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GST: Well Begun OR Half Undone?

Published on Sat, Dec 20,2014 | 12:11, Updated at Mon, Dec 22 at 16:40Source : CNBC-TV18 |   Watch Video :

It’s hot off the press! Just hours ago the parliament tabled the GST Constitutional Amendment Bill. It’s a Bill that makes important concessions to State governments. Alcohol is out of the GST. And petroleum products are in…but out - that is they will not be subject to any levy till further notification. Compensation to the States may extend to 5 years and there’s a twist in the tale - for two years an up to 1% tax will be levied on goods by the Centre and assigned to States. You know what they say about well begun and half done? Well today we find out whether this version of the GST is well begun or half undone? CNBC-TV18’s Menaka Doshi puts that question to Lakshmi Kumaran of Lakshmi Kumaran & Sridharan and Rajeev Dimri of BMR.

Constitutional Amendment Bill
Alcohol: OUT
Petroleum Products: IN & OUT
States Compensation: 5 YEARS
1% Additional Tax: TWIST IN THE TALE
Doshi: The fact is that the Constitutional Amendment Bill makes a mention of them but there will be no GST levy on them. Which petroleum products are we talking about specifically and what does all of these mean for those particular industries?

Constitutional Amendment Bill
    -  ‘In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council’
    -  GST Council: Union Finance Minister + Union Minister of State (Revenue/Finance) + State Finance Ministers
Kumaran: Petroleum products in this case what they are talking about is motor spirit i.e. petrol, kerosene, diesel, Aviation Turbine Fuel (ATF) etc. The State revenue on these petroleum product sales is considerable and they don’t want to give it as VAT at this point of time. So, what the proposal is, levy the existing taxes on petrol, like in the case of excise charge nominee, like VAT which had been charged, sales tax let it be charged. So normal existing levies on petroleum products will continue and they will not get into the GST chain. All other products are into the GST chain and therefore these two products, namely the petroleum products will ultimately get into the GST chain after two or three years as the cap maybe.
Therefore, it is not as though petroleum products are zero rated, it is not as though they are not going to be levied at all. They will be levied, the existing levies, both excise and sales tax etc, interstate sale all those as it is going on today- it will continue and they will be brought into the GST net after two three years when the States are comfortable.
Doshi: So, they are in GST but they are in suspended animation?
Kumaran: Exactly.
Doshi: What I am trying to understand is that when we say petroleum products as Mr Lakshmi Kumaran has pointed out it seems to refer to only five products, it does not apply to all the derivatives of petroleum products which was where the fear lay. This is a big input in all industry. So, it won’t apply to tyres or paints or anything like that. It only applies to the sale of these products which in itself is, as you were pointing out in a conversation to me before, a very B2C situation as opposed to a B2B situation. The fear was if you don’t bring petroleum products in, does the supply chain of all other industries that use petroleum products as an input get impacted by this?
Dimri: I agree with you- there are two points that I wanted to make. One, the policy of exclusion of these specific petroleum products has been around since 2005. So there is no change in either the list or the thought around it. As Mr Lakshmi Kumaran has indicated that it is an extremely high component for each State and everybody is concerned about it. Again to name the products- it is crude, it is high speed diesel, it is petrol, it is ATF and it is natural gas; of which crude, ATF and natural gas is actually an industrial input largely for power and for petro products and therefore the high taxes will continue. It is the diesel and petrol which somewhat you and I consume for our cars and of course that is not the only application but it is the revenue implication that is keeping it out and that policy has remained that way since 2005 or even prior, but it is not going to impact what your concern was i.e. plastic industry and tyre industry – no, that will remain part and parcel of a normal manufacturing industry and inside GST.
Doshi: So what does that mean in fact for industries such as power that use these as fuel?
Dimri: Power is outside of GST and therefore any fuel, whether they take natural gas, whether they take any other form of fuel. Crude of course doesn’t go to power and that will go to refinery. Today there are concessionals available to power industry because fuel cost adds to the power tariff and those details will emerge as and when the draft clause and the rate schedule will come out but one thing is clear that the power industry is outside of GST; power is not included as a taxable (interrupted...)
Doshi: So, is the refining industry then?
Dimri: Refining industry in itself is not. So if crude comes into a refinery and if the refinery comes out with 20-30 different products only five products are excluded, everything else is part of regular GST.
Doshi: Is this the best way we could have done this?
Kumaran: In fact, not the best way, this is the only way they could have done it. There is a difference between petroleum products and petrochemicals. In fact, apart from petrol, you have got a product called raw naphtha. Raw Naphtha is the main raw material for the production of petro chemicals. That is not kept out of GST, it is part of GST. So, therefore, that chain continues. Only petrol is taken out of it.
Doshi: Would there be any difference in the incidence of tax on let’s say the petrol and diesel that you and I buy to run our cars?
Kumaran: Should not because the existing levy will continue.
Doshi: So you are saying this is the only way we could have proceeded on GST. This is not a half baked GST, this is not a flawed GST design?
Kumaran: Ideally all of them should have been in, but India is now trying to get into the GST in a phased manner. They don’t know what is going to happen, how much is the revenue loss etc. Since the Centre is also promising to compensate the States where there is a loss of revenue because of the GST introduction. So they want to move cautiously. So, therefore, taking into account the concerns of the State governments and they are saying, alright, we will keep this major revenue earner for you out of the scheme for the time being, learn from this experience in the next two to three years how the GST functions. By the time it will get much more statistics as to how it can deal with the petroleum products and then you can introduce it.
Doshi: You brought up the issue of compensation and it does seem that the Centre has made considerable give away to the States by agreeing to an almost five year period of compensation as opposed to the earlier position of three years. Is it a big give away?
Kumaran: Not at all; once you have fixed the blended rate for the GST regime and I am sure the parliament and all State governments are going to fix a rate which will be slightly higher than the existing ones because nobody wants to lose revenue. I don’t think there is going to be any big loss to the State governments at all.

