Given that the proposed date of implementation of the Goods and Services Tax (GST) is April 1, 2010; a declaration regarding the design and architecture of GST is perhaps one of the most eagerly awaited announcements expected from the Finance Minister in the forthcoming Budget.
GST is expected to subsume the multiplicity of levies including excise duty, value added tax (VAT), service tax and thereby reduce the cascading effect of such taxes on industries as a whole. Positioned as the frontrunner of the third generation of fiscal reforms, it is expected to contribute significantly to the Exchequer; an immediate outcome of the increase in the tax base and improvement in the level of compliance which would be brought about by the new legislation.
Besides buoying the government’s revenue collections, GST is also expected to resolve some of the most pernicious problems currently faced by the industry. The first and foremost of these is the specter of double taxation. The most prominent example of double taxation is the case of software related activities. At present, the supply of customized software is not only recognized as a service under the taxable service category of Information Technology Software Service but is also treated as goods for the purposes of levy of VAT. Similarly packaged software although treated as goods for the purposes of excise as well as VAT is also sought to be subjected to service tax, especially when electronically downloaded. Similar issues plague the taxable categories of intellectual property services and rent a cab operator services to name a few.
Anomalies of such kind have arisen as there are no well understood or accepted rules for determination of whether a transaction qualifies as a sale of goods or as a provision of services. Further, given the differential tax treatment of goods and services, all stakeholders seek to make most of the tax arbitrage offered by virtue of the treatment of a transaction. At the same time, the Revenue with a view to maximize revenue collections, attempts to subject the transaction to all applicable taxes.
In this context, the proposed GST is expected to be harmonized with the HSN classification adopted for the purposes of customs and excise laws and would therefore clearly demarcate what are “goods”. Further, the proposal to levy the tax at a single rate (though at two levels i.e.at the State level and another rate at the Central level) effectively collapses the differential treatment of goods and services and is definitely a commendable solution to a long standing problem.
Another essential feature of the proposed dual GST should be the availability of seamless credit throughout the supply chain. Consequently, the problems caused by the inability to cross-utilize the credit of taxes paid at a State level against those levied by the Centre and vice versa should stand resolved. For example at present, the additional duty of excise in lieu of sales tax/VAT (‘ADC’) @ 4% is levied on all imports into the country with a view to provide a level playing field to the domestic industry. Importers are allowed a refund of the ADC so paid on production of evidence of onward sale of the imported goods. This creates cash flow issues for the importers on account of the lengthy and cumbersome process of obtaining refunds from the authorities and adds to the cost of the goods in the long run. In a GST regime, such problems ought not arise as the ADC would be routed through the credit stream and hence be an automatic pass through.
The availability of seamless credit along the supply chain also recognizes the ground reality that there is a strong interdependence between goods and services before the final product reaches the ultimate consumer. Separate and independent taxation of sales, manufacturing and services only results in an inefficient tax structure and cascading taxes, which have proven to be a major hurdle in achieving industrial growth.
The GST regime will also provide a much needed impetus to the industry as a whole. For example, the efficacy of GST is dependant on a strong Information Technology (IT) backbone. There is thus tremendous potential for the IT sector, which is one of the hardest hit by the global economic developments over the past one year in a purely business sense.
The merits of GST can clearly be seen to be many. Since the successful implementation of VAT on a pan India basis, firm averments with regard to the Government’s desire to implement this regime have been heard time and again, especially in the Budget Speeches. However, there has been no systematic dissemination of information with respect to the key aspects of the law itself or for that matter debate with the industry stakeholders to ascertain what they desire prior to drafting such legislation.
All eyes would therefore be trained expectantly on the Finance Minister on July 6, 2009 to detail out the recommendations of the joint working committee on GST, the reasons for adoption of the dual GST model and thereafter clearly spell out set of timelines for implementation of the GST regime within the proclaimed timeframe.
This article is written by the Tax Practice Group, Amarchand & Mangaldas & Suresh A Shroff & Co
