By TG Ramakrishnan
Even as the government postponed the discussion and vote on the Goods and Services Tax(GST) Bill on Wednesday till next week, its efforts to build consensus with the states for the implementation of GST have been quite commendable. The tabling of the Bill in Parliament is, in itself, a significant achievement.
Right from its inception, GST has been hailed as a game-changing reform that aims to make India a single, seamless market. Implementation of a well-designed GST model that applies to the widest possible base at a low rate can provide a significant growth stimulus.
The fundamental objectives of GST are the removal of the cascading impact of taxes, to bring transparency in compliance, to boost investments and thereby enabling a 1-2% increase in the country’s economic growth. In the currently tabled Bill, there are certain areas that vitiate the principles of GST and could potentially hamper the ease of doing business. It could also increase the costs for business significantly.
Additional non-creditable 1% tax: Clause 18 of the Bill proposes an additional tax of 1% on the supply of goods in the course of inter-state trade or commerce to be levied at source. The Bill provides the term of the additional tax as two years, or such other period as the GST Council may recommend. Given that any loss for the states is already compensated, and the fact that the 1% non-creditable tax flies in the face of what GST aims to achieve, the proposal to levy this additional tax should be repealed.
Exclusion of real estate and petroleum from GST: If real estate is excluded from the GST’s purview, it would mean that credit would not be available for the input used in the construction of factories, offices, civil structures and even plant and machinery which may be considered a part of real property, being attached to land.
The real estate industry was included in the value-added tax (VAT) net when VAT was introduced. Excluding it from GST would be a step in the reverse direction. Exclusion of real estate and petroleum (for the initial years) from the GST levy, and continuing with the current taxation regime for these sectors, will significantly increase the cost of doing business and drive inflation higher.
Additionally, this would increase the compliance costs for the businesses and complicate the overall tax regime in India resulting in administrative difficulties for both industry and governments.
Moreover, the real estate sector is a significant contributor to the GDP. It serves as a foundation for virtually all industrial and commercial activities. To exclude real estate from the GST’s scope would result in a major erosion of the tax base, causing distortion and denying the full economic benefits of the GST structure originally envisaged.
Internationally, in the modern VAT jurisdictions such as Australia, New Zealand, Canada and South Africa, land and property supplies are inseparable and indistinguishable from supplies of other goods and services. India should also follow suit.
High revenue neutral rate: The task force on GST appointed by the 13th Finance Commission had recommended significant broadening of the tax base and had suggested a single low rate of 12% (5% CGST (central) and 7% SGST (state)). There is an initial proposal to set the GST at 27%, which is disconcerting.
A high GST rate will be unviable for the economy leading to significant inflationary pressures, affecting consumer sentiment and could alienate weaker sections of society.
The revenue neutral rate needs to be kept low to spur growth, contain the inflationary pressure and achieve higher compliance.
Lack of clarity on executional matters: The design and structure of the proposed GST has undergone significant change since the first discussion paper was released by the empowered committee of the state finance ministers in November 2009.
As a run-up to April 1, 2016, pending the passage of the Constitutional Amendment Bill and the draft GST law, clarity is required on crucial executional aspects of the proposed GST: its rate structure; status of the readiness of the GST network; proposed release date of the draft GST law and regulations; principles and mechanisms of valuation; place of supply, credit allocations and refunds; transitional provisions; and treatment of unexpired fiscal incentives
Businesses need 6-9 months to configure their IT systems, testing them for compliance and impart training to the users. A directional clarity is urgently required for businesses to gear up to be GST ready on April 1, 2016.
There is a need to release the second discussion paper on GST jointly by the central government and the empowered committee covering all the above, failing which, despite best intentions, the execution of GST could create significant business disruption.
It is absolutely essential that all the above concern areas are addressed by both parties in the ensuing session of the Parliament and thereafter at its meeting to ensure a win-win situation for the Government and India Inc.
(The writer is former Senior Manager, Hindustan Unilever Ltd)