India is a union of states and union territories with federal structure. Power to levy taxes by Central Government and states are separately mentioned and cannot be encroached by each other. When the Constitution was drafted the way commercial transactions took place was simple. There was understandably clear distinction between the subjects of taxation. i.e. manufacture, entry, sale etc. Service was not thought of as a subject of taxation. However over a long period of time the way business transactions take place has undergone tremendous change. The aspect theory to attract levy of tax proved disastrous for the commerce. Most economic transactions have many facets. Aspect theory means if any of it’s aspect is related to subject of tax then tax is attracted. It has resulted into multiple taxes on same transaction.
Each Government department milked this theory to maximize their tax revenue. Multiple taxation during supply chain without right to claim input tax credit made most goods and services costly. This is a single most important reason why businessmen are eager to welcome GST. We have witnessed and enjoyed fusion of music, food, cultures etc. The Government has proclaimed that GST is integration of all indirect taxes into one tax — it is fusion of taxes. One nation One tax is how the Government is advertising this change. Very noble idea II
Let us examine whether the claim is correct. Claim : There will be very few tax rates.
Reality : Before it is implemented the idea has been given a toss. We have 7 different tax rates 0%, .25%, 3%, 5%, 12%, 18%, 28%. If we consider the compensation cess the number will shoot up further. Rates of taxes for services are separate with conditions about input tax credit will end up in factual different rates for such services. With pressure from different sectors number of tax rates may go further up.
Claim : Full seamless Input tax credits will be allowed :
Reality : There are too many terms and conditions for availing tax credits. The list of blocked credit is very long. No input tax credit for exempt supplies mean that the value of exempt supplies are inclusive of taxes. Various formulas are prescribed which are targeted to reduce the input tax credits. For a common man it is difficult to understand those formulas. In addition rate schedule for many services have a provision that it is without input tax credit or with restricted input tax credits. Tax on advance received is another impediment to seamless credit. Refund of accumulated credit will not be allowed. Cenvat credit which was available on pan India basis is now fragmented into 30 states and union territories. Thus It can be said that the this claim is hollow.
Claim : System will be simple :
Reality : In addition to complexity of understanding what is goods and service and different tax rates and input credit provisions the entire system is made further complicated. It has borrowed various concepts from existing laws and put them together. It has borrowed reverse Charge from service tax. Tax collection at source is taken from VAT. Tax deduction at source is from works contract. Job work concept is from central excise. Related party transaction is a concept from customs. Most of these have no significant relevance with VAT system of taxation. It has made the system most complex. Reverse charge tax on inputs from unregistered person has put the last nail. It will increase the unnecessary clerical work without any substantial revenue gain for Government.
Claim : Will implement GST with full preparedness
Reality : The success of GST depends upon robust IT system and infrastructure. Nobody knows whether the system developed by government is properly working or not. Those who tested are not at all satisfied with the system. Assuming that the GSTN system is good, it ought to be complimented by accounting systems which are used by taxpayers. At present there is not a single accounting software which can claim to be GST compliant. Does Government expect that eighty lakh tax payers will learn it in last fifteen days so that they can smoothly migrate to GST.
Instead of writing the law with reference to the new subject of taxation i.e. supply, those who drafted the GST Act have cut-pasted few each of the existing law and put them together. Even schedules of goods and services are borrowed from present laws without much change. It has made the GST Act hard to decipher and difficult to implement.
The journey began with fusion, it turn out to be fission and at present there is complete confusion.
My only regret is a revolutionary noble idea is being killed by petty minded attitude of law makers. I pray God : let the wisdom of political leadership prevail upon grid.