Any move to compensate states directly, waive 1% GST levy welcome: taxation experts


The Goods and Services Tax (GST), often hailed as the single biggest tax reform in Independent India, may finally please all. It seems the government may drop the additional 1 levy proposed for manufacturing states under the GST framework and instead compensate states directly. India Inc. will be most relieved if this were to happen.

This 1 percent conundrum has been vexing corporate India ever since a parliamentary panel suggested this levy for getting manufacturing states like Maharashtra and Tamil Nadu on board. Obviously, northern and eastern states have been opposed to this levy since it becomes an additional cost for them and even the Opposition – or specifically the Congress – has been vehemently opposed to this levy.

According to a story in the Times of India, the government may compensate manufacturing states directly instead of imposing to a 1% additional levy under GST even if this means multiple GST rates.

Last week, Minister of State for Finance Jayant Sinha had also indicated the government’s flexible attitude on this 1 percent levy saying there were many opinions on this and that the government would decide after consensus.

The 1 percent additional levy is non-VATable and as of now, is applicable only on inter-state sales, not inter-state supplies. Removal of this additional 1 percent levy has been one of the three key demands of the Congress and something over which the GST rollout has been stuck. Well, taxation experts welcomed the prospect of removing this levy from the GST framework and instead Centre compensating manufacturing states directly, which will burden the exchequer but provide a relief to businesses.

MS Mani, senior director with Deloitte India, says compensating states directly would be a far better way than imposing this 1 percent additional levy. “In the event that this 1% additional tax cannot be revoked, an option for the Centre to compensate states in addition to the agreed compensation would be a better way as far as trade and industry are concerned. The cost effect of this 1% tax would then be avoided.”

Bipin Sapra, partner – Tax and Regulatory Services at EY also echoed Mani’s views. He termed this additional 1 percent tax as “an aberration from the destination based GST structure envisaged in the present scheme” and said it needs to be removed. “This will result in increase in cost of goods and services and distort the concept of single market economy in India where choices to buy are not dependent on the rate structure in a state.”

It is another matter that the increased burden on the exchequer may eventually increase then burden on you and me in some form or the other, if the government decides to compensate states directly.

Another thing taxation experts are bemused over is the proposed “sin tax”. According to some reports, the government may look to tax what it sees as luxury items at a rate far higher than the GST rate. Since alcohol is outside the purview of GST, perhaps this would include tobacco and maybe even luxury cars.
Sapra of EY says that the concept of sin tax is widely accepted in tax policy across the world and generally implemented as excise duty which is not creditable. But he warns against introducing complexities in the GST regime, saying “The more the number of rates of GST, the more complex the taxation regime and prone to classification and interpretational issues.”

The government needs to simplify GST framework and this essentially requires multiple levies to collapse into a single one country wide. Already, taxation experts are unhappy with separate levies classified as state GST, Central GST and Integrated GST. Adding sin tax over and above these levies could further complicate the GST regime even if it generates more revenue. The ideal GST is a single tax levied on all transactions and the revenue apportioned between various stakeholders. The concerns regarding loss of fiscal autonomy for the states have lead India to adopt a multi-level structure of GST. Sapra says, “This structure, at a transactional level, brings its share of complexities and potential litigation which will increase transaction cost.”


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