India not yet ready for GST

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The question to be asked is not whether the Goods and Services Tax can be introduced in India (the answer is that a compromise GST can be introduced) but whether India is ready for GST (the answer appears to be a no since the impacted parties dont appear ready for a compromise). There can be no two opinions about the benefits of a single indirect tax that subsumes most of the present indirect taxes, across-the-board tax credits on inputs and a value-added tax in the true sense of the term.

Compensation, entry tax and keeping petroleum out of GST are stated to be the stumbling blocks for introduction of GST. These are not new issues — they have been in existence ever since GST was conceptualised. The fact that we do not seem to have moved ahead after years of parleys does not give confidence that either side will give space to the other for a truce. The States — probably justifiably — do not want to let go of VAT and hence are seeking an amount that truly compensates them. The Centre feels this is just a mathematical number that can be worked around.

Indirect taxes

While the structure of the GST is being discussed, it is probably time to introspect on whether the nation is ready for it. Our record on indirect taxes and in particular value-added taxes has been a consistent jugalbandi of initial confusion and subsequent litigation. We took some time to define exactly what is manufacture under the Central Excise Act.

When we first thought of bringing in a value-added tax under the Central Excise Act (by permitting set-offs of taxes paid on inputs), we christened it Modified Value-Added Tax (Modvat). The use of the word modified suggested what the idea was behind the scheme. Thanks to some byzantine clauses resulting in denial of credits, Modvat soon came to be known as Mostly Denied Value-Added Tax.

In 1994, the then finance minister discovered what subsequently proved to be a goldmine — service tax that was introduced as a simple tax on services. Considering the history of Modvat, the government did not permit setting off of input tax credit for 8 years after service tax was introduced. In 2002, they introduced the Service Tax Credit Scheme, which lasted for two years, and in 2004 they morphed Modvat and the Service Tax Credit Scheme. Called the CENVAT scheme, it only added to the confusion. The introduction of service tax also saw the courts debating whether a particular transaction was a sale or a service. High Courts held different views on whether the sale of a sim card was a sale or a service and hence approached the Supreme Court for a decision. A seemingly tired Supreme Court gave a tired answer: it said it was both.

Entities that had no taxes on exports were given a choice of offsetting it against future services or claim for a refund. When the refund claims were made, the department started nitpicking on whether a security guard was essential for export of computer software and denied credit. More recently, the VAT department in Karnataka seems intent on dealing with e-commerce firms the way the Union Government has dealt with radio taxis: ban them without getting to know their business model or talking to them about it.

 With every indirect tax coming with such a complicated background, is there any likelihood that GST will be any different? We need to accept the fact that the country is not ready for GST — yet. This is not to say that there should be no litigation in taxes at all — taxes and litigation are made for each other.

However, a game-changing law such as GST cannot be introduced with our patchy and litigious track record. No GST is better than CGST — Compromise GST. That is what the present draft GST law looks like. The government would do well to fix the existing laws and then revisit GST. This break may actually help everyone.

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Source/Author: Hindu Business Line




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