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GST: Reality by April 2016?

Published on Fri, Nov 14,2014 | 22:50, Updated at Mon, Nov 17 at 16:50Source : CNBC-TV18 |   Watch Video :

4 years after it was to first go online, we now have a new date for India’s move to GST- April 2016. Or so hopes the government & the Empowered Committee of State Finance Ministers on GST. The buzz has definitely returned. Finance Minister Arun Jaitley says he expects to table the revised Constitutional Amendment Bill for GST this winter session of parliament. Newspaper headlines are once again discussing revenue neutral rates, place of supply rules and state compensation and GST experts are back on TV! To tell you whether India is on the right path or not- 2 of them join me this weekend on The Firm- Sachin Menon of KPMG and S Madhavan, formerly with EY, now an independent expert and consultant to the Finance Ministry.

Menaka: The very first important number- which is the annual turnover threshold limit for goods and services tax (GST) registration- the empowered committee has stuck with the Rs 10 lakh limit even though the government has suggested raising that threshold to Rs 25 lakh. Will Rs 10 lakh be a good threshold limit or will the total cost of getting those Rs 10 lakh turnover traders to comply be totally not worth the revenue earned?

Threshold for GST registration

Empowered Committee: Rs 10 lakhs
Government: Rs 25 lakhs
(Amounts refer to annual turnover of firms)

Menon: This is perhaps a climb down on the past position that even the sub-committee appointed by the Empowered Committee has recommended that Rs 25 lakh threshold limit as a minimum threshold limit. Now this Rs 10 lakh proposal is actually going to create a lot of administrative issues and not only that, this Rs 10 lakh means pretty much every trader is covered and you will find lot of opposition from these groups who are going under Rs 10 lakh limit. So, the point is that if you look at the revenue trend in the country it is 80-20 principle. That is 20 percent of this industry is contributing towards 80 percent of the revenue and 80 percent is contributing only 20 percent.

It is the Empowered Committee’s own admission that by reducing the limit from Rs 25 lakh to 10 lakh, the number of dealers will go up by 60 percent which means that, that much administrative cost and that much effort for managing all this. At the end of the day it doesn’t mean anything to the government. May be they may end up collecting the money which would be either equal to what they are going to spend i.e. cost of compliance or may be spending a little more than what you collect.

Menaka: If GST is supposed to be all inclusive and it is this one tax that is finally going to make a large number of Indian tax payers pay so to speak then isn’t Rs 10 lakh worth the effort?

Madhavan: Let me make the point here that all of the progress on GST and it is commendable the progress is largely independent of views of industry - organized and unorganized sectors. So, this is something that the administration has set out as what it believes to be an appropriate GST. So, that’s the caveat. In other words, stakeholders such as industry are not yet on board and they haven’t been privy to any of these discussions.

As to the threshold, which is the initial point that you are making, well Rs 25 lakh itself is an inadequate number and I concur with all that Sachin talks about in terms of cost of compliance and administration of those small tax payers. Bear in mind that there are two elements to this discussion of thresholds - one is to register them ahead of the payment of the actual GST and then to require them to pay the GST beyond that particular subsequent level of turnover. So, we are talking about a very low threshold not only for the registration itself but then for the payment of the tax. The initial number on the table, if my memory serves me right because it was several years ago, was not Rs 25 lakh; it was Rs 40 lakh. When the initial recommendation went form the Empowered Committee to the Finance Ministry, the Ministry requested a relook and the empowered committee has done the relook and reiterated its stand that it ought to be Rs 10 lakh. So, clearly a very low threshold and world over you will not have- relative to the tax payer base - such a low threshold.

Menaka: Let me come to the very important number- even more important than this threshold- which is the revenue neutral rate. Now it seems that the Empowered Committee Sub-committee has proposed a 26.7 percent revenue neutral rate. That works out to the State GST coming in at 13.9 percent and the Central GST come in at 12.8 percent. I am not sure if this is the final rate because the other thing we hear is the National Institute of Public Finance and Policy (NIPFP) has been asked to recalculate the rates. However at 26.7 percent or 27 percent, aren’t we working with too high a GST rate?

Revenue Neutral rate

EC Sub-Committee proposes 26.7%
State GST at 13.9%
Central GST at 12.8%

Reports indicate NIPFP to recalculate rates

Menon: It is indeed prima facie that rate has actually created lot of hurdles in implementation of GST because I am sure that there will be opposition coming from the industry itself to say that at this rate perhaps GST would be workable or not. They also have provision for merit rate; merit rate is supposed to be a lower rate for essentials. For example for a medicine or some of the food items - 12 percent. So, if you are taking out that 12 percent, what is the rate and then that is what is 27 percent? The other one is that if rates are uniform, single, then what is the rate which is coming to almost to about 23-24 percent. So there are two ways that it is done.

Menaka: If we were not  to adopt a merit rate and therefore the revenue neutral rate would come down to 23 or 24 percent keeping in mind the calculations of 26.7 percent would that be more acceptable or both numbers are too high?

Menon: It will still be high because this entire calculation didn’t take into consideration what is the kind of additional revenue generated because some of those traders or the dealers who are so far not on records coming into the GST mainstream is not considered, which is considered to be almost one third of the total tax collection which is collected today.

