GST In India : Recent Developments in the EU

The previous article in this column had discussed the recent developments in the EU in relation to the VAT, by way of publication of the Green Paper on the future of VAT. That article discussed the background to the Green Paper and as to how and why the Green Paper had been prepared. This article is focused on the two broad areas for discussion that have been highlighted in the Green Paper as follows:-.  

• the principles of taxation of intra EU transactions
• the other issues which also need to be addressed, in the estimation of the EU.

The Green Paper indicates that the period of consultations will be from 1st December 2010 till end May 2011. Hence, the consultation period is currently open at the time of writing of this article. The Commission informs that the based on the consultations, it would present its priorities for the future of VAT in the EU, by means of a communication at the end of this calendar year and that legislative initiatives and other actions can be expected from 2012 onwards. It is indeed intriguing to note these timelines, as they appear to be very timely from an Indian GST standpoint as well, given the similar schedules that we ought to be following here in India, in order that we have a best in class GST sometime in calendar 2012.

The Green Paper sets out a total of 33 questions concerning the two broad areas referred to above, keeping in mind that the review of the VAT system in the EU was undertaken in order to achieve the following objectives:- 

• reduce the complexities of the present system;
• make the EU single market work better; 
• maximize revenue collections; 
• tackle the system’s susceptibility to fraud; 
• cope with changes in technology and the economic environment.

On the first broad area relating to the principles of taxation of intra EU transactions, which can be termed as the area of technical VAT design, the Green Paper explores the present system of taxation in the state of destination of supplies of goods and services, with certain exceptions, based on the point that the VAT revenues accrue directly to the member States in which consumption happens, according to the rates and exemptions in those States. It points out that the key issue to be resolved in that regard is to ensure that the treatment of intra EU supplies and domestic supplies is uniform and consistent . It states that equal treatment can be achieved either by taxing intra EU supplies or by eliminating the effective charging of VAT on domestic transactions via a generalized reverse charge system, whereby the taxable person to whom the supply is made becomes the person liable for the payment of VAT. The related question is, of course, whether such treatment needs to be equal and, if it does not, to what extent a different treatment is acceptable, without it being an obstacle to the smooth functioning of the single market or allowing fraud linked to cross border transactions.

Thereafter, the Paper discusses the distinction between the tax treatment for Business to Business (B2B) transactions and supplies to final consumers (Business to Consumer or ‘B2C’). On cross border B2B transactions, the Paper comments on the VAT principle that for both goods and services, the taxation is based on the rate and conditions of the State of destination and since this is not the case as regards domestic transactions, the distinction in the treatment becomes a source of complexity and vulnerability to fraud. As oppose to this, the Paper recognizes that B2C supplies are typically taxed in the State of origin i.e. where the sale is made or where the provider of services is established. This brings about its own challenges. The Paper accordingly concludes that given these challenges, there is a need to consider a general use of the reverse charge mechanism in relation to domestic B2B transactions. Alternately, the Paper suggests that consistency can also be achieved by taxing all intra EU transactions based on the rates in the State of destination. Here again, the place of destination can itself be defined in two ways:

• as the place of arrival, for goods, and as the customer’s place of establishment, for services or
• as the customer’s place of establishment, for both goods and services

The paper closes this first area for discussion by way of the first two of the 33 questions, which are posed as follows:-

• Are the current VAT arrangements for intra EU trade suitable enough for the single market or are they obstacles to maximizing its benefits?
• If the later, what are the most suitable VAT arrangements for intra EU supplies? Particularly, is the principle of taxation in the State of origin, which was the original principle of VAT taxation in the EU, still relevant and achievable in the present scheme of things?

To summarize, the objectives of designing an ideal VAT would be to evolve a broadbased VAT, as opposed to a relatively narrow based one, as at present, and to bring about best practices that would balance the interests of Government, business and the citizens.

The Paper thereafter goes on to the second broad area for discussion, on the other issues and delineates them into the following five categories:-

Neutrality of the VAT system

• Scope of VAT
• Exemptions from VAT 
• Deductions 
• Treatment of international services

Harmonization of VAT 

• Legal processes
• Derogations and speed of response 
• VAT rates

Reducing red tape 

• Programme for reducing administrative burdens and streamlining VAT obligations  
• Scheme for small businesses 
• One stop shop mechanisms 
• Adapting the VAT system to large and pan European businesses 
• Synergies with other legislations

Robust VAT System 

• VAT collection mechanisms
• Protecting bona fide traders against fraud

Efficient and modern VAT administration

If one were to analyze these categories and attempt to categorize them in some other manner, these could be classified as follows:- 

• Legal processes 
• Efficiency in collections 
• Reducing red tape or bureaucracy

As regards legal processes, the objectives could be (i) to bring about revised VAT rules and regulations based on consultations with all stakeholders and (ii) harmonization and certainty. Regarding efficiencies in collection; the objectives in relation thereto could be 

• Improving and simplifying the collection of VAT and its administration
• Reduce the VAT Gap and combat fraud 
• Protect bona fide traders against VAT fraud

Finally, on reducing red tape, the objectives could be 

• Reduction of administrative burden
• Simplification 
• One stop shop (B2C) and 
• Cross border VAT groupings 
• Synergies with other legislations

These other issues, which together constitute the second broad area of discussion in the Green Paper, will be discussed in further detail in the next article. As can be appreciated, many of these issues resonate with us here in India, given their centrality to the design and model of the dual GST that we wish to bring about.

The author is Executive Director,PricewaterhouseCoopers Pvt. Ltd. pwctls.nd@in.pwc.com

Supported by Rahul Renavikar and Abhishek A. Rastogi