GST important reform not game-changer, has flaws: Expert

GST important reform not game-changer, has flaws: Expert
The Goods and Services Tax (GST) Bill was stalled in the Parliament Tuesday. The opposition including Congress, BJD and Left are insisting to refer the bill to the Standing Committee on Finance. GST bill vote and passage is likely later Wednesday. Chances of GST clearing in current Parliament session is dim and if that happens the tax reform may miss 2016 deadline.Speaking to CNBC-TV18, M Govinda Rao, Member, 14th Finance Commission said GST bill in its current form is not flawless. According to him, GST is an important economic reform but not a game-changer.

The government has to get the approval of 29 states for the tax reform to pass through. The opposition parties are raising serious concerns on a number of clauses including levying of an additional 1 percent tax on interstate supply of goods which could have cascading effect. Exclusion of alcohol and petroleum from the purview of GST are also some of the major concerns.

Rao believes the bill will get a nod in Lok Sabha today and the pending negotiations make meeting GST deadline optimistic.

Adding to the discussion, Satya Poddar, Partner-Tax & Regulatory Services, EY said it is impossible to value interstate supplies for tax computation. He believes it is possible to resolve the interstate supply tax.

Below is verbatim transcript of the discussion:

Q: With the help of Trinamool will the GST bill pass through Lok Sabha? What happens to the fate of the amendment bill here after?

Rao: It might pass, and I am sure it is going to pass in the Lok Sabha but the problem will be in the Rajya Sabha. I do have certain other problems with the bill- one is that it is just a minimalist plank, it is just a framework. There are lot more things that needs to be done.

Even in this minimalist framework it is not a flawless sort of a bill, there have been number of things that have been left out. There is 1 percent tax on the interstate sale and there are problems of that nature which Satya Poddar once called factitious federalism sort of a thing.

Since it is a minimalist thing when you come to the next stage there are number of negotiation that have to be done by the GST council. I warned whether in the next 11 months they will be able to do it.

I am afraid that is not going to be very optimistic situation because negotiations will have to be done under threshold simplify the assessment for the small dealers, exemptions, rate structure mechanism for relieving interstate taxes, legislations, special arrangements for the special categories states, finalising a place of supply rules.

There are variety of these issues and then capacity building itself. I really don’t know, number one – I don’t think we should consider this as a major game changer.

This is an important reform and this reform is a process that is where we should start and start moving from there. This is not an event it is process, this is important for this country but at the same time let us not hype it and say that it is a game changer.

Q: One of the most undesirable compromises is the decision to continue with that inter-state sales tax of 1 percent. Presently, the tax is only on services and the new levy will tax supply of both goods and services. What in your mind will this lead to? Do you think this will negate a major gain from the basic levy of GST?

Poddar: Yes indeed. When the politicians were negotiating the compromise package on December 17, when the deal was struck with Gujarat Finance Minister Saurabh Patel and a few other Finance Ministers, at that time, the idea was to lower the 2 percent tax on inter-state sales to 1 percent for the short period of two years. However, in the process of making that change, that compromise they broadened the tax from inter-state sales to inter-state supplies.

Now, what that means is that any supply, any movement of goods inter-state becomes subject to 1 percent tax; that is a draconian change. It is a minor change in terms of legislative drafting but it is impact is so magnified that it can bring the whole economy to a standstill.

You cannot move the goods from place to next place without incurring this 1 percent tax. They imagined the plight of the manufacturers and the distributors that before they can order goods inter-state they say we have to pay the 1 percent tax.

The second thing is that the tax is going to be a nightmare to comply with leaving aside its economic burden because it is like taxing – you move your food from kitchen to the dinning table and it becomes subject to 1 percent tax because the law defines that movement to the supply of goods. So if there is inter-state border between your kitchen and dinning table you have to pay the 1 percent tax.

Even if you are prepared to pay the 1 percent tax you ask the question on what value. It will be impossible. It is not a question of not being simple or complicated, in my view it will be impossible to value all those transactions because there is no third party involved. How do you value that movement from one division of a company to another division of a company?