Menaka: Sachin was telling me that the 13th Finance Commission recommendations suggested a 12 percent revenue neutral rate keeping in mind exactly the point Sachin had made which is that the tax net widens through an imposition of GST and therefore the total revenue collected goes up. 12 percent and 27 percent that would lead me to a conclusion that we have really not made any progress on the most key aspect of GST which is the revenue neutral rate.

Madhavan: Very depressing but true because let us understand the premise and the promise of the GST under which this whole initiative began many years ago. The idea was to broaden the tax base and therefore as a corollary to broadening the tax base you moderate the tax rate. In other words, the idea was to broaden it from what the base was which is admittedly narrow today and therefore moderated from an aggregate of whatever it is 25-26 percent across the excise, service tax and the value added tax (VAT) aggregate to a much more moderate tax rates. Expectations have been around 14 to 16 percent if not 12 percent as per the 13th Finance Commission. We are now suggesting that we keep some large categories of product out and we are happy to talk about petroleum particularly but equally alcohol and tobacco. These are very significant product categories from a revenue collection stand point of the States. If we keep those products out and then stay with 25 or 27 percent aggregate taxation under the GST, then what is the premise and promise of the GST? You are negating the entire element or the ability of the GST to foster efficiencies and productivity with the economic system so that you get to the ultimate goal. Bear in mind that GST is a means to an end. The end being to get the gross domestic product (GDP), to double digit rate of growth over a period of time at least in the medium-term if not in the short-term. That premise clearly will not happen if we continue with the 27 percent aggregate tax and we keep several product categories outside the tax net.


States ask for petroleum, tobacco & alcohol goods to be excluded from GST

Constitution Amendment Bill seeks to subsume petroleum products

Menaka: You have answered my last point that I wanted to talk about to gauge how far we have come and that is the exclusion of petroleum, alcohol and tobacco products. I will get your comment in then on the entire list of issues that we have spoken about because Madhavan has already touched upon the fact that if we keep so many products out, you are really not implementing the GST in the way you should. Have we truly made progress in the last couple of years that GST has been under the radar so to speak? Because that will then lead me to answers for my next question which is can we make it to the April 2016 deadline?

Menon: There are some fundamental issues to be finally sorted out but generally if you speak they have made lot of progress in this because there are deliberations happening …. (Interrupted)

Menaka: They have made all the progress without consulting industry.

Menon: Compensation was one of the issues which is more or less sorted out; it was one of the main issues. Constitution amendment is another issue where they say that we have to keep petroleum in the amendment itself.

Menaka: So States wanted the exclusion of petroleum to be included in the Constitutional Amendment Bill?

Menon: Yes, which more or less they have agreed on that.

As far as tobacco is concerned, it is in now. Alcohol it is decided that it will remain outside. Wherever there are high duty tax items like petroleum or alcohol, the central governments proposal is that you collect that under a different tax in addition to GST.

Menaka: Will we make it to that April 2016 deadline; is it realistic? Now under that I identified three things that we must be able to do which is to get all the States to agree on a common design for a GST and am not sure whether that’s already happening because just a few months ago, we had Gujarat raise the issue of perpetual Central Sales Tax (CST) collection in order to protect their revenues to some extent. Then you have got the state compensation issue. I don’t know how much progress we have made on the Centre and the States agreeing on that. However I did read that the Finance Minister said that the first tranche of compensation will be discussed in the winter session and the third bit is National IT framework which is the only area where I seem to get the best responses where everybody says yes considerable amount of progress has been made. Are we ready for April 2016?

States consensus on design?
-    Gujarat proposes continuation of sales tax levy at source

States consensus on compensation?
-    FM proposes 1st tranche to be discussed in winter session

Readiness of national IT architecture?

Madhavan: It depends on what you mean by ready for GST and what nature of the beast so to speak. If you ask me the question will the Centre and the States agree to a uniform GST design? The answer is yes; there has been considerable progress and I agree with Sachin when he believes that enough progress as been made.

Not withstanding Gujarat, not withstanding Tamil Nadu and the marginal States who sought of are playing a game of brinkmanship for a variety of reasons. I nevertheless believe that between now and April, the States and the Centre clearly will see eye to eye because the Centre has made a lot of concessions in terms of exclusions, in terms of thresholds and so on and so forth. So the Centre is more than meeting the States half way on that model.

Now the question then is what nature of the GST do we expect to bring in in April 2016? If the present 27 percent aggregate GST rate, with the exclusion of several product categories and with all the other elements of the GST design which we do not have the time to talk about today - if that is the understanding, then I am afraid the version or the particular kind of GST that they will bring dual GST. Bear in mind it is not typically well known across the world which used to a unified GST. So we are grappling with the dimensions and the challenges surrounding a dual GST; not to speak of these other design elements. So we might have a GST which is imperfect, unfinished and perhaps halfway house.

Menon: The Indian GST in many ways is unique. I don’t think anywhere in the world we have dual GST as we are doing right now with so many exclusions and exceptions etc. So we will never have a perfect GST; that’s a fact. If we wait for a perfect GST to come and then introduce GST perhaps GST will not see the light of the day for the next one more decade. May be the good idea would be to start with the GST and involve industry, take their feedback as Madhavan said; even 80 percent if we get it right that is good enough.

Menaka: Are we on track to get even 80 percent because Madhavan seems to be saying halfway house which means we have got only 50 percent right?

Menon: I would imagine that now most of the suggestions made by the Empowered Committee, the Centre are perhaps not going to accept it; that’s what I am getting. The Finance Secretary has conveyed that this may not be possible.


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