Levy of Goods and Services Taxes from 1 April 2010: Preparedness of Taxable Persons

K.Sethuraman, Researcher, NLSIU, Bangalore

ABSTRACT

It is likely that the extant central and state levies of indirect taxes on the domestic production and sale of goods and on provision of services may be replaced by the levy of central and state Goods and Services Taxes from 1 April 2010. Two stages of preparedness of the suppliers of tradable goods and services, whether they are domestic producers, service providers or traders, arise for consideration, namely, when associations of trade and industry are called upon to offer comments on proposed legislation; and when the legislation is in place. It is proposed to consider various aspects from history, relevant theories and possible enactment alternatives and to identify matters for the cooperative formulation, by the associations of trade and industry, of a unified response to the Government of India as and when comments are invited on any proposal for legislation, and to be prepared to avoid conflicting responses to proposed legislative provisions in the first stage.

No tax is levied in any civilized society without the authority of law. Tax law can be ascertained only from the provisions of statutes enacted by using words chosen by the appropriate legislatures competent to enact such statutes. It is for the taxable persons, their advisers, primary, and subsequent-level, tax administrators and the Tribunals and the Courts to ensure full compliance and fair administration by accurate interpretation of the legislative intent discernible from the provisions made in the Statutes.

The legislature may choose to follow moral norms such as equity in distribution, efficiency in allocation, justice and the like in enacting the provisions in the statutes; or may simply enact the provisions to meet the objective of fiscal expediency. The objective of fiscal expediency is also subject to a discipline of choosing from various possible alternatives in quantifying the requisite public expenditure to be incurred in the discharge of constitutional responsibilities, and the amounts of revenue to be availed from debt, non-tax and direct and indirect tax instruments to meet such estimated expenditure. The constitutional responsibilities of the Union and the States are delineated by the provisions of the Constitution, which include the requirement of crediting all revenues accruing to, or reserved to, the Union, and accruing to, or devolving on, the States to the respective Consolidated Fund, and vesting of the authority to autonomously allow appropriation from the Funds with Parliament or with the concerned State Legislature to meet public expenditure in the discharge of their respective constitutional responsibilities.

The Union and the States may or may not be able to fully realise the welfare objective of inclusive growth implied in the Directive Principles of State Policy enunciated in the Constitution, since resources available to them may be scarce. They are however required to follow the Principles as much as possible, since they are fundamental in the political governance of the country. It is appropriate that any reform of taxation aims at inclusive growth.

The likely direction of the reforms of the manner of levy and collection of indirect taxes on the supply of tradable goods and services may be discerned from the statutes enacted by the States in pursuance of their mutual understanding as recorded in a White Paper, the strategy recommended by the Taskforce on the Implementation of the FRBM Act,2003 in their Report of 2004, and the alternatives discussed by Satya Poddar and Ehtisham Ahmad in “GST Reforms and Intergovernmental Considerations in India”, a working paper commissioned by the Department of Economic Reforms, Ministry of Finance. The reforms are being conceived of as involving the following steps:

1)      Collection of state taxes on supply of goods on a ‘value-added’ basis;

2)      Phasing out/reduction ‘ceiling’ rate of central tax on supply of goods to zero;  agreeing on levy of central in lieu of state tax on exchange of excisable goods; and

3)      Identifying the principles of collection of central tax on provision of services by the Union and the States and of the appropriation of their proceeds

While the provisions to be included in the Direct Tax Code to be effective from 1April 2011have been put up in the public realm for debate, it is as yet unclear as to what are likely to be the provisions in the proposed central Goods and Services Act and in the proposed state Goods and Services Tax Acts to be effective from 1 April 2010; and if, in case any amendment of the Constitution is required, whether it is likely to include any amendment of Entries in the Seventh Schedule relating to levy of central excise and state taxes on sale of goods, a definition of the term ‘supply of goods and services’ as an integral concept relevant in supply-chain management and a repeal of the definitions of some transactions of the nature of provision of service as ‘deemed’ sale/purchase of goods.

Practically the statutes to be enacted need to avoid creating an obligation for taxable persons to report compliance to more than one primary tax authority in respect of the same transaction. Avoidance of distortions in the otherwise competitively discovered market prices of tradable goods and services would require the collection of all indirect taxes at destination except in case of some select goods, such as alcohol, tobacco, petroleum products, and the like, the domestic consumption of which may need to be curbed in the public interest. As for luxury services they are already being collected at destination only.

