Finance Commission may consider compensation for States to advance the implementation of a “Flawless” GST
GST
Dated:- 29-6-2009
Dr. KELKAR ADDRESSES 3rd NATIONAL CONFERENCE ON GST FOR ACCELERATED ECONOMIC GROWTH AND COMPETITIVENESS
Following is the text of the Speech delivered by Dr. Vijay Kelkar, Chairman Thirteenth Finance Commission on the occasion of ASSOCHAM 3rd National Conference on "GST for Accelerated Economic Growth and Competitiveness", organized here today:
"Introduction
It is indeed a privilege to be present at this seminar on "GST for Accelerated Economic Growth and Competitiveness" and share some thoughts on the Goods and Service Tax.
Over the past fifteen months, in my capacity as Chairman of the Finance Commission, I have had the privilege of visiting twenty five States in our country and discussing with the respective State governments their views on our Terms of Reference and how the Commission should go about its work.
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r organizing this seminar which will be addressed by important policy makers and implementers. I am confident that this seminar would result in a set of concrete recommendations that can be forwarded both to the Government of India as well as the Empowered Committee of the State Finance Ministers for their consideration. As you will all agree, policy can be best influenced when it is still malleable and I urge not only ASSOCHAM but also all the other trade associations to closely study all possible ways in which the GST will impact their membership and put forward their views on the various issues as early as possible in anticipation of, rather than consequent to a draft GST law which may be put up for discussion.
Much can and has been said on the merits of the GST. It will bring about a phase change on the tax firmament by redistributing the burden of taxation equitably between manufacturing and services. It will lower the tax rate by broadening the tax base and minimizing exemption
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deed a staggering sum and suggests the need for energetic action to usher the GST regime at an early date. I will attempt to address important questions relating to effective implementation of the GST regime.
Concerns relating to GST
Most concerns expressed about the implementation of GST can broadly be divided into three categories –
a. Design issues
b. Operational issues.
c. Infrastructure issues.
I shall take these up one by one.
Design issues:
What should be the design of the GST ? The broad framework of GST is now clear. This is on the lines of the model approved by the Empowered Committee of the State Finance Ministers. The GST will be a dual tax with both central and State GST component levied on the same base. Thus, all goods and services barring a few exceptions will be brought into the GST base. Importantly, there will be no distinction between goods and services for the purpose of the tax with a common legislation applicable to both.
However a number of issues r
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the Revenue Neutral Rate the Task Force assumed that apart from VAT, stamp duty, vehicle tax, taxes on goods and passengers, taxes and duties on electricity, entertainment tax, entry tax, luxury tax, taxes on lotteries, betting and gambling, purchase tax as well as all State cesses and surcharges will be subsumed into the State GST. Central Sales tax will stand abolished. From the government of India side, Central excise, additional excise duties, service tax, Additional Customs duty (CVD), and all cesses and surcharges (other than educational cess) will be subsumed into the Central GST.
There appears to be agreement that the best option would be a bare minimum number of rates, at best two, preferably one. We assume that a single rate structure will find favour with a very limited set of exemptions available for basic foodgrains as well as basic education and health services. This single rate will ensure low compliance costs, obviate classification disputes, and ensure uniformity of
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view is taken on the rate to be applied as well as on the exemption regime which should be adopted. The report of our Task Force will be published on the Finance Commission's website shortly and I hope that that this will contribute to better awareness and constructive policy dialogue.
Rules of Supply for goods and services
While CST will be abolished in the GST regime, the treatment of inter state sales will need to be carefully thought through. It would be necessary to guard against tax arbitrage where local sales which will be taxed could be shown as inter state sales which will not. The CST Act provided for documentation to attest the interstate nature of the sales. A number of models are being examined by the Empowered Committee which will serve as alternatives. Since the final model adopted would have a direct bearing on the ease of inter state trade transactions as well as the compliance cost, I would urge that all trade and industry associations involve themselves in thi
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on eligibility is equally diverse. The list of exempted goods also differs across States. To allow for uniform treatment of inter state transactions nationally, it may be necessary that these variations be bridged so that tax cascading is eliminated. However, the concerns of smaller States need to be kept in mind. For this reason, perhaps such convergence could be targeted over a certain period of time rather than immediately.
