R.K Rengaraj, Advocate
Introduction : Goods and Service Tax is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. Currently, there are 160 countries in the world that have implemented GST. The latest global corporate tax rate study made by KPMG international has found out that the lowest company taxes among the developed economies are still found in the European Union countries. The study further revealed that Europe’s indirect taxes are the highest in the world. Goods and Services Tax or Value added Tax rates in the countries of European Union average 19.5 percent, compared with 10.8 percent in Asia Pacific.
GST in India: In India, GST is yet to be implemented.If implemented, it is expected to help build a transparent and corruption-free tax administration. GST will be levied only at the destination point, and not at various points. It is estimated that India will gain more than $15 billion a year by implementing the GST as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.
The delay in implementing the GST in India is linked with amendment in the constitution amendment.
The Constitution of India provides for a threefold division of functions and powers:
a) those exclusively assigned to the Union Government,
b) those exclusively assigned to state governments and
c) those concurrently assigned to the Union and the State Governments, with residuary powers with the Union Government.
It further provides for a clear division of fiscal powers between the Union and the states in order to effectuate these various functions. With regard to taxes, the principle that is adopted is that taxes which have an inter-state base are levied by the Union while those with a local base are levied by the states, with residuary powers belonging to the Union.
CST Compensation: Most of the Indian states favoured implementation of GST, but raised concerns with regard to safeguard of fiscal autonomy and compensation for revenue loss due to phasing out of the central sales tax. The Centre needs to recognise the need for independent compensation mechanism for revenue losses suffered by states. The central government should permit states to revise CST upwards to 4 per cent in absence of implementation of the GST. In order to allay apprehensions of states about future revenue loss on account of introduction of GST, there should be constitutionally mandate compensation mechanism.
The Centre on account of the reduction in the rate of the central sales tax (CST) from 4 per cent to 3 per cent in April 2007 and from 3 per cent to 2 per cent in June 2008 has not compensated fully and it is still an issue.
The original idea was to first reduce the rate and then to phase out the CST completely, before the initial target date of implementation of the GST in 2010. In the view of the states, while the implementation of GST has been delayed, the states have incurred losses on account of the reduction in the CST rates. The states believe therefore that the CST related compensation ought to continue until the time of introduction of the GST or, alternately, the rate of CST ought to be raised back to 4 per cent. The Centre’s view is apparently that there has been inordinate delay in implementation of the GST and hence no compensation ought to be paid beyond 2011-12. The compensation methodology has itself been a constant source of disagreement between the Centre and the states, leading to delays in release of compensation for the past several years.
The Centre has apparently computed the compensation after netting off the increase in states revenues arising from the VAT rate increase from 4% to 5% and 12.5% to 14.5%. In fact, this has not been acceptable to the states, who apparently believe that the VAT rate increases are entirely in order and not part of the GST compensation discussion.In the previous Government, States had reservations about the Union finance minister having veto power on state GST, but they do not have any issues in giving him exclusive authority on central GST. On the Centre’s proposal to give Constitutional backing to the GST Disputes Authority, the states said it should rather find a place in the GST legislation. The Authority, with three members recommended by the GST Council and approved by the Chief Justice of India, will ensure that states do not deviate from the agreed principles of GST.
Budget expectation: In the pre-budget consultation meeting with the Ministry of Finance, Confederation of Indian Industries (CII) has strongly urged for early implementation of GST as a sure fire means of lifting investor sentiment and putting the Indian economy back on track..
Conclusion: The new Finance Minister, Shri Arun Jaitley said that there is need for “rounding off corners” towards implementation of GST.In the author’s opinionit is time todiscuss global scenario and the challenges for ushering in GST in India. Let us wait and see.