GOODS & SERVICE TAX-CHALLENGES AHEAD TO THE COUNTRY
GOODS & SERVICE TAX
CHALLENGES AHEAD TO THE COUNTRY
Vishnu Langawat & Shruti Raikar
Content
A. Introduction
B. Constitutional framework
C. Experience in other countries
D. Challenges ahead to the Empowered Committee
E. Conclusion
A. INTRODUCTION
Law is a dynamic subject which keeps changing as per the requirements of the society. Lord Macaulay had never thought when a Court will strike down the provisions of the homosexuality under Indian Penal Code in partiality. India as per the requirement of the society at large and to address emerging global and national development is aggressively working towards the tax reform. Government of India had setup Indirect Tax Enquiry Committee under the leadership of Sh.L.K.Jha and on the suggestions of the Jha Committee, Government introduced concept of VAT in the Central Excise Law with respect to manufacturing stage which gradually developed and rechristened to present CENVAT Scheme. However introduction of VAT in respect to sales tax got delayed for another 19 years because of sales tax is a state subject which can be levied only by respective state and required consensus among all the States which did happen only in year 2005 when the Sales Tax was replaced by the Value Added Tax. Getting overwhelming support from the States, Finance Minister in the Budget for 2006, proposed 1st April, 2010 as date for introduction of a national level Goods & Service Tax that should be shared between the Union and the States. In Budget Speech 2009, Finance Minister further stated that it is government’s objective to introduce a GST both at the National and State level, hence some more steps in that direction are necessary, he further submitted before the House that one measure that would facilitate the process is the further convergence of central excise duty rates to a mean rate which is currently at 8% leaving certain exceptions .
It will be relevant to state that currently there are number of statutes or taxes are applicable. For example, upon import of goods, one has to pay Customs Duty, Service Tax on renderance of Services, upon manufacturing of goods Central Excise duty, upon sales of goods VAT or CST, some states impose Entry Tax upon entry of goods in the states, thus there are various levies in different form which are levied on business and only solution to such various levies is Goods and Service Tax.
Further, essential details of the GST is still unwrapped, will introduction of GST remove the difficulties of compliance of multi tax laws? Will introduction of GST replace a disappearing tax base? Will dual structure GST harmonize the Union and State revenue share and will attain fiscal federalism? These are some of the aspects of the GST which are the subject matter of this Article.
B. CONSTITUTIONAL FRAMEWORK
Article 265 of the Constitution of India embodies an important constitutional principle, namely, that no tax shall be levied or collected except under the authority of law means by an act of the legislature. Further Article 268 to 281 deals with the distribution of revenues between the Union and the States. In any federation the problem of allocation of resources is difficult, since two different authorities, union and state, with independent powers are raising money from the same taxpayers. Hence it is necessary that tax collected from the taxpayers be appropriated between the union and states harmoniously. Constitution of India embarks clear cut division of powers between States and Union including power to levy taxes which is tabulated as under:-
Sr. No. Union State
1. Excise Duty on manufacture Sales Tax on Sale of Goods
2. Customs Duty upon Import Duty of Excise on alcoholic liquors
3. Central Sales Tax on sale of goods in interstate transaction Taxes on professions, arts etc
4. Service Tax Taxes on vehicles
5. … Octroi
6. … Tolls
7. … Stamp Duty
8. … Taxes on luxuries, entertainment etc.
9. Tax on Land & Property
Existing taxation policy suffers many problems like multi taxation laws, administrative issues and compliance issue. Kelkar Task Force had suggested comprehensive GST based on VAT principle. Introduction of integrated GST to replace existing multi tax law is not only desirable but also imperative in emerging economic situation. In the existing Constitutional framework, implementation of integrated GST is difficult and it requires constitutional amendment which is subject to judicial scrutiny and subject to principle of basic structure. Thus implementing an integrated GST within the existing constitutional framework is hard nut to crack. Further recent development shows that Union and Empowered Committee is considering to implement “dual structure” GST which shall be levied by both Union and State level rather a single national GST as considered by Government earlier.
In dual structure of GST, there will be rates for union and separate GST rates for the State, which will be uniform in all states. Dr. Shome, advisor to the finance minister in a statement said that in the dual GST, input tax credit would be allowed only at one chain and no carry forward of the credit from one chain to other would be allowed. He further said that the intention of the Empowered committee is to merge as many local levies in the GST. This model of GST is (a) within the existing constitutional framework, (b) balance the fiscal autonomy of Union and State Governments (c) eliminate cascading effect of tax (d) easy to administer and (e) subsume multi taxes structures .
C. EXPERIENCE IN OTHER COUNTRIES
Taxation in GST model is simple, transparent and eliminate cascading effects of tax as it apply to entire supply chain and because of this reason only over 130 countries have adopted this model of taxation. Countries have adopted GST model based on their fiscal and social requirement. Australia has adopted a national level GST which is levied and collected by the Federal Government but proceeds of which are appropriated to the all constituent units, however such kind of model is not possible in India since there is clear cut division of powers between the Union and States. Further such kind of model will have a damaging impact on the Indian federalism as states will be dependent only on the Union.
