input credit we could see a certain amount of that being offset?
A: Yes indeed, that is what I am saying.
Q: Let me then ask you about some of the other questions that have come in to us from consumers who have been writing in and this also has to do with your draft rules that were put out and most people that we have spoken to, at least the tax experts that we have spoken to believe that the move to actually make PAN verification mandatory is a good move, because that will eventually perhaps bring down tax evasion as well. Explain to us the rationale behind some of the rules including this and what they will mean?
A: Even now all legislations which are given in the central excise and service tax regime are PAN based, which means we do use PAN numbers as a basis for giving the registration. This will continue in the GST regime. What this will mean is that there will be a greater validation of the identity, so yes it will be a significant move which will ensure greater coordination between the indirect and the direct regimes.
These are the suggestions made for the public to get back to us. We have like you rightly mentioned put in the public space a lot of these rules. We believe that this will help the industry know the business processes. We have also put along with these rules all the attendant forms which again is significant. This will help them in developing their IT infrastructure and the business processes to deal with these returns and legislations and payments modules. These are significant things which we have done and well in time I would say for the business to start reacting to it.
Q: The difference between the Central GST (CGST), the State GST (SGST) and the Integrated Goods and Service Tax (IGST) are these 3 taxes required to be paid by the same taxable person and whether cross utilisation of these 3 taxes is allowed?
A: You see the model law has made this clear whatever the credits made available on the IGST will be used only for payment of IGST and then CGST and then SGST. On the CGST and SGST itself the credits available in SGST will be used for SGST. The credits available in CGST are used for CGST. Cross utilisation here is not permitted.
These are significant again in terms of lessening the burdens on the consumer, on the manufacturer and should give a fillip to the economy itself.
Q: How will the taxpayers file returns in the GST?
A: Online. He is expected to it online and that should be a significant measure, which will help in the ease of doing business which will simplify the entire process. The Goods and Services Tax Network (GSTN) which is the non-profit company established will do the front ending for all these business processes, so he is expected to everything online.
Q: Whether the transition time given to industry to make the switches enough or not and clearly here the government seems to be pressing forward and industry seems to be lagging behind. The question is how much lead time will companies have to be ready for the GST?
A: We have put everything in the public space. The model law is there. The business process have been put forth, as I mentioned the various forms which needs to be utilised for each one of these key business processes are there. We have having extensive outreach programme. We are training both our administrators and also trying to reach out to the industry, so we do believe with all these playing simultaneously industry have sufficient leave time now.
Q: You believe that April 1 2017 is very doable?
Q: Linked to that is also the question on what kind of support and leniency will be available to ensure the smooth implementation and transition not only from the governments perspective but also from the tax payers perspective?
A: There is a transition which has been provided for in the model law. We do realise that there are going to be challenges in the implementation itself. As regards to leniency let us wait and see, I really can’t comment at this point of time.
Q: To go back and revisit the exemption question because there have been concerns on what happens to area based exemptions and so on and so forth and this links back to strategic business decisions that companies will need to make. So, do you believe that well before the next two months we will have clarity on that which is what he revenue secretary seem to suggest as well?
A: We should be having clarity because the model law is in the public space. We have got suggestions, we have got comments that are being taken onboard, that are being examined. It will be placed before the council at some point of time. It will be getting their approvals and again it will be in the public space sooner rather than later. So, with the combination of the business processes which are in the public space and the law clarity will be there on each one of these issues.
Q: Just on the GST because you talked about that and we were expecting some movement on that front from the cabinet today in terms of approving the funding but on the IT readiness, the government has also very clearly maintained that the IT systems are geared up for April 1, 2017 timeline but what will it also mean now online registrations and so on and so forth, how will this ecosystem need to develop to make sure that it is all in place?
A: What this cabinet today has approved is funding for the IT infrastructure update or the CBEC itself. This is very significant because we have been seeking this and we have had the government’s concurrence today.
It is a very ambitious project. We will ensure that our IT infrastructure is updated to meet the requirements of GST. We have also simultaneously working on the software bit, working closely with GST and the GST is a frontend company. It is also acting as a lot of other states. A few states are out of it, CBEC is out of it. We are doing our own backend along other states. So this IT infrastructure update is essential and the ecosystem in effect is being put in place to ensure it meets the requirements of GST.
Q: Will concessional sales tax forms and check posts be abolished under the GST?
A: Wait and see.
Q: There is a lot of wait and see.
Q: Are you saying that by November, we should have most answers?
A: You should.
Q: So then realistically, from September 30th which is when the next meeting of the GST council takes place and we don’t know whether the winter session is going to be advanced or not, but give us a sense of the roadmap that we can expect now between 30th September and the winter session.
A: 30th September is the next meeting. There should be some other meetings immediately thereafter, subject to the convenience of all the ministers and the finance minister. It should happen very soon again to address all the key issues.
Taking off from there, we expect that further dates of the council’s meetings also should be finalised. Everybody understands the emergency, everybody understands huge amount of work which needs to be done to get these processes complete. So I do believe that between October and November most of the work of the council in terms of its recommendations should be ready and what that will mean is that we will be ready in turn to present the documents to the parliament itself for necessary validation.
Q: There are sectoral comments that have come in from the FMCG sector, from the e-commerce sector, from the auto sector but we leave that for the next episode where we will talk to you about sector specific stuff but what is the biggest fear around the GST that you are having to deal with today?
A: I wish we had more time in terms of number of hours per day because all my colleagues, my officers are working 24 hours literally to ensure that we put in place all processes. It is going to be challenging, it is a new law, there are going to be transitional issues, they are going to have legacy issues of the previous central excise and service tax regime, which we were having till now. So there are challenges. We have to put in place an administrative sector structure to meet the requirements of the GST regime, there are multiple challenges and yes, there are concerns but none of those which cannot be met.
Q: What will happen to CBEC structure in future once the GST were to rollout?
A: You will have to change with the requirements of the new regime and we will do so. We will have to reconfigure our administrative set up, we may also perhaps have to relook at our name itself. We will still have the customs portion of the work with us as it were with the Central Excise and Service tax, we are getting subsumed into the GST. We will do the necessary and that is perhaps be a new beginning also for the organisation.