The Cabinet on Wednesday approved amendments to the GST Bill to compensate states for revenue loss for five years on introduction of the uniform nationwide indirect tax regime, as has been suggested by Rajya Sabha Select Committee.
Former PMEAC member M Govinda Rao and COO (Tax & Head of Indirect Tax) at KPMG Sachin Menon discuss the merits of the amendment in an interview to CNBC-TV18.
Below is the transcript of M Govinda Rao and Sachin Menon’s transcript with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: The panel headed by Bhupendra Yadav suggested maximum goods and service tax (GST) of 20 percent and also suggested a 1 percent additional tax by states to be levied only on the actual sales and not on the intercompany transfer of stock. How much of a positive would that be?
Menon: I feel that this particular recommendation is not very well thought out because end of the day this 1 percent additional tax is a misnomer and it is going to distort the entire GST structure; that is a fact. Rather I would have been happy had the panel recommended to withdraw this 1 percent. Now, by recommending that this could be only on the supply against consideration, if you look at the ratio of interstate total supplies to the interstate sale against consideration it could be hardly about 25 percent, maximum 30 percent which means that 70 percent of the estimated collection by imposing 1 percent additional tax is discounted. So, you get only 30 percent.
I have to pay 1 percent additional tax if I am selling interstate but if I am stock transferring, no 1 percent additional tax is leviable. Every company would stop interstate sale; they will just stock transfer as far as possible. So, government won’t achieve their objective of additional collection and at the same time the industries will have to spend unnecessary expense of building up a warehouse in each location which is avoidable. It is nobody’s game for that matter. So, industry is also losing, government is also losing so the proposition of discounting to the level of only on the sale of sale for a consideration seems to be not achieving neither the government purpose nor the industry.
Latha: But it will at least stop cascading?
Menon: To some extent. Whatever maybe those 30 percent, what they are going to collect to that extent the cascading would get reduced.
Latha: And also politically at least is going ahead. Otherwise it was getting stymied. So, you do not think that we are at least closer to a GST, however distorted coming into play?
Menon: Everybody is looking forward to GST regime and the industry, the consumers, the public, everybody except for this political game, everybody wants GST. So, maybe even in a subdued manner, people would like to push this reform through. But having said this, if I were given a choice, either one percent is not there or one percent is there. It should be the scenario. In between, perhaps may not be making any sense.
Latha: What is your sense of the amendment proposed? Compensation has to be provided for five years and this one percent manufacturing tax has been allowed provided there is a sale involved and not simply transfer of goods. As is, do you think we have made some positive progress towards GST?
Rao: I do not know whether it is a positive progress towards GST. When they had that one percent on the interstate supply of goods in the 122nd Constitution Amendment Bill, I was the one who said that there is a birth defect in the Bill. Now, to the extent that you see the stock transfers or the consignment transfers, out of that, to that extent it is better. But basically, neither from the efficiency nor from equity point of view, even if one percent, interstate tax on sale is appropriate. Now, should we go ahead with this? Perhaps we should and perhaps we should really give a guarantee that in two years time, this will go.
Latha: What are the chances it will go?
Rao: In fact there is a serious disincentive for it to go. No state would like to get rid of it because even the poorest states would not like to, people do not matter to us. It is only the governments. One of the saddest commentary of Indian tax reform is that the industry is basically reacting to the proposals and not being proactive. I have never seen any industry who is coming up and saying that this is the way we should have an ideal tax system. When the government comes up with a particular thing, then they come up and the start reacting to it. I think that is not on. And then the government, it is not just the government, I think the stakeholders’ consideration should be taken into account. But the fact of the matter is the GST thing is stuck in the mud. It is like a bullock cart stuck in the mud. It neither moves forward nor moves backward. And I think there is a very serious problem with this.