GST Updates (21st Oct 2016)

Shifting the GST goalpost

October 21, 2016
The outcomes of the latest meeting of the Council tasked with steering the Goods and Services Tax regime are worrying. For one, it leaves the Centre hard-pressed to meet its intended deadline for the new indirect tax regime, April 1, 2017. Finance Minister Arun Jaitley had set a November 22 target to resolve all operational issues with State representatives in the Council so that the rates and implementation modalities could be codified into law and passed by Parliament in the winter session. When it met for the first time in late September, things appeared to be on track, with the Council agreeing almost unanimously on technicalities such as the turnover thresholds for firms to be covered under the GST and the division of administrative control over tax assessees between the Centre and the States. A time-bound road map to finalise remaining details, such as the tax rates, compensation for States in case of revenue loss under the new system, as well as the legislative actions required in Parliament and the State Assemblies, was also agreed upon.

As the winter session approaches, that spirit of cooperation has evaporated: the Council has agreed on precious little, including the tax rates proposed by the Centre. Worse, the pact reached earlier on administrative control of manufacturing sector assessees has unravelled with States raising fresh concerns. The proposal to subsume in the GST all cess levies, several of them introduced by the present NDA government, has been discarded. This was a critical part of the official GST pitch and was backed by the Council in September. But now the Finance Ministry is keen on an additional cess on ultra-luxury and ‘sin’ goods to fund compensation for States losing revenue. It has suggested a cess may be better than the 40 per cent slab for demerit goods, mooted by a committee led by Chief Economic Advisor Arvind Subramanian along with two other slabs of 12 per cent and 17-18 per cent. With a four-tier GST rate structure, a 4 per cent tax on gold (in line with the CEA’s advice), in addition to some exemptions that would be granted as tax refunds, topped with the new cess to compensate States, the new regime could well just be old wine in a new bottle, from the taxpayers’ perspective. Mr. Jaitley has explained that the rate proposals are meant to prevent a spurt in retail inflation. But to bring about convergence with States at the Council’s next meetings in November and bring its showcase reform item back on track, the government needs to return to the drawing board.  Source – www.thehindu.com [21-10-2016]

GST cess confusion: Focus should be having most products at 18% rate

October 21, 2016
The third meeting of the GST council (October 18-19), primarily to finalise the rate structure, compensation mechanism to states and issue of ‘dual control’ in tax administration can be termed as ‘partially’ successful.

There were two key outcomes from the meeting. First, there seems to be a consensus on the mechanism of compensation by the centre to the states by taking FY16 as the base year and 14% annual growth over the base year. This looks far simpler than earlier discussions about taking three years out of last five or an average of last five years, etc., for arriving at the base amount. States seemed happy with this consensus and with that the focus moved to the rate structure.

As expected, the proposal mooted was for multiple rate slabs of 6, 12, 18 and 26%. This is in contrast with earlier discussions (emanating out of the CEA report) about primarily two slabs of 12 and 18, with a proposition of 40% on few ‘sin’ or ‘luxury’ products. Having a lower rate of 6%, which seems to be primarily meant for food products and other essential items, makes sense as increasing the effective rate on these products to 12% could have been inflationary and detrimental to the common man.

The other departure from the earlier thinking was to have a new slab of 26% for certain products, possibly the ones the CEA recommended to put in 40% slab such as tobacco, luxury cars etc. Principally, this line of thinking looks reasonable, as a differential of 22% (between 40% and standard rate of 18%) was too steep and unprecedented. However, there were two big surprises here. First, there was a reference to ‘luxury products’, other than those contemplated in the CEA report. While there were no official words on the additional products which could fall here, possibility of certain consumer durable and FMCG products falling into this category was doing the rounds. Till now, the industry (including FMCG, consumer durables etc.) had been expecting a standard rate of around 18% and had factored that in their business plans. The government had also been saying that there would be a consequent price reduction in these segments as the effective rate of tax would drop from current 25-27% to around 18%, making them cheaper for the common man.

It appears that the government is trying to compare the possible GST rates with the existing rate of tax on a product-by-product basis, which may not be the best strategy, when the country is on the cusp of a radical tax reform. Instead, the focus should be to have most of the products at a standard rate (of 18%) and bank on increased consumption, more manufacturing and economic activity leading to revenue buoyancy.

The second and bigger issue is the proposal that products under this category could attract a central cess (under Article 270 of the Constitution, Centre has a right to impose such cesses) to fund the compensation to be given to states, if any. While there does not seem to be a consensus on this cess as yet, initial indications are that most states are in agreement with the mechanism. I think having a cess is not a good idea and there are many reasons for it.

To start with, right from the first discussion paper on GST, issued by the then Empowered Committee in 2009, industry has been told that all cesses and surcharges will be subsumed under GST. This has been reiterated over the years in various official documents and the government interactions, including the FAQ document issued by CBEC last month, which says that ‘central surcharges and cesses so far as they relate to supply of goods and services’ would be subsumed in GST. A simple tax rate structure, with uniform classification across states, with no additional layering of tax, was one of the reasons why GST got such an overwhelming support from all stakeholders.

Currently, many of these cesses (like automobile cess, NCCD, etc.) are applied at the stage of manufacturing only and are not credible for businesses. However, since GST is on all supplies, it is not clear whether this cess will also apply at each leg of supply chain, which would further lead to cascading of tax. Further, it seems that thinking is to have different rates of cess for different products, as the idea is to recover the differential between the current effective rate of tax and 26%, which will lead to further complications.

Also, it is not certain if the Centre would actually need to compensate the states, given the fact that there are estimates of additional GDP growth between 1-2% on account of GST. The experience of VAT also suggests that revenue growth of the states could be significant. Economists would argue that if GST rates are moderate, it would boost the consumption and will result in overall increase of tax base for the government.

It is also expected that parallel economy will shrink under GST, which could also lead to increased income tax collections. In any case, there are various taxes which are outside the GST net, which can be used as additional revenue generating measures. These include excise duty on tobacco, taxes on petroleum products, stamp duties and so on.

The other problem with having a slab of 26% is the subjectivity in defining what would constitute a ‘luxury’ product. Till a decade back, probably a television could qualify as a luxury product, which is not the case today. Same is the case with four wheelers, air conditioners and so on. Similarly, it’s a matter of debate as to whether an aerated beverage is a luxury product or not, given that studies point that more than 90% sales are made to people other than high income class.

As it is, India is making a departure from a classical GST system in many ways, including proposing the multiple rate structure, which seems to be the only realistic way of moving ahead as of now. However, imposition of cess and broad-basing of this proposed 26% slab, may be too much of a diversion from what was envisaged till now. This does require a serious rethink.  Source – www.financialexpress.com [21-10-2016]


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Hi, I am business consultant working with a team of Chartered Accountants, Company Secretaries, Lawyers & MBAs. I am promoter of " Make Your Business So Simple" "Make Education So Simple" Make Life So Simple" Make Legal Affairs So Simple".

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