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Uncertain Future ... GST |
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P. C. Joshi, Advocate |
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The participants may recall that a Task Force, under the Implementation of the Fiscal Responsibility and Budget Management Act, 2003 was constituted by the Union Government which later on pointed out the necessary fiscal corrections that were required to be made both on the expenditure side as well as on the revenue side. The Kelkar Committee submitted its report and recommended certain tax reforms which inter alia included introduction of an integrated Goods and Service Tax (GST). The Union Finance Minister, while presenting the budget for 2007-08, announced that the Goods and Service Tax would be brought into force throughout the country from 1st April, 2010. 2. Aftermath of VAT From 1st April 2005 onwards till date, all the States in the country and the Union Territories have changed over to VAT system as against varied types of provisions and several rates of levying tax. Though the uniformity all over the country was one of the objects to be achieved; till date that has not been achieved fully, in asmuch as the rates on some of the items are not the same all throughout, though by and large the slabs or the number of rates have been reduced to the minimum. Even the procedural provisions are not uniform. 3. Dual VAT & Service Tax At present we have dual VAT system in vogue, Central VAT (CENVAT) and State VAT. Because of the constitutional provisions and restrictions, today Centre collects service tax on as many as 106 services. As regards the levy of tax on sale of goods, many States have not yet adopted Harmonious System of Nomenclature (HSN), though such a system will have to be followed sooner or later because the nomenclature used in that system have been adopted uniformally by almost all countries. We also have CPC; i.e., Central Product Classification from UNO. That also is used for tabulating all kinds of data relating to trade and services. The said CPC have classified as many as 131 groups of services, out of which 83 services have already been taxed by the Centre. All the participants are well aware that percentage of services to our GDP is consistently travelling northwards. Now 56% of GDP is from services. With the introduction of a common GST as proposed from 1st April 2010, the percentage will rise to an unexpectedly high percentage, much more than 56%. The total revenue collection by the States also will improve tremendously. The recent announcement by Maharashtra Finance Minister about collections also support the above view. As per his announcement published in Indian Express of 7th May 2009, the figures for collections during last year and this fiscal year ended March 2009 are as under :
From the above figures it would be noticed that the revenue under VAT, Excise and Vehicle Tax have improved upward. The Stamp duty & Registration and Profession tax have shown the downward trend. Possibly, the large number of persons have crossed 65 years of age during the year 2008-09 or some of the industries may have been affected adversely by the economic scenario all over. 4. Learn from West Unlike the Western countries, our law-makers do not believe in advance information or information in regard to the proposed levy, for a proper discussion amongst the taxpayers and the tax professionals. We have to rely on our own sources for whatever information we can collect, therefore the present note may be read in that context with a rider that what is mentioned hereinbelow is only an outline of the future levy on the basis of information gathered by me from various sources, including the articles and related informations in newspapers and the announcements made at various seminars and conferences by the speakers. 5. Beautiful Bride Whenever a topic on GST have been discussed, the speaker concerned or the faculty, as the case may be, have painted the new measure in a very positive manner similar to a mother of the bride describing her daughter before marriage and the relatives of bridegroom carrying high expectations from the description so made, even at the time of conducting the marriage ceremony, where the bride occupies the rostrum with a veil on her face. The reality of the beauty could be known only when the curtain is lifted later on. At that point of time, the reality of the bride having several black spots on the entire body may shock the bridegroom side, but then it may be too late at that point of no return. In the same manner, we carry high expectations, as was the position before introduction of VAT system. Such an expectation, however, proved to be misfounded. Therefore, we should not be surprised if once again we receive similar shock, after introduction (if any) of the much trumpeted GST. 6. Exemption to be specified One of the views gaining ground amongst the States is that under the new regime, unlike the present position of specifying taxable services, the notifications would cover only the exempted services, barring which all services will be taxable, either by the Centre or by the State concerned. In that respect, certain services of all India nature will be retained by the Centre, while those having localized scope will go to the respective States. Initially, however, for a period of 2 to 3 years, the services which are taxable services under the Service Tax Act may be roped in. 7. GST Model At present the exact model of the proposed unified Goods and Service Tax have been prepared by the Empowered Committee of State Finance Ministers and the same have been submitted to the Union Finance Minister with its recommendations. As far as possible, the existing provisions with certain changes, consequent to policy decisions, will be adopted. Therefore, all States will have additional source of revenue through services that may be earmarked for them. 8. Goal – Tax everything As mentioned hereinabove, the ultimate goal and the target planned is to tax all services except those notified to be exempt. Therefore, it is possible that even a funeral cremation undertaking and social services with accommodation like home for senior citizens, sanitariums, vipasanas and natural cure centres may also be roped in. Administrative services by the Government, educational services, obligatory services of municipalities like waste treatment and disposal, septic tank cleaning, sanitation, domestic services and trade union services may also be taxable. In other words, any economic activity which do not involve the supply goods will be treated as that of services liable to be taxed under GST throughout the country, including Union Territories and Jammu & Kashmir. 9. Future scenario As per the recommendations of the Empowered Committee, there would be dual GST applicable to all transactions involving sale of goods and supply of services. 10. Consolidation With the implementation of GST, the following levies by the Central Government would be repealed: 1. Central Excise Duty Following levies by the States would also be withdrawn : 1. Value Added Tax As regards the rates for levy of tax on the sale of goods or supply of services, the same would be: (i) 0% - All items which are
