Dr. Sanjiv Agarwal
This year’s (2011-12) Union Budget assumes greater importance in the wake of ongoing high level of corruption and financial irregularities in almost every sphere of governance, thus putting tremendous pressure on the exchequer and fuelling bad money in the system. Also, the present governance and banking system has been unable to tame the evil of inflation causing hardship to one and all. Petrol prices and high rate home loans are only adding salt to the injury. However, economy has shown positive signs on various parameters.
Priorities that should concern the Finance Minister
The top agenda for the Finance Minister would be to address the issues of combating inflation, putting a brake on corruption, unearthing black money in the system and planning revenue and growth. The focus should be on the following –
• The government should balance the revenue raising measures against some incentive to industries and service sectors.
• Tame the mounting double digit food inflation and general inflation in the country for past many months, rather than depending upon the central bank.
• Assurance strict measures to narrow down the gap between rural poor and urban rich class.
• Continue with proactive economic polices to see the continuity of robust economic trends, (current GDP growth @ 8.6% as against 8% in previous year), widening the tax base so as to include unorganized and informal sector without increasing the tax rates.
• Continue to emphasise on reducing the fiscal deficit to about 4.5 % of GDP. This would also help reduce current account deficit.
• Widening taxable service base to cover all services particularly the ones, yielding large revenues, like railway freight.
• Improve investment in natural resources management such as mining, environment etc.
• Have a proactive strategy for young population (demographic dividend) of which only 10 percent find jobs in organized sector.
• Unlock the huge-disputed demands in taxation by facilitating faster and amicable settlements.
• Draw a final road map with timelines for both- DTC and GST atleast w.e.f. 1.4.2012.
• To revisit GST structure to be followed with fresh and open mind to restore confidence, remove various impediments faced and find solution to issues posed before the empowered committee.
Expectations for GST
So far as GST is concerned, the seriousness of our Government, the democratic approach to introduce GDP and the deliberations at Empowered Committee – all have become a mockery. What is painful is that the people who do not understand much about GST and its implications are to decide on GST structure in the said empowered committee. The members therein, are primarily concerned about state’s shares of revenue and nothing else, of course, least about the tax payer.
It is high time that the Union Government should stop hoping for the consensus to emerge between the centre and different states on the GST roll out. Now what is legally permissible must be acted upon. It is once again advocated that India must follow the national GST structure rather than dual GST structure to avoid distortions and seamless taxation system. The two-centre and states can well decide their sharing or appropriation or compensation ratio on which no assessee or citizen will have any objection to.
The Government should make all out efforts to seek consensus before the budget date, if possible, so that clarity can emerge. While it is now proposed that constitution of the GST council will be done by Act of Parliament, constitutional amendments should also happen fast with whatever amendments are required. There are much hopes from the forthcoming budget as this is going to be truly a curtain raiser for GST.
According to the present understanding of dual GST, the GST rate is likely to be 16 percent – 8 percent for Central GST and 8 percent for state GST as against 10 percent service tax presently. Assuming that GST may come in 2012, than this budget should set a trend in bringing down present service tax rates to 8 percent (being Union tax). We also have a strong case for tax rate reduction owing to higher inflation and slow sectoral growth.
While drafting GST law, it is suggested that a single rat of GST would help maintain uniform and simple tax system with most of the items, ie, good and services being treated equally so that classification disputes would be minimized. Efforts should be continued to have objective advantage from GST by GST subsuming all most all states and local level taxes. Drafting of GST is going to be most crucial as definitions and law must be unambiguous, unlike what we have today in service tax law.
The government should also work on a formula where in all the products and services are covered under the GST regime. The benefit of GST should be available to all players including those in liquor or tobacco industry and fuel / petroleum sector.
The budget should also seek to integrate or blend the excise and service tax before we get GST. Though we already have common cenvat credit rules in place, there are disputes in relation to direct or indirect inputs and input services. To point out few grey areas where integration is needed, issues persist such as payment of excise duty at the time of clearance of goods from the factory but service tax being paid on receipt of value of service, separate registration and procedural compliance requirements, different treatment of export of services and export of goods and consequential relief or rebate. Not only this, even appeal procedures are different. Once GST comes, all these will have to be streamlined both, legally as well as administratively. For smooth transition to GST, 2011 budget will be the right time to initiate and test the integration exercise. That the two taxes are handled by the same department, adds strength to this argument.
Today what is needed is the strong political will at the centre with entire industry already backing it and proactive state governments ruled by various parties. There may be political differences between the two, but today, lot of capital inflow is also held up for want of clarity on tax issues and GST is one of them. It requires certainty in tax laws so that business and investment plans are drawn up. Entire investing world can not have a wait and watch policy for long. Once GST is in, we will also avoid the issues involving interpretation and double taxation- say in case of a software industry or a works contract. The judicial decisions have always favoured the assessee by holding that the same income or turnover can not be subjected to tax twice.
The forthcoming budget should also rationalize the duties in order to scale down inflation, atleast on essential items and overhaul its fuel pricing policy. It would also be opportune time to touch upon issues of corporate social responsibility vis a vis tax reforms and accountability in public spending. On GST issue, all ought to be one and states will have to shed their inhabitations of revenue loss and rather look at the larger long term revenue model.