Canada’s GST, known as Harmonized Sales Tax (HST) which is levied at a combined federal and provincial rate of 13% (composed 5% of Federal Rate and 8% of Provincial Rate) in three participating provinces namely Newfoundland & Labrador, Noca Scotia and New Brunswick and applies to the same base of goods and services that are taxable under Federal GST. Further HST is collected federally by the Canada Revenue Agency, once collected the appropriate amount is them remitted to the participant provinces. The harmonization of the provincial and federal sales tax does not affect the cost of goods and services for the consumers . In the context of Constitution of Canada being very similar to the Constitution of India, only three provinces have agreed to implement GST, which testify the difficulties involved in implementing GST in the Federal structure of Government.
D. CHALLENGES AHEAD TO THE EMPOWERED COMMITTEE
After successfully implementing the VAT in Country, Government of India assigned a new task to the Empowered Committee of State Finance Ministers to prepare a roadmap for the introduction of Goods and Service Tax with effect from 1st April, 2010. In May 2007, Empowered Committee in consultation with the Union Government constituted a Joint Working Group (JWG) with an objective to study the various model of GST existing globally and recommend the possible model for introduction of GST in India. JWG has presented its report on GST to the Empowered Committee in November, 2007 recommending a dual GST model for the Country which is a good option to strike balance between fiscal autonomy of Union and States and empower both the Governments to levy tax to a large base of goods and services ultimately eliminating the cascading tax. Though the States have agreed on Dual GST but model draft GST legislation is still unveiled. Recently Chairman of the Empowered Committee of State Finance Ministers has said in a statement that the draft legislation will be ready in two months on which comments being sought from the stakeholders and concerns.
E. CONCLUSION
International experience shows that implementation of GST in federal country is a Herculean task and require consensus among the stakeholders. It is relevant to mention that states have finally reached a consensus on dual structure consisting Federal GST and State GST comprising multiple rates for goods and a single rate for services. Further this dual model of GST will subsume both Central and State taxes in one legislation which is achievable in the existing constitutional framework of the Country. Further this Dual GST may achieve an administrative and compliance advantages but fundamentally there is no change as regards to the rates are concerned. Further there is still no clarity on the treatment of land and real property, financial services & non-profit sector etc, hence time will tell the real story.
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CHALLENGES AHEAD TO THE COUNTRY
Vishnu Langawat & Shruti Raikar
Content
A. Introduction
B. Constitutional framework
C. Experience in other countries
D. Challenges ahead to the Empowered Committee
E. Conclusion
A. INTRODUCTION
Law is a dynamic subject which keeps changing as per the requirements of the society. Lord Macaulay had never thought when a Court will strike down the provisions of the homosexuality under Indian Penal Code in partiality. India as per the requirement of the society at large and to address emerging global and national development is aggressively working towards the tax reform. Government of India had setup Indirect Tax Enquiry Committee under the leadership of Sh.L.K.Jha and on the suggestions of the Jha Committee, Government introduced concept of VAT in the Central Excise Law with respect to manufacturing stage which gradually developed and rechristened to present CENVAT Scheme. However introduction of VAT in respect to sales tax got delayed for another 19 years because of sales tax is a state subject which can be levied only by respective state and required consensus among all the States which did happen only in year 2005 when the Sales Tax was replaced by the Value Added Tax. Getting overwhelming support from the States, Finance Minister in the Budget for 2006, proposed 1st April, 2010 as date for introduction of a national level Goods & Service Tax that should be shared between the Union and the States. In Budget Speech 2009, Finance Minister further stated that it is government’s objective to introduce a GST both at the National and State level, hence some more steps in that direction are necessary, he further submitted before the House that one measure that would facilitate the process is the further convergence of central excise duty rates to a mean rate which is currently at 8% leaving certain exceptions .
It will be relevant to state that currently there are number of statutes or taxes are applicable. For example, upon import of goods, one has to pay Customs Duty, Service Tax on renderance of Services, upon manufacturing of goods Central Excise duty, upon sales of goods VAT or CST, some states impose Entry Tax upon entry of goods in the states, thus there are various levies in different form which are levied on business and only solution to such various levies is Goods and Service Tax.
Further, essential details of the GST is still unwrapped, will introduction of GST remove the difficulties of compliance of multi tax laws? Will introduction of GST replace a disappearing tax base? Will dual structure GST harmonize the Union and State revenue share and will attain fiscal federalism? These are some of the aspects of the GST which are the subject matter of this Article.