Constitutional Amendment Bill
‘Compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years’
Doshi: Or the Centre, isn’t it?
Kumaran: Yes. You and I are going to pay for it; that is fine. The State governments were blocking the entire thing because the components are not being made part of the constitutional amendments etc. So, therefore the Centre has given away not only three but five years.
Doshi: The one twist in the tale though is this interesting one percent additional tax. The Bill says levy of on an additional tax on supply of goods not exceeding one percent in the course of interstate trade or commerce to be collected by the Government of India for a period of two years and assign to the States from where the supply originates. Where has this come from? What does it mean and again what does it mean from the larger point of view of the design of a GST?

Constitutional Amendment Bill
‘Levy of an additional tax on supply of goods, not exceeding 1%, in the course of inter-State trade or commerce to be collected by the Government of India for a period of 2 years, and assigned to the States from where the supply originates’
Dimri: Well this design is clearly against the notion of GST because we are trying to get away from this origin base of tax and therefore CST is to be phased out. This is nothing but a back door entry for CST. So while I understand the revenue compulsion that this is to protect the revenue of the States which are going to lose CST. What is not clear is whether there is additional tax of one percent; while it says for two years but there is also a provision which allows the GST council to extend the period of two years.
So, if there is some stretchablity in that what I would be most curious to know as the details emerge is- is this a tax which is available as credit to the tax payer in which case it is more a matter of compensation between the Centre and State and one State and another but it doesn’t impact tax flow to the tax payer. But if it is going to be a non-creditable tax then it is continuation of CST just by another name and that would be regressive.
Kumaran: Basically if you look at the existing tax regime there is something called goods originating State and consuming State. Originating sales - they are collecting Central Sales Tax; that goes to the particular State. In the case of GST the tax ultimately gets consumed by the Consuming State. So, the originating State loses that money. So, therefore the originating States who were contributing to the exchequer they are now worried whether they will lose that money at all. Therefore, as a temporary measure, it is again a bargain where the Centre says, okay, I will charge one percent extra for the interstate sales and give this money back to you to the originating States so that you are not immediately worried about your loss of revenue at this point of time but come to the table; let us now work together.
Doshi: Will it get a credit as Mr Rajeev was pointing out?
Kumaran: Yes, they will.
Doshi: So, from a tax payer, an assessee point of view it is not of big impact but from a State point of view at least they get that assured additional revenue so to speak?
Kumaran: Correct because that goes to them straight away.
Doshi: How prepared are companies for GST because nobody expected or nobody was sure when exactly this regime will take off?
Kumaran: At this point of time they must know now that various additional components of excise, additional duties of excise etc will all go away and so will number of State levies. Many finance ministers are very innovative in introducing new type of levies. All those things will get subsumed. There will be one common market in India. What the companies have to do now at this point of time is they wait for the actual GST law. These are only Constitutional amendments; it is merely the guidelines. In terms of this Constitutional amendment, the State government and the parliament have to now legislate. When you legislate, the rules, regulations and those things have to be necessarily gone through in very great detail and many companies have to necessarily relook at their method of supply chain and also vendor chain and whether- in this GST regime- what they have been doing till now is the right way of doing or they should tweak something to complete their supply chain management properly so that they get the maximum advantage of the GST.
Doshi: Are you happy with this GST design?
Dimri: The way I look at it is that what will happen on April 1st 2016 is the process of implementation of GST. This is not the end of implementation of GST as Mr Lakshmi Kumaran also mentioned. Overtime a lot of things have to come into it. While entry taxes is in it, we still have to deal with octroi and other things, what happens to real estate, what happens to stamp duties and other taxes, we still have to deal with two-three years later petroleum getting into it. So April 1st 2016 is the beginning of the process of GST introduction in India and not the end of that process.


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