Shivaji Sarkar
The Goods and Services Tax (GST) Bill is projected to set a new dimension in taxes through a supposed uniform rate across the country, something any nation would want. Ideally speaking, it is all about treating all States as equals and ushering into a comfortable regime. Undoubtedly, the Union Government is pushing the Bill as it wants the country to turn into a tax-friendly regime. Indeed, this is welcome as it is projected to cascading effect of taxes, referred to as ‘taxes on taxes’. Imagine, a trader ‘A’ sells his goods to trader ‘B’ after charging sales tax. Trader ‘B’ then re-sells it to trader ‘C’ after deducting service tax. Now trader ‘C’ pays a double service tax – one paid by trader ‘B’ and one sold by trader ‘B’. Bluntly, tax on tax. Pertinently, this was the situation till value added tax (VAT) replaced service tax.
Primarily, this system was introduced so that a dealer, at every stage, used to get credit of the tax paid at the earlier stage against his tax liability. Thereby, this reduced the overall liability of traders but had little impact on inflation. Notably, a similar concept came into force vis-à-vis the duty on manufacture – Central Excise Duty – much before it was in regard to sales tax. The Cenvat credit scheme (earlier known as Modified Value Added Tax) was also a welcome move by trade and industry where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods.
There is no gainsaying that India is virtually adopting a dual GST, in other words, GST will be charged both by the Central and State Governments. Hence, it would be a slight variation of the present system. Undeniably, GST is not elimination of multi-point taxation. Raising a moot point: Will it be complicated? It might be a little. But there are chances that overall taxes might not be low as is being projected. Interestingly, at the meeting of State Finance Ministers with Union Finance Minister Arun Jaitley, these issues came up in different forms. The crucial revenue neutral rate of taxation or capping of GST did not find favour with many States. This included the Chairman of the Empowered Committee on GST, West Bengal Finance Minister Amit Mitra who underscored that the ground level work still remains.
The most contentious issue regarding GST’s roll out has been the revenue neutral rate ie the rate which allows the Central and State Governments to collect the same revenue despite changes in laws. Importantly, the States do not want the GST rate to be capped at 18 per cent or mentioned in the Constitution Amendment Bill. No matter that the Congress has been a votary for capping it.
Realistically, whatever be the name, there are likely to be three kinds of taxes, not one as is being projected. There would be a State GST to be collected by the State Government; Central GST to be collected by the Union Government and integrated GST to be collected by the Union Government on inter-State transactions. Also, a transaction of sale within the State shall have two taxes: State GST and Central GST. A transaction of sale from one State to another shall have only integrated GST. But it is not that simple. Arguably, if there is a transaction within the State before transfer to another State, the commodity might have to pay all the three taxes: State GST and Central GST at the first stage and integrated GST subsequently.
Consequently, there would not be any elimination of taxes on taxes. The apprehension that GST might be complicated and inflationary might not be untrue. Today, nobody knows how much would be 100 per cent compensation for the States, how the Centre would bear it or if it would transfer to consumers. Read, further inflationary.
True, conceptually, the GST is a very good tax. However, for its successful implementation, all States have to implement it together and that too at the same rates. Otherwise, it would be really cumbersome for businesses to comply with. Significantly, one of the main benefits that the new GST regime promises is a reduction of multiple taxes. But the truth is just the opposite. Article 246A confers power on Parliament and every State legislature to levy GST.
Thus, we are likely to have one Parliamentary law and about 29 State legislations that levy GST. And there is no Constitutional requirement that all the State laws be uniform. As it stands, many States have entry tax. This might continue. Add to this, the exclusion of petroleum products, electricity and real estate could result in a mangled Indian version of the GST. All in all, the GST has many challenges. But as it appears today, it does not ensure real uniform, one-point tax rate.