B. CONSTITUTIONAL FRAMEWORK
Article 265 of the Constitution of India embodies an important constitutional principle, namely, that no tax shall be levied or collected except under the authority of law means by an act of the legislature. Further Article 268 to 281 deals with the distribution of revenues between the Union and the States. In any federation the problem of allocation of resources is difficult, since two different authorities, union and state, with independent powers are raising money from the same taxpayers. Hence it is necessary that tax collected from the taxpayers be appropriated between the union and states harmoniously. Constitution of India embarks clear cut division of powers between States and Union including power to levy taxes which is tabulated as under:-
Sr. No. Union State
1. Excise Duty on manufacture Sales Tax on Sale of Goods
2. Customs Duty upon Import Duty of Excise on alcoholic liquors
3. Central Sales Tax on sale of goods in interstate transaction Taxes on professions, arts etc
4. Service Tax Taxes on vehicles
5. … Octroi
6. … Tolls
7. … Stamp Duty
8. … Taxes on luxuries, entertainment etc.
9. Tax on Land & Property
Existing taxation policy suffers many problems like multi taxation laws, administrative issues and compliance issue. Kelkar Task Force had suggested comprehensive GST based on VAT principle. Introduction of integrated GST to replace existing multi tax law is not only desirable but also imperative in emerging economic situation. In the existing Constitutional framework, implementation of integrated GST is difficult and it requires constitutional amendment which is subject to judicial scrutiny and subject to principle of basic structure. Thus implementing an integrated GST within the existing constitutional framework is hard nut to crack. Further recent development shows that Union and Empowered Committee is considering to implement “dual structure” GST which shall be levied by both Union and State level rather a single national GST as considered by Government earlier.
In dual structure of GST, there will be rates for union and separate GST rates for the State, which will be uniform in all states. Dr. Shome, advisor to the finance minister in a statement said that in the dual GST, input tax credit would be allowed only at one chain and no carry forward of the credit from one chain to other would be allowed. He further said that the intention of the Empowered committee is to merge as many local levies in the GST. This model of GST is (a) within the existing constitutional framework, (b) balance the fiscal autonomy of Union and State Governments (c) eliminate cascading effect of tax (d) easy to administer and (e) subsume multi taxes structures .
C. EXPERIENCE IN OTHER COUNTRIES
Taxation in GST model is simple, transparent and eliminate cascading effects of tax as it apply to entire supply chain and because of this reason only over 130 countries have adopted this model of taxation. Countries have adopted GST model based on their fiscal and social requirement. Australia has adopted a national level GST which is levied and collected by the Federal Government but proceeds of which are appropriated to the all constituent units, however such kind of model is not possible in India since there is clear cut division of powers between the Union and States. Further such kind of model will have a damaging impact on the Indian federalism as states will be dependent only on the Union.
Canada’s GST, known as Harmonized Sales Tax (HST) which is levied at a combined federal and provincial rate of 13% (composed 5% of Federal Rate and 8% of Provincial Rate) in three participating provinces namely Newfoundland & Labrador, Noca Scotia and New Brunswick and applies to the same base of goods and services that are taxable under Federal GST. Further HST is collected federally by the Canada Revenue Agency, once collected the appropriate amount is them remitted to the participant provinces. The harmonization of the provincial and federal sales tax does not affect the cost of goods and services for the consumers . In the context of Constitution of Canada being very similar to the Constitution of India, only three provinces have agreed to implement GST, which testify the difficulties involved in implementing GST in the Federal structure of Government.
D. CHALLENGES AHEAD TO THE EMPOWERED COMMITTEE
After successfully implementing the VAT in Country, Government of India assigned a new task to the Empowered Committee of State Finance Ministers to prepare a roadmap for the introduction of Goods and Service Tax with effect from 1st April, 2010. In May 2007, Empowered Committee in consultation with the Union Government constituted a Joint Working Group (JWG) with an objective to study the various model of GST existing globally and recommend the possible model for introduction of GST in India. JWG has presented its report on GST to the Empowered Committee in November, 2007 recommending a dual GST model for the Country which is a good option to strike balance between fiscal autonomy of Union and States and empower both the Governments to levy tax to a large base of goods and services ultimately eliminating the cascading tax. Though the States have agreed on Dual GST but model draft GST legislation is still unveiled. Recently Chairman of the Empowered Committee of State Finance Ministers has said in a statement that the draft legislation will be ready in two months on which comments being sought from the stakeholders and concerns.
E. CONCLUSION
International experience shows that implementation of GST in federal country is a Herculean task and require consensus among the stakeholders. It is relevant to mention that states have finally reached a consensus on dual structure consisting Federal GST and State GST comprising multiple rates for goods and a single rate for services. Further this dual model of GST will subsume both Central and State taxes in one legislation which is achievable in the existing constitutional framework of the Country. Further this Dual GST may achieve an administrative and compliance advantages but fundamentally there is no change as regards to the rates are concerned. Further there is still no clarity on the treatment of land and real property, financial services & non-profit sector etc, hence time will tell the real story.
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