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N K Gupta, B Com; LLB; LLM; PhD

N K GUPTAGST is one of the biggest tax reforms since 1947. It would mitigate the cascading effect by subsuming a large number of Central and State taxes into a single tax, and pave the way for a common market. A roadmap towards the stronger nation is stalled in the political walls of Rajya Sabha. The Constitution Amendment Bill (CAB) needs to be passed to rollout the GST as it will change the existing framework of indirect taxation. In present system, the Centre government imposes tax on manufacturing and State government has the power to levy tax on the sale value of goods. On the other hand, States cannot impose service tax. However, GST will require both the Centre and States to levy tax on the common pool of goods and services.

The 122nd (CAB) has been passed by the Lok Sabha on the 06.05.2015 and after that the same has been introduced before the Rajya Sabha. Since then it is stuck there as the congress has three demands which need to be settled first to bring the GST. The Central government has agreed on all the demands of the opposition except the cap in the bill, as it is not feasible to amend the constitution or to seek parliamentary approval every time to change the tax rate.

If the government puts a certain figure in the bill, then changing that percentage in the future will need another amendment in the Constitution. The government is not in favour of mentioning the specific percentage in the Bill, so that changes in it can be made merely through an executive order.

In the recent discussion made at the World Economic Forum in Davos, Finance Minister has described the condition for cap on the tax rate as preposterous. “So every time there is a drought, flood and you need to increase the tax rate, you have to first go to all states in India to change the tax rate. This is something which is just not possible,” he said. The contention of the Central government to collect the high rate of GST from the general public to compensate affected peoples is not correct. These funds can be recovered from the other sources such as income tax, wealth tax or though dividend distribution tax etc, which does not have the direct impact on the purchasing power of the poor. Indirect taxes are more regressive in nature. It has the major impact on the poor rather than rich. Increase in the GST rate to finance these situations would only be the cause of inflation. It will make the consumables more expensive to afford, for the people at large.

The Committee headed by the Chief Economic Adviser Dr. Arvind Subramanian on possible Tax rates under GST is of the view that the range of the Revenue Neutral Rate (RNR) should between 15 percent and 15.5 percent. The Committee recommends a two-rate structure one for the standard rate on normal goods and the other one is lower rate for the necessities. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The Committee recommended that lower rate be kept around 12 per cent (Centre plus states) with standard rates varying between 17 and 18 per cent. A demerit rate would be applied on the luxury cars, aerated beverages, paan masala, and tobacco and tobacco products at the fixed rate of 40%.

Three tier tax rate structures can be mentioned under the bill instead of mentioning the single rate. It would eradicate the problem to charge the rate other than the 18% cap, as a higher rate is proposed to be charged on the luxurious and the demerit goods. The government should give the impression to incorporate the GST rate in the bill itself. Ceiling rate would reduce the inflation and prone them to be elected in the next cycle. The Central government will then have the majority in the both the houses of the parliament. It will leave no ground of difficulty to make any type of amendment in the constitution for them.

To see the GST in existing indirect tax system the CAB has to further go by these stages:

Once, both Houses approve the Bill, it will need a nod from at least half of the State Assemblies, after which the President will give his assent. After that, three legislations, one for CGST, one for SGST and one for IGST, need to be enacted.

In the article 279A (1) of the 122nd CAB, “The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and Twenty-second Amendment) Act, 2014, by order, constitute a Council to be called the Goods and Services Tax Council” and that council shall make recommendation to the Union and the States on parameters like rates, exemption list and threshold limits.

To facilitate the smooth transition, Education Cess and Secondary Higher Education Cess get subsumed in the Service Tax, Excise and simultaneously rates get increased to 14% and 12.5% respectively in the last union budget. In the upcoming budget as well we can see the same line of revolution to align with this new regime. It is proposed to have an increased rate of 16% from the effective rate of 14.5% (Service Tax plus Swachh Bharat Cess). Consumer is being cheated as he has to pay high from today itself but the benefit that could arise from GST would be available only on it’s implementation, which may or may not be happen.

In the present taxation system there is a long list of exemptions in the Excise as well as in the State VAT laws. This list needs to be pruned to avoid the cascading effect in the GST Law. Lower exemptions in the proposed regime would increase the tax base and would culminate the lower rate of taxes to cope up with the new regime easily.

All these moves are going to be in vain, if the GST Law does not come into force. The government revenue will certainly be increased as soon as this increased rate would become applicable but what would be the fate of the ultimate consumer/ service receiver. It is only the consumer who has to pay alot for it’s rolling out. It may be in the form of higher rate of taxes or done away with the exemptions.

Industry is urging from a long time but no relief has been granted from the input tax credit (ITC) restrictions or long lasting procedures to avail the credit. It would be a great deal, if the government would allow the tax paid on inputs fully in parallel to high rates going to be imposed on the service sector. Services such as professional services, construction services or the IT services are the most affected region, whose major revenue get blocked in the form of accumulated credit.

Nevertheless, all the stakeholders are looking very keen to opt with this new law as this would remove the plethora of taxes prevailing in the current system. It will render India into a one big market, make tax evasion difficult and ensure seamless movement of goods and services. GST has been implemented in over 160 countries and in many cases revenues have risen dramatically along with the GDP. It has been estimated by the economists that the implementation of GST will increase India’s GDP also by 1 to 2%. It would attract the foreign investment to fulfill ‘Make in India’ prospect.

