As the government hopes to pass the constitutional amendment bill on GST in the upcoming session of Parliament, there are many who say it is a half-baked bill as petroleum will still draw existing taxes, even though it will be within GST. However, David Raistrick, Managing Director of Deloittes global indirect tax team, says it is a right strategy to begin with. He tells Indivjal Dhasmana that foreign investors are eagerly looking at developments related to GST. Edited excerpts:
According to constitutional amendment bill on GST, petroleum will be kept within GST, but the federal government and state governments will be allowed to charge the present taxes--central excise duty and VAT. Do you think this is a right strategy?
The move is a welcome measure towards rationalization of the GST regime. The inclusion of petroleum products has been a matter of concern for the Centre, State and the industry. States were distressed on account of loss of revenue and the autonomy to tax petroleum products. The existing regime on petroleum product is complex. There are restrictions on input tax credits on both Central and State levies. By bringing petroleum products within GST regime possibly at zero rate and at the same time charging excise duty and sales tax will keep the government option open and enable migration into full GST at a future date without going through the rigmaroles of constitutional amendment. This approach of keeping petroleum within the GST regime mirrors that seen elsewhere around the globe, and in my opinion is the right way forward.
Besides petroleum, the other issue was the compensation to states due to revenue loss after GST is rolled out. Did similar disagreements occur when GST came into force in other places?
India is a unique federal republic where the Constitution empowers the Centre and the State to levy taxes on specified subjects. Introduction of GST elsewhere did not face this specific issues, with the exception of a few nations such as Canada where it was necessary to have a form of “dual” system so that both the State and Federal government raise an element of the GST each. However, in the vast majority of countries this has not been an issue.
A sub-panel of our state finance ministers has recommended GST rate at the central level of 12.77% and 13.91% at the state level. Currently, the state-level VAT is 12.5%, central level excise duty is 12%. Central service tax rate is 12%. But, states cant impose service tax. Is the GST rate too high or is it okay?
The National Institute of Public Finance and Policy (NIPFP) in its report determined, under various scenarios, RNR (Revenue Neutral Rate) up to 27.54% comprising of CGST of 12.77% and SGST of 14.77%. The recommendation caused turmoil, and the support from the sub-committee of State Finance Ministers aggravated it.
The rate is much higher than that recommended by the Thirteenth Finance Commission and the rates discussed while contemplating the introduction of GST. The assumptions such as coverage of petroleum and liquor products, real estate, rate of CST, etc. used for deriving the rates may be revisited to reduce the RNR to a rationale level.
Globally, economies have embraced a modest rate at the time of introduction of GST and gradually moved to a higher rate. The difficulty I have with commenting on whether this rate is too high is that it Is not a straightforward exercise to compare this directly to the total tax currently levied. If one is to assume that the total indirect tax collected is broadly similar to under the existing regime, then the rate would appear to be okay.
The GST Council will have federal finance minister and state finance ministers in it. Federal FM will have one-third vote, state FM together will have two-third votes. Any decision on GST could be altered by 75% of the votes. This means that neither the federal government alone or state governments alone could bring about changes in GST. What is your take on it?
The GST Council is a good idea. The Council is statutorily empowered to decide all operative aspects of GST including which of the extant taxes should subsume into GST, coverage, determination and review of tax rates. It will also recommend on the manner of distribution of taxes on inter-state trade. In the EU, a VAT Committee is set up under Article 398 of the VAT Directive to promote the uniform application of the provisions. However, it is only an advisory committee and does not have any legislative powers. The VAT Committee cannot take legally binding decisions but can give some guidance on the application of the Directive.
How are foreign investors looking at developments surrounding GST in India?
Indirect tax costs, strict rules, restrictive regulations and bureaucracy are barriers to international trade for MNCs operating in rapidly growing markets such as India. The introduction of GST is expected to create a unified market, which will usher in greater transparency and accountability, besides making it easier to do business for foreign players. There is a buzz in the international community of India being the next big destination for doing business. A GST regime that is similar to that in use around the world makes India more attractive to overseas business, and is being viewed very positively. The current regime is seen as being complex to operate and can be a barrier to international companies.
Place of service rules are still being deliberated in India. If there is a service like IT, which is consumed in several states, where do you think the tax should be levied-- at headquarter level or at branch level?
The present place of services rules do not address such a situation. Further there is no official document in the public domain which discusses such transactions. However, the OECDs VAT/ GST International Guidelines, talk of the place of taxation for cross-border supplies of services and intangibles to businesses established in multiple jurisdictions.
In cases where the services are used by one or more establishments other than the establishment that entered into the business agreement, the taxing rights are allocated in two steps. In the first step, taxing rights are allocated to the jurisdiction where the customer establishment that enters into the business agreement is located. In the second step, taxing rights are allocated to the jurisdiction where the customer establishment that uses the service or intangible under a recharge arrangement is located.
Although India is not a member of OECD, cooperation between India and the OECD has increased over the years. India is now able to contribute to the work agenda of OECD in areas such as taxation and fiscal affairs, competition policy and financial education and literacy, to name just a few. India could draw a feather out of the OECD guidelines for such complex transactions.
I would expect the above to be applied in India to avoid issues with non-taxation of services. This will continue to be a major issue as the global economy becomes ever more digitized and it appears sensible for India to adopt similar principles to those seen elsewhere around the world.
Some advanced nations like US does not have GST. How do they cope up with the idea of common national markets in terms of tax rates and cascading effect of taxes?
The US currently operates a Sales Tax regime, which is a form of indirect taxation, although different to GST. It works well for an internal market, but has seen stresses emerge over the last few years as the economy becomes more digital. There are also taxation issues as they relate to the international movement of goods and services. I believe that a GST regime would work better, although this would face a number of state and federal government hurdles and is unlikely to lead to the introduction of GST in the short term.
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