Cracking solution to cascading effect of 1% tax over GST to be tough

arvindsubramanian1-kRqG-621x414@LiveMint.jpg

Arvind Subramanian had criticised the one per cent tax proposal, suggesting the government reconsider it

A solution to the cascading effect of the contentious one per cent over the Goods and Services Tax (GST) might be elusive, or at least difficult to arrive at.

A sub-panel of the empowered committee of state finance ministers and the finance ministry has been trying to find a solution. The tax on inter-state movement of goods was proposed in the Constitution amendment Bill for two years so that manufacturing states embrace GST.

The panel would submit its report to the government in a month, sources said.

“The way the tax is structured, it (cascading) cannot be avoided. Period,” Satya Poddar, tax partner-policy advisory group, EY, told Business Standard.

This is because first of all, the tax would be levied over and not included in the chain of input credits, he explained. Secondly, it would go to producing states, while GST was planned as a destination-based tax. Now, consuming states can’t be asked to give credit for the tax as they would not get the levy.

Who, then, will give credit to avoid the cascading effect?

If the tax was included under GST, it would go to a destination state, he said, and the very purpose of the tax would be defeated.

V Sivasubramanian, a director of law firm Lakshmikumaran & Sridharan, said the one per cent tax was contrary to the principles of GST.

Unlike GST, where input credits are given at each stage of the manufacturing chain, this tax would be like the (CST), where no credit could be given, he said.

Sivasubramanian suggested a few alternatives, but that would require scrapping the one per cent tax and replacing it with some other options.

is a tax on the inter-state movement of goods and would be done away with once GST is introduced, planned on April 1, 2016.

GST and state-level value-added tax do not have a cascading impact like the tax in the earlier system, say, sales tax. Tax under the older system is imposed on the total value of goods at each stage of production and selling, leading to a cascading effect. In GST and VAT, tax would be imposed on only the value-addition at each stage of production and selling.

For this purpose, tax paid on inputs are reimbursed at each stage, which is called input credit.

However, the one per cent tax was proposed in the Bill after manufacturing states such as Gujarat were not willing to join the GST regime; a destination-based tax system is not to their advantage. But this created the problem of cascading.

In reply to a debate on the Bill in the Lok Sabha, Finance Minister Arun Jaitley had assured the House that the cascading effect of the one per cent tax would be avoided and a sub-panel of the empowered committee of state finance ministers would work on it.

Amit Kumar Sarkar, partner, Grant Thornton India, said an option to avoid the cascading impact of the one per cent tax was to include it in the integrated GST (I-GST). Such a tax would be leviable on inter-state movement of goods and services and collected by the Centre, to be given to the states.

Currently, the proposed model was that there would be an information technology (IT) backbone to map I-GST on a ship-to-location basis, so that the tax can be given to consuming states. Now, one more mapping would be required to map goods on the basis of ship-from-location basis so that the tax could be given to manufacturing states, Sarkar said. “This is the only model I can envisage to avoid the cascading of one per cent tax for manufacturing states.” This model was discussed earlier, Sarkar said, but discarded because it would complicate the system. In the IT backbone, one more mapping would have to be done for ‘ship-from-location’ goods. That is why the one per cent tax over GST was proposed for manufacturing states – as a route to get manufacturing states to accept the GST system.

This one per cent tax proposal had drawn flak from various quarters. In fact, Chief Economic Advisorhad criticised the provision, suggesting the government reconsider it. The Congress had demanded its withdrawal as one of the five conditions for its support for the Bill in the Rajya Sabha.

Source: Business Standard

Leave a Reply

Your email address will not be published.

Solve this and then Post Comment *

scroll to top