Inter-state 1% tax in GST retrograde, a punishment: Expert

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Satya Poddar, Partner-Tax & Regulatory Services, EY thinks the select committee is unlikely to make any fundamental changes in the design of GST or the constitutional bill

The one percent tax on the inter-state supplies of goods, and exclusion of certain items from the Good and Services Tax (GST) are self defeating and will undermine the effectiveness of GST, says Satya Poddar, Partner-Tax & Regulatory Services, EY

“The one percent tax itself, is a punishment for trading with your own brothers and sisters within the confederation of India,” Poddar tells CNBC-TV18.

“So if you buy goods locally then the one percent of tax applies but if you import the goods one percent tax does not apply; that will hurt industry’s competitive position in the local markets as well as global markets,” he says.

According to Poddar, states are not being pragmatic in their demands, and are over zealous to ensure there is no revenue loss. “If anything, all the undesirable features introduced by states in the GST Bill will cause loss of revenues,” Poddar says.

Also, when the Centre is agreeing to provide full revenue compensation, there is no need for states to make such flawed demands, he says.

Poddar feels despite all the flaws in the GST Bill, the effective tax rate can still be lowered to 12-13 percent. He says the proposal to exclude items like electricity, construction inputs, petroleum, is a big mistake.

“Electricity is a major cost of manufacturing in India and with a tax on electricity not been subsumed and electricity not being subjected to GST, cost of electricity at best will not come down, at worst it may go up,” Poddar says, adding it will hurt the competitiveness of the industry.

“Same thing is true for alcohol, same thing is true for real estate because no input tax credit will be allowed for cement and steel that is used for production and manufacturing.

So, how can you have any beneficial impact of the GST if the costs are not lowered, if an investment is not incentivised?,” he asks. According to Poddar, talk is that the select committee is unlikely to make any fundamental changes in the design of GST or the constitutional bill.

“It is largely going to a rubber stamp of what is already referred to the committee,” he says, terming it “unfortunate.” “For some reason the debates have turned entirely political in the select committee as result many of the thoughtful recommendations made by the opposition parties, industry, are being rejected,” he says.

Below is the transcript of Satya Poddar’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: What are your own thoughts on the news flow that has come through as far as good and services tax (GST) is concerned and do you think it could be taken up in this session itself?

A: In my view from the news I hear the select committee is not going to make any fundamental changes in the design of a GST or the constitutional bill. It is largely going to a rubber stamp of what is already referred to the committee. This is unfortunate. In some way it was an opportunity for the government to have those flaws corrected in the Select Committee. But for some reason the debates have turned entirely political in the Select Committee as result many of the thoughtful recommendations made by the oppositions parties made by all of the industry submissions are being rejected.

For example the one percent tax on the inter-state supplies of goods, there has been virtually unanimous consent from all of industry representatives that this tax is retrograde and it should not find its way in the final bill. Obviously even many of the members of the committee were sympathetic to those pleas of the industry but I am told as of now the select committee has not accepted any of those recommendations.

The same thing is true for the base broadening. Tax payers want the base to include beer, alcohol, petroleum, electricity and even construction inputs. However, again the committee is not conceding anything. It is quite possible that the government is afraid that if any amendments are made in Rajya Sabha then they have to sent the bill back to Lok Sabha again. This may, again may mean loss of few weeks, few months in the approval of the bill from the parliament. On the other hand if there is no consensus and there is no acceptance of the industry demands then you really wonder what is the point of rushing through the bill, which is flawed.

Latha: What would you think therefore will be the revenue neutral rate if you have to account for this one percent as well as for the absence of theses four elements?

A: The revenue neutral rate is fortunately independent of all the flaws in the GST bill. The flaws not necessarily have a major impact on the revenue neutral rate. My impression is that based on the calculations I have done and based on the discussions that the committee of the officials have started revenue neutral rate still can be brought down very substantially. If you go with a single tax rate it is still possible to bring the rate down in the range of 12-13 percent. So I am really hoping that even if the GST bills goes in its flawed manner it is still possible for the government to bring the rate down at 12-13 percent.

Latha: What will be the impact on industry in that case assuming what you say happens?

A: Industry impact is clearly negative. The most important exclusion is first of all electricity. Electricity is a major cost of manufacturing in India and with a tax on electricity not been subsumed and electricity not being subjected to GST, cost of electricity at best will not come down, at worst it may go up. This will not be good for the competitiveness of the industry.

The one percent tax itself, is a punishment in trading with your own brothers and sisters within the confederation of India so if you buy goods locally then the one percent of tax applies but if you import the goods one percent tax does not apply so that think will not be healthy for the domestic industry will hurt their competitive position in the local markets as well as global markets. Same thing is true for alcohol, same thing is true for real estate because no input tax credit will be allowed for cement and steel that is used for production and manufacturing. So, how can you have any beneficial impact of the GST if the costs are not lowered, if an investment is not incentivised?
Read more at: http://www.moneycontrol.com/news/current-affairs/inter-state-1-taxgst-retrogradepunishment-expert_2063801.html?utm_source=ref_article

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