It may not be possible for the political entrepreneurs representing the Union to agree that all the proceeds of the potentially lucrative central service tax may be assigned to appropriately defined destination States, unless the political entrepreneurs representing the States are able to agree to let the Union have legislative competence over some of the entries relating to taxes in the ‘State List’. This may need a grand bargain, though not as envisaged by the Taskforce on the Implementation of the FRBM Act, 2003. The grand bargain between the political entrepreneurs representing the Union and the States may begin even after changing the manner of levy of indirect taxes on business-to-business transactions of supply of goods, including deemed supply of goods from 1 April 2010 after an agreed amendment of the Constitution and the enactment of a central Goods Tax Act in replacement of the Central Sales Tax Act, 1956. In the absence of such a grand bargain, it is likely that the reform to be implemented from 1 April 2010 may-

(1) be limited to an enactment by Parliament stipulating the manner of the Union and the States collecting and appropriating the proceeds of the central service tax and to zero-rating the ceiling of the central tax on sale of goods;

(2) (hopefully) somehow avoid any obligation of any taxable person to report compliance to more than one primary authority in respect of the same transaction;

(3) not allow the taxable persons at the destination to avail the incentive of prior-stage tax credit for all the transactions in a supply chain, since central tax authority may not be able to allow credit from the Consolidated Fund of any State and a state tax authority may not be able to allow credit from the Consolidated Fund of India; and

(4) do away with all exemptions (except perhaps the non-levy/exemption of inter-state consignments ,‘high sea’ sales and transit sales of goods by transfer of documents of title to the goods while they move from one State to another)

An analysis of history of legislation relating to the central tax on sale of goods leads us to note that with cooperation between the political entrepreneurs at the national and sub-national levels the destination principle of collecting taxes on sale of goods need not have been given up in 1956 and even the incentive of prior-stage tax credit as in a system of collection on a value-added basis could have been incorporated as early as in 1950. Theoretical approaches evolved by the scholars of new institutional economics and law&economics schools help lead us to such enactment alternatives as would avoid the incidence of tax on the supply of goods and services in business-to business transactions so that the final incidence is only on the domestic consumer and there is no incidence on exports out of India. Since trade transcends political boundaries, such approaches enable the evolution of such markets and institutions as may be adaptively efficient in response to circumstances beyond the reach of municipal law.

Associations of trade and industry need to work for such reforms as would enable their members to pursue all possible profitable transactions of supply of goods and services, without being constrained to avoid some transactions merely because they involve unreasonably high tax-induced transaction costs, and with the knowledge that as long as they comply with the requirements of law they will be able to avail the statutory incentives of prior-stage tax credit on the receipt of all goods and services without exception and that those who evade taxes will not be able to perversely avail any incentive and make competition unfair for the law-abiding. The lawmakers need to be petitioned to enact such statutes as will enable rather than disable intended transactions because of tax-induced transaction costs. It is to be noted that more transactions lead to better growth of the economy.

The associations need to prepare to respond to the Government as soon as their suggestions are invited on the provisions of any proposed legislation. Unless the proposed legislation is based on the unbiased findings of an appropriate survey by the Government or the Empowered Committee of State Finance Ministers, as was done by the Jha Committee in 1978, the manner of levy and collection of indirect taxes in any proposed legislation needs to be compared with

(a) an ideal manner of levy of a central tax on business-to-business transactions (assigned to destination State for collection) and a state tax on business-to-consumer transactions (subject to prior-stage tax credit), and collection of the central tax by the authorised primary tax authority of the State of destination as specified in the supply order by the recipient firm along with the state tax, if any, payable by that firm; and

(b) the extant manner of levy and collection

by the associations developing an appropriate questionnaire and conducting a survey of the firms on the impact, on account of every enactment alternative, by way of an increase or decrease in the estimated  revenues owing to the enactment enabling or disabling more transactions on account of the likely reduction/increase in the tax-induced transaction costs. The survey may also estimate the increase/decrease in the costs of compliance with statutes that envisage many categories of transactions of supply of goods and services on the basis of non-market criteria defined with reference to legal fictions and those that envisage fewer categories on the basis of well-understood market criteria such as ‘business-to-business’ and ‘business-to-consumer’.