Many telecom companies operate a warehouse of the parts which are taken out each morning from the warehouse to the repair site for repairing the towers of the telecom network. Now, all of those movements becomes subject to 1 percent tax. This is just absolutely insane. So, I don’t think the ministers were fully aware of what they were doing at that moment in time.

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Q: Aside from this being a terrible problem do you think it will get resolved? Gujarat benefits a lot from this so once assuming it goes into negotiation stage from the Rajya Sabha that still looks very distant as and when that happens do you think Gujarat will give in?

Poddar: Technically, it is possible to resolve it because in the constitution they simply say that tax will apply only to inter-states supplies. However, lawful for implementing this tax can define the supply very narrowly.

The least they could do is to go back to the council of inter-state sales as apposed to inter-state supplies and then the tax of one percent will apply in the same manner as a currently two percent tax that applies to inter-state sales.

It is possible to resolve it now as far as the loss to Gujarat is concerned. Gujarat loss cannot take precedence over the lost to the economy. If the economy does not function then Gujarat will have no revenue to collect.

The worst thing is that this tax will apply; Gujarat will collect the tax if they ship their goods to Rajasthan, your brothers within India. However, if they ship their goods to Bangladesh, Pakistan or any third country one percent tax will not apply.

I find a reverse discrimination that your brothers within your own federation are going to be treated more punitively than your alien neighbours.

Q: This point is well established that if the supply of goods and services are taxed, then it will be highly detrimental but what could be the solution to this problem in your mind?

Rao: In fact they have been done deliberately. The whole idea is tax the stock transfers, the consignment transfers, this is very retrograde as Satya said, this is a very bad way of going about it.

Initially, way back in 70s, they had the 46th amendment to consider consignment transfers as a sale but then the enabling legislation was not done and thankfully that remained at that but then this is a short-sighted view of some of the producing states.

Unfortunately, in Gujarat which should have been in the forefront championing this reform has fallen into the trap and as Satya said, exports outside the country are completely zero rated but then the interstate movement is sought to be taxed.

Now only way they can do is-there has to be a great deal of advocacy, by all of us saying that this is a wrong thing to do and then the government will have to get up and then say that even if you have to continue for two years, in fact it is not even clear that it is two years, two years are until the GST council decides, it might continue forever.

Q: Under current circumstances the GST council is almost super government. It is going to have a lot of powers will that be politically feasible?

Rao: That is precisely because they just want you to rush through this constitution amendment bill with a minimum thing and then put everything on the GST council, so that GST council decides.

Where in the GST council you have 1/3rd of the weight to the Union Government so if you have the remaining half of the states with you, you are through, that is the way they want to possibly proceed.

However, this is going to be a very fragile arrangement. That is why I am saying it is a minimalist sort of a constitutional amendment. Everything has to be decided so this particular thing that one percent extension of supply is mainly because they want to tax the consignment transfers.

The better constitution should prevail and at least in the enabling legislations they have to make it sale rather than supply. Sale of goods and service rather than supply is the only way forward or else they have to amend the constitution amendment bill to make it a sale, we should advocate that.

Q: You also told me the fact that real estate has not been included and that is going to be another big flaw. Do you think this amendment should be passed at all in this present stage and a second question, when do you think we will get a GST at all in the country?

Poddar: The policy paralysis for the past seven years has been very detrimental to the economy. Investors are holding back their investments so even though the GST that is being contemplated in the constitution bill is far from perfect, is far from desirable.

I am really hoping that there will be resolution of this paralysis by voting in favour of the constitution bill and then all the flaws including exclusion of real estate, exclusion of alcohol, exclusion of petroleum may have to dealt with at the second round of amendments.

Let us move on with the first round of amendments and then when the GST will happen, I am doubtful that it can happen on April 1, 2016 but even if it is delayed, that delayed implementation is only possible if we clear the bill through the Parliament this week, otherwise we will be asking that question forever into the future.

 

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