In the short term, the Goods and Services Tax regime would not impact prices of petroleum products, which are an input for many industries and some services. Will GST then have the desired impact on the economy? Leaving petroleum products out of the GST tax base would reintroduce cascading (of input taxes) into the tax regime, opines NIPFP professor Kavita Rao – pointing out in the same breath that it may not be a bad idea to tax polluting fuels
The Constitution (One Hundred and Twenty Second) Amendment Bill 2014, should logically get past the Rajya Sabha in the Monsoon session of Parliament, to usher in the much awaited Goods and Services Tax (GST) regime. The GST would apply to all goods and services, except alcohol for human consumption, electricity and real estate. In the short term, the tax reform would also not impact prices of petroleum products, which are an input for many industries and some services, like transport services.
Will GST have the desired impact on the economy with inflationary petro-fuels out of its ambit? BW Businessworld hunted down an economist, who has worked on the road map for GST in India since the reformed tax regime was first announced in Parliament, to read between the lines of the proposed Bill.
Professor Kavita Rao was the author of the National Institute of Public Finance and Policy’s (NIPFP) paper on the Goods andServices Tax (GST) in November 2008. The first discussion paper of the Empowered Committee of State Finance Ministers on GST was released a year later. She is now on the panel on ‘Revenue neutral rates for state GST & Central GST and place of supply rates’ of the Empowered Committee of State Finance Ministries.
BW Businessworld sought her out to decipher the nuances of the Bill on GST that is now awaiting the approval of the Rajya Sabha. Excerpts from a conversation with Madhumita Chakraborty
Would you like to interpret for our readers, what leaving petroleum products out of the ambit of GST will mean for industry and the consumer?
The objective of changing from the present regime of taxation to GST is to eliminate cascading (of taxes on raw materials and intermediaries onto the price of the final product) from the tax regime. It is argued that cascading introduces distortions in economic decision making, which is best avoided. By leaving out some commodities like petroleum products from the tax base for GST, we would be reintroducing cascading into the tax regime. However, there is another aspect that needs to be kept in mind.
Petroleum products are considered polluting fuels. Many countries across the world impose non-rebatable excises on these commodities to discourage consumption of these fuels. These two arguments clearly work in opposite directions. In countries which do have a VAT (value added tax), there is an additional non-rebatable excise on these commodities, making creditavailable for taxes on inputs and capital goods at the stages of exploring and refining in the petroleum industry. This would not be the case in the proposed tax regime in India.
To assess the impact of excluding petroleum products from GST, one needs to compare it with the alternative scenario, which is not clear at the moment.
How will the Integrated GST impact the revenue of the states?
The IGST referred to in the Bill, is a levy to be imposed and collected by the Union Government and would accrue to the importing state. In that sense, the exporting states, which had a right to collect Central Sales Tax on inter-state sales in the present regime, would not have this right in the GST regime. The Union Government is committed to compensate states for any loss of revenue for a period of five years. However, the exporting states have asked for a one per cent tax to be collected and retained by the exporting state as an interim provision for the initial two years. This levy was to be over and above the IGST. By eliminating the Central Sales Tax and levying an IGST, the GST regime was to reduce the extent of cascading in inter-state transactions. But by introducing an additional one percent levy, a degree of cascading will be re-introduced in the regime.
It should be mentioned here that the level of the levy is not related to the potential losses that the states might suffer. The loss or gain from GST would vary across states. A uniform tax rate would not yield losses or gains for all. Therefore, the one per cent levy should be viewed more as a mechanism for states to have more control over their own resources, i.e., not depend completely on the Union government for compensation, than as a mechanism for full compensation at the cost of re-introducing cascading into the regime.
In the short term, will GST be revenue neutral for the Central and state governments – or will there be some gainers and some losers?
The change from the present regime to GST implies a change in the tax base for states – at present states get revenue from central sales tax in addition to other taxes. But when the new regime is introduced, this source of revenue would be lost while the states would get an additional base of tax on services. The gains and/or losses for a state would depend on the relative dimensions of the (tax) base subject to central sales tax and the base subject to service tax. If these two are in balance, the state would not suffer losses – if not, the state would suffer losses or gains.
For example, a mineral rich state like Jharkhand could be receiving revenues from central sales tax (CST). If its ability to raise a similar amount from taxation of services is not commensurate (with that from the CST), a loss of revenue may occur. It is important to keep in mind that the rate of tax would also determine whether and which states or the Centre, would gain or lose from moving to the GST regime.
Should states be tempted to fix higher rates, the desired impact of the tax reform could be diluted – could it not?
In fixing the rate of tax, two issues play a role. Firstly, states feel that higher rates of tax would allow them to raise more revenue and hence, make them less dependent on the Union government for compensation. Similarly, the Union government feels that it has the responsibility of not only protecting its own revenue, but of generating enough revenue to finance claims for compensation from the states in the event of loss of revenue. However, high rates of tax are believed to be a disincentive for compliance.
Compliance with the tax system could be impacted when the tax rates are higher and that in turn, could water down the potential benefits of the reform process. Therefore, the choice of the rate of tax would be an important determinant of gains and losses of the states and the centre. More so – since the anticipated expansion in economic activity with the reform may take some time before it is evident.