The first draft of such a questionnaire is annexed. This may be improved upon. The associations representing business firms supplying goods and services need to come together and consider a cooperative approach for evolving a unified response to any proposed statute so that there is a qualitative change in the business environment that enables the evolution of markets and institutions that are adaptively efficient, instead of only a parametric change based on mere concern of the collecting governments with ‘revenue-neutral’ rates of indirect taxes. It may be worthwhile for trade and industry associations and professional bodies of service providers to confer on an all-India basis to cooperatively evolve a unified response to any proposed legislative measure.

Download Power Point Presentation on the  above

Annexure

Survey Questionnaire

 Survey of Tax-induced and Other Transaction Costs of Exchange in the Existing and Other Alternative Markets for the Supply of Goods and Services in India

Note: This Questionnaire seeks to elicit information from a sample of individuals and firms engaged in business and professions in India and in the course of such engagement acquire and supply tradable goods and/or services. The questionnaire has been evolved on the assumption that the economy in India would be able to realize more of the unrealized potential of growth, if only the economic agents exchanging tradable goods and services in the Markets are not constrained by unreasonably high transaction costs in pursuing some of the transactions in order to maximize the values of their property rights. The questionnaire focuses attention on transaction costs induced by the manner of collecting indirect taxes levied by the Union and the States on events that take place during the transit of goods and services in the various supply chains leading to economic agents who are domestic producers/service providers/traders and exporters and on the availability or otherwise of incentives that enable them to avoid such costs so that the incidence of the taxes is only on  the prices of goods and services  required for consumption in India.

2. The information sought is either based on actual as may be disclosed publicly or on estimates to be made on alternative assumptions. The respondents need to focus attention on such types of proposals if any which could have resulted in conclusive transactions between the respondents and other parties for mutual benefit if only it was possible to ‘shift’ fully or substantially to other  parties the incidence of the central and /or state indirect taxes paid by the respondents at the prior stages, but had to be dropped since such ‘shifting’ was not possible.

3. The information is required to be furnished on the basis of three alternative assumptions relating to incentives that may be available in the Union and State statutes. The first assumption is the existing design of incentives in those statutes, including the Central Sales Tax Act, 1956 that levies a tax on sales made ‘in the course of inter-state trade and commerce’ and the Finance Act, 1994 that levies a central service tax on select services. The second assumption is the alternative believed to be likely to come into force on 1^st April 2010 as a result of understanding between the Union and the States about sharing of central service tax revenues without any specific reference to the tax-induced transaction costs likely to be faced by the economic agents liable to pay what are described as central and state Goods and Services Taxes (Alternative 1). The third assumption is a hypothetical alternative that clearly enables the economic agents to avoid indirect-tax induced transaction costs in the supply of goods and services so that the incidence of the taxes is only on  prices of goods and services required for domestic consumption (Alternative 2).

QUESTIONNAIRE

1. Name of the responding organization
2. Postal address for communication
3. Name (and designation if any ) of the contact person
4. Telephone/Cell No. and e-mail ID of the contact person
5. If the organization is liable/assessed to pay corporation tax, the year since when it has been so liable/assessed
6. Main Activity (Domestic Producer/Domestic Trader/Service Provider/Exporter) of the responding organization

Actual or  Estimated? If Incentives are as in?	Existing Statutes	Alternative1	Alternative 2
Outlay(Rs.000) on the acquisition of goods and services in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of central indirect taxes paid as part of price of supplies received in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of state indirect taxes paid as part of price of supplies received in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of revenues from supply of goods and services in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount(Rs.000) of central indirect taxes ‘shifted’ to recipients of supplies in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) 0f state indirect taxes ‘shifted’ to recipients of supplies in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of incidence of central indirect taxes borne as transaction costs in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of incidence of state indirect taxes borne as transaction costs in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of costs of litigation if any on the interpretation of central and state statutes levying indirect taxes in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of other costs of compliance if any with the central and state statutes levying indirect taxes in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Amount (Rs.000) of other costs if any regarded as transaction costs in
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13