In his Independence Day address to the nation, the prime minister mentioned of putting paid to ‘tax terrorism’ and attendant untoward initiatives. The goods and services tax (GST) now in the works does, in fact, have the very real potential to shore up transparency and end arbitrariness in tax demands. It should greatly improve the
ease of doing business, and also shore up efficiency gains across the board. But we need to rationalise taxes on logistics, transport and infrastructure including power, so as to improve the gains from reform of consumption taxes as we move to implement GST. GST data can well be duly analysed to resolve domestic and international tax disputes of a transactional nature, such as issues of transfer (intra-company) pricing, pertaining to not just domestic operations of multinational corporations but to domestic valueaddition generally. For instance, poring over GST data should reveal information about intra-company margins, deviations across products, and the relevant transaction flows of goods and services to purposefully improve decision-making on transfer pricing tax demands.
The idea behind GST, of course, is to reform and overhaul the indirect tax regime, and provide tax set-offs across the production and delivery value chain so as to avoid tax-on-tax and cascading tax rates, with the objective that tax is only levied on the value added at each stage of output, both at the Centre and the states, and for both goods and services. It would reduce transaction costs and simplify taxation procedure.
Abroad, the mavens did propose value-added taxes for years till New Zealand adopted a comprehensive GST regime in 1986. The same year, India began to levy — in a limited way — valueadded tax on production inputs. The plan, rightly, was to begin reforming India’s high-cost tax structure and avoid taxation on inputs already taxed. The Centre began taxing services in 1994, when the tax was made applicable on three services. Fast-forward to 2012, by which time the purview of the tax had been extended to 119 services. It was based on a list of services mentioned in Section 65 of the Finance Act, 1994.
In 2012, a new service tax regime was introduced, with all services amenable to tax, unless specified under a negative list or otherwise exempted. Meanwhile, state governments began levying value-added taxes on consumption in 2005, which is how we now have the dual VAT structure that needs reforming to provide tax credits across the value chain, both at the Centre and states. Hence the GST game plan. It would allow the central government to levy tax on the distributive trade, and for the states to do so for services. But to do so, the Constitution would need to be amended, and the legislation notified.
The changeover to GST is expected to increase compliance costs and require more documentation. But with up-to-date information technology tools such as the GST Network now being set up nationwide, it should be possible to manage transition and follow-through. It should boost compliance on production and consumption taxes nationally.
Under GST, every sales invoice would contain a tax code on levies paid. Further, the input tax information cannot be manually changed, which should ease the process of input tax credit and thereby reduce the indirect tax burden on businesses and households.
It should also be possible to improve business decisions based on tax data and analytics. For example, by keeping a tab on tax credit outgo and by better balancing input tax credits, it should be possible to optimise operations and investments.
The GST data would have analytic value. It follows that with GST, organisations can transform their intercompany pricing analysis to a more data-driven approach based on actual transactions on record.
The constitutional amendment specifies that the main petroleum products, which garner a hugely disproportionate indirect tax revenues for both the Centre and the states, would be included in the GST regime at a later date that is to be decided by the GST Council. We continue to have a perverse tax-on-tax regime on petro-goods. Going forward, it makes sense to rationalise taxes on oil products and bring them under the GST regime, although with an additional top-up tax to account for environmental externalities. The Centre needs to start that process. The GST regime can well be improved over time.