In the last Union Budget, the hon’ble Finance Minister Arun Jaitley told the Lok Sabha, that much awaited GST will be introduced on 1st April, 2016. “We are committed to implementing a State of the art indirect tax system, the Goods and Services Tax, from April 1, 2016″. But the Statement has been changed now and the government has been tentatively eyeing a mid-year rollout of the tax, either June 1 or October 1 of this year. It may be looking at another washout as far as pending bill is concerned as opposition is giving the impression to disrupt Parliament and stop passage of key bills, including a constitutional amendment bill to allow the goods and service tax (GST).

The rollout of the country’s most significant reform may be delayed further, as lot of ground work is still remains to be done. Consensus on the various issues needs to be required by both the parties of the Parliament. The Union Minister Venkaiah Naidu has expressed hopes regarding the passage of the GST bill in the upcoming Budget session. For the implementation of the GST this budget session is going to be extremely important as it is at the crucial stage of it’s journey. There is a ring that the implementation of the GST may be pushed back by a year to April 2017, so be prepared for the further delay if the same gets true.

(Author is Executive Director with S S Kothari Mehta & Company)


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One Comment

  1. Hemen Parekh says:

    A Laughing Matter ?

    Last evening, TV channels showed the traditional ” Halwa Ceremony ” in the Finance Ministry building

    With this , the process of preparing / printing of the Union Budget starts

    The people involved will stay ” imprisoned / incommunicado ” till FM completes his budget speech on 29th Feb , to ensure that the budget provisions do not leak out

    That does not stop the experts ( – and some non-experts like me ) , to make predictions such as :

    * Revising limits for personal Income Tax slabs

    * Reducing rates for TDS

    * Rationalizing procedures ( assessment scrutiny / tax refunds / tax litigations etc )

    * Launching new Schemes / Funds for savings and investments

    * Increase / decrease of Excise rates on products ( watch out smokers and drinkers ! )

    * Increase / decrease of Import Duties on products to protect local industries / stop dumping from China

    * Recapitalization of Banks ( to write-off Rs 7 lakh*crore of NPA with tax payers money )

    * Write-off DISCOM debts of Rs 4 lakh*crores by passing the buck to State Governments ( tax payer burden ? )

    * Write off loans to farmers – what with elections looming in 5 States ( but I support this )

    News papers report that the Government have received budget suggestions from some 7,000 persons and that , this time around , Prime Minister himself is closely involved in the budget making exercise

    Now , with all this obsession / seriousness / paranoia , surely this secrecy surrounding the budget document , cannot be a laughing matter !

    Unless you ask ,

    * some foreign software geeks ( eg: Sundar Pichai / Satya Nadela / Vivek Ranadive / Ray Kurzweil etc )

    * some Indian BIG DATA ANALYTICS geeks ( Mukund / Krishnan / Sanjay / Srikant / Raj / Anurag etc )

    Because , if you do , they will laugh and tell you :

    ” Just give us the actual budget documents of the past 60 years ( including the accompanying budget speeches ) and we will process these documents using Big Data Analytics software and predict what will be the provisions in the forthcoming budget ( with a probability of 99.7 % – ie ; plus or minus six standard deviation )

    And then , we will process those past budget speeches with a PARAPHRASING software ( ala Kurzweilai.net ) and give you an advance print-out of Shri Arun Jaitleyji’s speech on 29th Feb ”

    But of course , Shri Jaitleyji could cheat the PREDICTIVE ANALYTICS , by announcing following unpredictable :

    * Total Abolition of Personal Income Tax ( or at least , reducing incremental tax rates in each higher slab )

    * Decreasing Incremental Corporate Tax Rates , linked with each higher slab of ” Permanent Employee Number ”

    * Perpetual Amnesty Scheme for all CASH deposits made in Jan Dhan Accounts , if invested in tax-free Infra SPVs

    * Transfer of 1.8% of GST (from 18%) into buyers’ PPF a/c , to ensure all citizens get PPF a/c for tax-free savings

    This amount to be used for paying premium for COMPREHENSIVE HEALTH INSURANCE to cover all illnesses

    * Introduction of plastic Currency Notes of Rs 500/1000, embedded with micro RFID sensors ( stop Black Money )

    Surest way to ensure that almost all payments are made thru official channels !

    * Introduction of BTT ( Bank Transaction Tax ) @ 2% to yield Rs 15 lakh*crore of revenue ( against revenue loss

    of Rs 2.5 lakh*crores caused by abolishing Personal Income Tax )

    Now such announcements , besides being ” Unpredictable ” , would echo Shri Narendra Modiji’s following announcement at Make in India week on 13th Feb :

    ” There is no time for incremental changes . We want a quantum jump ”

    Dear Shri Jaitleyji :

    How about an ” Incremental Quantum Jump ” by

    * Announcing these unpredictable on 29 Feb 2016

    * Spreading out actual implementation over the next 5 years

    That could be the surest way to win 300 seats in 2019 Lok Sabha elections !

    Any other budget provision / announcement , would be a laughing matter


    21 Feb 2016

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