The Narendra Modi government needs to reach out to the Opposition and strive for political consensus to overhaul the indirect tax regime, or the taxation of goods, services and sales.
The point about indirect taxes is that there tends to be a bewildering array of them. They tend to ‘cascade’, with taxes levied on several inputs (good or service) that have already been taxed, along with inputs to those inputs.
It leads to a high-cost and inefficient tax structure prone to evasion and revenue leakage. Hence, the pressing need for a modern integrated goods and services tax (GST), with tax payable only on the value added at each stage of output and set-offs available along the value chain, both at the Centre and the states. The GST would amount to the culmination of over 25 years of indirect tax reforms, which would boost the efficiency of taxation, improve tax buoyancy and bring about an integrated market nationally.
However, there is a sound rationale for the constitutional amendment Bill for GST to have a clear provision for an additional 1% tax on interstate trade for a two-year transition period that is to be decided by the GST Council.
The council will also decide when to levy GST on petroleum crude and the main oil products.
It is premature to levy GST on immovable property and real estate. Only a few countries levy GST on real estate.
Given the opacity in real estate here, GST for the sector will raise prices not just to cover the tax but also for the heightened cost of supply.
Now, we have had indirect tax reforms in fits and starts since the mid-1980s, to avoid tax-on-tax and the cascading of rates. At the central level, we did begin with ‘Modvat’, later termed ‘Cenvat’, which allowed credit of tax paid on inputs and capital goods up to the manufacturing stage.
Later in 1994, a tax on services (service tax) was introduced by the Centre. Adecade later, the input tax credit scheme for Cenvat and service tax was rationalised to permit the cross-flow of credit across the two taxes. Still later, in 2005-06, the states began a phased change over from a multiple-point sales tax regime to a value added tax (VAT) system covering transaction and sale of goods up to the retail stage.
Yet, despite the reforms, significant tax-cascading remains in place. For instance, Cenvat remains confined to the manufacturing stage and does not extend to the distribution chain beyond the factory gate. Or, while input tax credit of Cenvat or additional customs duty paid on goods is now available to service providers paying service tax, they are not able to set-off state VAT or other state taxes paid on their purchase of goods.
Hence the need to amend the Constitution to provide the central and state governments concurrent powers to make laws on the taxation of goods and services.
The proposed GST would incorporate various central indirect taxes including the central excise, countervailing duty and service tax. It would also subsume state VAT, octroi and entry tax, luxury tax, etc. With GST, the 2% central sales tax, levied by the central government on interstate sale of goods, and earmarked entirely for the tax originating state, will be done away with. To preclude revenue uncertainty, the 1% additional originbased tax on interstate commerce makes ample sense.
As for deciding on GST for oil products, the fact remains that valueadded taxes have not been extended to the main petro-products, and we continue with the perverse system of cascading tax-on-tax rates for oil.
It is a huge disproportionate revenue source, particularly for the states, but also for the Centre. But oil is a slippery business. We need to widen the indirect tax base and modernise the tax structure. Otherwise, key segments like transport, haulage and logistics will remain inefficient and high-cost.
However, tobacco products and portable alcohol can certainly stay outside GST. As for real estate, given the rigidities and widespread prevalence of cash payments alongside invoices, businesses will otherwise try and reduce the use of relatively higher taxed inputs and increase the use of relatively lower taxed ones, perhaps even merging with and acquiring suppliers. And were it not for the taxation, the output may not be the most efficient.
So, even as we improve transparency in the vexed sector, and continue to levy value-added taxes like stamp duty, registration fee and capital gains tax on real estate, GST on immovable property can clearly wait. The council will need to decide on the all-important revenue-neutral GST rate, say, 16%. The global norm is below 20%.