presently free of tax, export and Special Economic Zones. 12. Inter-State transactions of both goods & services The levy under GST by the Centre would entirely depend on the banking network which will play a pivotal role in the GST regime. Under such a system, the seller effecting inter-State transaction from an exporting State would collect GST from the buyer or the recipient or beneficiary of services, from other State. Such a seller after collection of GST, will deposit the collections in the bank treasury in the despatching State, respective State-wise, to their credit. The seller would be expected to provide details of individual customers or beneficiary of services in the receiving State to the bank, while effecting the payment and through bank network, to the receiving State also. The buyer or the beneficiary from other State, will be able to claim input tax credit on the basis of a digitally authorised signed invoice of seller from the despatching State through his bank. That will be the position as far as the transactions between two registered dealers are concerned. However, in case the buyer or the recipient of services happened to be unregistered or a non-dealer, then the collected amount from the despatching State will remain with the said State, since no input tax credit will be claimed nor remitted to the receiving State. Such a scenario may usher in the notifications that may encourage transactions with non-dealers, through grant of additional input tax credit on the same analogy of present reductions on transfers to branches outside the concerned State. In case of involvement of multiple States in the transaction of sales or services in the course of inter-State trade or commerce, the first seller would submit a consolidated place-wise statement in accordance with each State with complete details of the buyer/beneficiary of services. Such a system will involve payment by the seller to the bank/treasury in his State to the credit of concerned State Government. Accordingly the bank will remit the credits to the respective States with the details furnished by the seller while making the payment. It is expected that with the implementation of the above stated multi-State system, there would be no paper declarations nor will it involve any cross-checking and therefore it is expected that there would be no loss of revenue, either to the Centre or the State. The system will not require inter-Government transfer of funds and at the same time the exporting State will not be able to control the revenue of the importing State. 13. Exemption As mentioned earlier, the small list of exempted goods and services would be notified and that would be applicable uniformally throughout the country with the rider that the individual States will have similar power of notifying exemption or concessional rates, as is prevailing at present under the provisions of section 8(5) of the Central Sales Tax Act. Therefore, all inter-State transactions involving supply of goods or services will be taxable unless notified to be exempt by either of the governments. 14. Registration It is reliably learnt that the present threshold limit requiring the compulsory registration under VAT system or Service Tax provisions will continue in the initial period, but the registration number that may be issued under the new GST regime will be PAN based. 15. Returns & Recovery With the unified GST enactment, there would be a single return to be furnished to the designated officer of the State concerned with a copy thereof to the authority under the Central government. The mode of payment and the recovery procedure as provided in various enactments will also continue to be the same under the GST regime. 16. Appropriate Authority As far as the assignments of individual returns are concerned, the service providers and the dealers having turnover of more than Rs. 1.5 crore will be under the Central as well as State purview, while the dealers and service providers with lesser turnover; i.e., below Rs.,1.5 Crore, will be under the State scrutiny only. 17. Situs & Appropriate State Under the new regime, the place of consumption would be the situs for supply of goods and services, if the buyer/recipient of services happen to be registered dealers, while in case the buyer or the beneficiary, happen to be a non-registered one, the place of supply will be the situs for the purpose of determining the appropriate State which will be able to levy and collect the tax as GST. Departing from the present position of the despatching State levying Central Sales Tax on the basis of movement of goods, the inter-State transactions under GST will involve the levy by the State of consumption or State receiving service benefits. 18. Export & Import As mentioned earlier, exports outside the territory of India and the sales made from Domestic Tariff Area (DTA) to Units in Special Economic Zones would be zero rated, while the imports, both from other countries as well as Special Economic Zones, would be taxed under GST with the facility of claiming input tax credit by the importer concerned. 