Operational Issues
Common Approach
For GST to be successful, all States and the Centre should implement it in a similar fashion. Only this will bring about the national common market which is one of its goals. This will be possible when there will be a common law, a common assessment procedure and perhaps even a common return. The Empowered Committee can provide the required leadership to engender this uniformity of approach between all the States amongst themselves and also with the Union government.
Sharing of information
Recent experience relating to re
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discussed earlier. Given the volume of such transactions, this system necessarily has to be IT based. The present system Tax Information Exchange System ( TINXSYS) does not appear to be fully operational across all States. There are asymmetric benefits to States in putting in place such infrastructure and this appears to be affecting their incentives to do so. We need to put in place a system which will uniformly incentivize all States to participate in and contribute to the verification system. Or alternatively, one central agency could be charged with maintaining this system. Both the alternatives available are challenging, but this needs to be done.
Checkposts
Most States have put in place a system of checkposts on its road borders. Apart from other verifications which may take place, these checkposts verify and document inter-state sales of goods carried by the vehicles which cross these borders. These details are then cross verified with the VAT returns of the importing dealer
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st and the importing States checkpost. Both these checkposts are often located within a couple of kilometers of each other and a vehicle driver has to spend considerable time in both. Perhaps, it may be possible for both the States to put up a combined checkpost. Officials of both States could sit together and conduct their verifications in one checkpost. Or one State could handle traffic on one direction and the other State in the other direction. But essentially there would be only one check per border for a goods vehicle. Such an arrangement will significantly reduce travel time. The Finance Commission is prepared to support creation of such checkposts if the respective State governments are willing to operate jointly.
Impact on Small Enterprises
The impact of GST on small enterprises is often cited a concern. On the State GST component, the position will be exactly the same as under the present VAT regime. There will be three categories of small enterprises in the GST regime. Th
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stions from trade bodies on how this issue can be addressed.
A "Flawless" GST
Ideally the GST would subsume all the major State Level taxes, use a single rate, allow for only essential exemptions and eliminate all barriers to trade. This flawless GST will feature the following characteristics.
Harmonisation
For GST to be effective, there should be identical GST laws across States as well as at the Centre. I propose that not only the law but also the methodology relating to levy, assessment, collection and appropriation of the GST should be similar across States and the centre. Such a unified approach will simplify procedures, eliminate bottlenecks and drastically reduce transaction costs for dealers, enabling them to leverage cost and time gains from the new taxation system. Necessarily, such an approach requires that tax rates for most goods and services be common across the country as should be the list of exemptions and thresholds. These considerations would need to b
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well as a mechanism for giving advance rulings would further facilitate trade and industry. Here too, associations can play a very useful role by providing advice and suggestions on the modalities to be followed.
Expanding the envelope
The broader the tax base, the lower will be the GST rate. I therefore return to an issue raised in the 2003 FRBM Task Force report – the taxation of real estate. The construction sector is a significant contributor to the national economy. Housing expenditure dominates personal consumption expenditure. Further, the present piece meal taxation of this sector encourages perverse incentives. Raw material is charged CENVAT, the works contract is charged VAT and stamp duty is levied on the sale. With no provision of input tax credit in place, there is little incentive to record such transactions either at the construction stage or at the sale stage at their correct value. This leads to substantial loss of tax revenue and fuels the parallel economy. I am awa
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y examined, it must also be recognized that while implementation of the GST is aimed at being revenue neutral to the States, it will be budget positive for the government. This is because governments are large purchasers in the market for their own consumption and their cost of procurement will come down significantly with the implementation of GST. Apart from these static benefits, dynamic benefits will be generated in the medium term through more economically efficient production, improved competition and more importantly greater employment.
Role of the Finance Commission
It is possible that some States may want assurances that existing revenues will be protected when they implement GST. The Commission is willing to consider providing for compensation in order to advance the implementation of a "flawless" GST.
Next Steps
I have shared with you my views on what should be some of the goals of the Goods and Services Tax. I am acutely aware that there has been as yet no
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