19. GST in other countries Almost all countries have adopted the VAT system providing for the unified levy on supply of goods as well as services. However the rates vary from 5% in Japan to 15% in Ethiopia and U. K. The novel measure of registration could be found in Thailand, where every person at the time of his / her birth, is given a National Identification Number and that number will be available to the individual concerned for all purposes under all enactments and no separate registration is required under any specified enactment. In Australia, the GST is levied and collected by the Central Government and distributed amongst the States. In Canada, the GST is being levied since 1991 and the rate is 7% in the hands of purchaser or the recipient of services. The Canadian government treat defaults very seriously, in the sense that as much as 115% is the quantum of fine for non-remittance of GST. The GST is a tax on personal consumption. The GST is also payable on certain prizes : 1) By any professional at any place in the country. 2) Persons and organisations engaged in commercial activities within the country or with other countries having taxable trade of more than Canadian Dollars 30,000 are liable for registration as well as for payment of GST, but all taxi operators regardless of their receipts or turnover, have to get themselves registered and pay GST on all the rentals or hire charges received by them. In Canada, the registration number is known as Federal Business Number, issued by Canada revenue agency and that will be useful for not only the revenue matters, but also for import-export, pay roll deductions etc. Almost all goods and services sold or provided are taxable under GST. However, basic groceries and drugs are zero rated, while certain essential services are exempted. In other words, almost all transactions are covered under GST, from manufacturing to marketing as well as service providers. Input tax credit is available for the entire GST paid while effecting the purchases or receiving the benefits of services. The input tax credit, however, is available only to registered persons. As a status symbol and a marketing measure, all the business organisations get themselves registered for a first hand impression about its qualitative services and capacity of quantitative supply even during the initial period, because no organisation would like the customers know that their turnover was below Canadian Dollars 30,000 per year. The obligation of payment of GST is honoured even when the company or the individual concerned had not collected the amount from the customer. Similar is the situation in our country as well. In United Kingdom, unlike the Indian government, the Chancellor of Exchequer do keep the taxpayers well informed in advance. The proposal of personal tax changes which will be effective in the year 2011 have been announced recently, while the changes in personal taxes that will take place from April 2010 have also been announced. Let our law makers (new ones) understand the tremendous goodwill that will be gained by advance informations. Such a measure will also avoid lot of litigations. 20. Standard rate of VAT in U. K. The standard rate of VAT that was reduced from 17.5% to 15% for the period 1-12-2008 to 31-12-2009 will be reverted back to the standard rate from 1-1-2010. In order to simplify and modernise the VAT system for cross border trading and for countering fraud across EU, certain package of measures have also been announced, by which the rules have been changed in respect of basic place of supply or service and the time for payment. Along with the return, a list showing European sales of transactions or cross border services are also to be complied with. A new electronic refund procedure for VAT paid in other EU member States, is also announced. 21. Conclusion All persons concerned with the tax administration in India are optimistic for successful launch of GST. However, none of them are certain about the exact date of implementation of the new regime, in view of the fact that the recent election to Lok Sabha may not result in the desired majority to any single party and the combination which may form the Government may have cross-interest and lesser enthusiasm about changing over to the new tax system. Although Australia is a leading ally of USA in the Pacific, its economic and political relations with China have rapidly improved in recent years. In many ways, the Australian defence debate on China’s capabilities and intentions is becoming a trend setter in the Asia-Pacific region. All major Asian nations will hereto navigate between their growing economic inter dependence with China on the one hand and their fears about the strategic consequences of Beijing’s rising military profile. China recently objecting to the development projects in Arunachal Pradesh with World Bank assistance is an example that will have to be borne in mind by our policy makers. 22. Effect of economic slowdown Different countries have taken
up corrective actions that suits them most, e.g. reduction of bank rate, excise
and import duties etc. Vietnam, a small country, have announced reduction of
goods and services tariffs to push up demand in the domestic market. Their
garment and textile products, cement and motor bikes will bear 50% less VAT
while footwear will witness a 30% reduction in income tax. It is well said that a good law badly implemented will not be successful, while a simple law properly administered will really be a successful one. In short, it is hazardous to expect too much from GST, whatever may be the model, much will depend on the simplicity and efficiency in implementing the GST, keeping in mind the federal set-up of the country. When VAT system was to be implemented, many professionals were of the view that many them would be short of briefs. However, the experience of last few years after the implementation of VAT have proved their apprehensions to be misfounded. Many controversies have cropped up all over the country and some of them have already reached the Supreme Court. Therefore, so long as the draftsmen vet the GST provisions properly, minutely, dispassionately and in a transparent manner, there are bound to be litigations even under GST and therefore it is very much essential for all the professionals to keep themselves abreast with the developments that take place in the matter through legislation as well as through judgments of the constitutional courts. I wish all professionals a healthy and wealthy future. [Source: Paper presented at Two
Day National Tax Conference held on 5th and 6th June, 2009 at Pune.] |
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