GST Updates (26th Oct 2016)

Govt Firm on Multiple Rates and Cess on Luxury Goods

October 26, 2016
Notwithstanding criticism, the government is of the view that the proposed cess on luxury and sin goods under the goods and services tax (GST) regime is the best way of creating a corpus to compensate states for any revenue loss, as consumers will have to pay significantly more if the fund is financed from regular taxes.
The government is also firmly backing its four slab-GST structure as it feels it’s the most appropriate system for a country where indirect taxes contribute a big percentage of the exchequer’s revenue and where tax rates on mass consumption items should remain low.
The proposed tax structure has been criticised for being complicated and one that defeats the purpose of a single neat GST while the cess is seen as distortionary and one that would lead to cascading of taxes.
The GST Council, the apex body on the new tax regime, will meet again on November 3-4 to freeze the tax rate. The government is confident that consensus on the cess and the slabs will be arrived at in this meeting.
The government is targeting a Rs 50,000-crore corpus to fund states for any loss of revenue under GST and has proposed a cess on luxury and sin goods for this purpose.
The benefit of the cess is that it would entirely accrue to the Centre and could then be distributed to states.
The other option, backed by some states and experts, is to raise the highest tax rate instead as cess would cause cascading of taxes and would distort the GST. But, under this route, to create . 50,000-crore fund, the government estimated it would have to raise revenues of over Rs 1.7 lakh crore from tax paying consumers.
This is because of two reasons -42% devolution out of Centre’s taxes to states under the Fourteenth Finance Commission and sharing of GST.
In order to retain Rs 50,000 crore in the compensation fund, the centre would need about . 86,000 crore in additional tax before 42% devolution to states.
The NITI Aayog has also defended the cess despite its shortcomings in that there would not be input tax credit and said that it would anyway be temporary , as it would compensate the states for loss of revenue in the first five years of GST.
Former finance minister P Chidambaram has criticised the proposed multiple rates. roposed multiple rates.
“A well designed GST is expected to have standard rate, plus and minus standard rate.
That latitude interpreted to me as multiple rate -zero to 100 that’s not GST. That is simply existing VAT rates in a new shape, old wine in a new bottle,“ he had said.
But the government is keen to press ahead with the four slab structure for GST, as it believes this is the best way of ensuring against revenue loss, while at the same time protecting consumers.
Under the proposed structure, some goods will be exempted from GST while others will be levied 6%, 12%, 18% and 26% rate.
The government expects goods taxed at 6% to account for 7.08% of tax base, the 12% slab to account for 28.3%, the 18% slab to account for 31.04% and the highest 26% rate to account for 24.8% of total revenue. Gold taxed at 4% will get the balance 8.7%.
European countries too have multiple levies and if one takes into account the differential VAT rates for tobacco and alcohol, most of these countries effectively have four rates. – [26-10-2016]

Revenue neutral rate structure of GST to be finalised next month

October 26, 2016
Asserting that the government is determined to implement GST from the next fiscal, Economic Affairs Secretary Shaktikanta Das on Tuesday expressed confidence that the revenue neutral rate structure will be decided the next month. “The rate structure on which there is a lot of discussion going on at the moment with the GST Council and also in the public domain… will get resolved in the next meeting of GST Council in the first week of November. Maybe, one or two sittings, it should come to a conclusion,” Das said at an Assocham event here. Dismissing criticisms, he said the rate structure has been prepared based on “a very practical basis”. –[26-10-2016]

Right Click: PMO Steps up to Hear Ecomm Complaint

October 26, 2016
The Prime Minister’s Office is looking to address complaints by ecommerce companies that the current rules are too restrictive pending the drafting of a longer-term plan for the key job generating sector by a NITI Aayog committee.
A meeting of top officials was held at the PMO on Thursday to discuss a range of issues including taxation, marketplace curbs and the offline-online conflict.
“There are a number of issues confronting the sector, including foreign investment, taxation,“ said a government official who attended the meeting. “The idea was to take a stock.“
The government has already set up a committee under NITI Aayog chief executive officer Amitabh Kant to review the ecommerce policy and issues faced by companies.
The PMO was drawn into the matter after ecommerce players approached several departments with multiple issues and in the absence of a single nodal ministry.
The Department of Industrial Policy and Promotion (DIPP) had issued a press note in March laying down a new foreign direct investment (FDI) framework for ecommerce aimed at creating a level playing field vis-à-vis brick and mortar businesses. It allows 100% FDI in the marketplace model through the automatic route but such entities are not allowed to influence prices by offering discounts. Moreover, a single vendor cannot account for more than 25% of sales on an online marketplace. On the other hand, offline retailers met finance minister Arun Jaitley last week to press their case and raise the issue of unfair competition from online players through what they described as predatory discounting. Taxation has emerged as a major irritant for the ecommerce sector along with restrictions imposed by state governments.
States like Gujarat have imposed a separate entry tax on goods sold on online portals while others want to impose value added tax on top of the Centre’s service tax.
The ecommerce companies say they only facilitate sales and are not sellers themselves so they should only face service tax. States such as Uttar Pradesh even require consumers to file declarations with the state VAT department for goods above Rs. 5,000.
The NITI Aayog committee is expected to submit its report in a month’s time, spelling out a clear framework and bringing about predictability in the overall sectoral policy. Morgan Stanley estimates India’s ecommerce market will swell to $119 billion by 2020. The government sees ecommerce as having a huge potential for job creation by providing market access to small entrepreneurs and businesses that would find setting up physical retail establishments too expensive. – [26-10-2016]

Govt sources say cess is a better option than high tax rate

October 26, 2016
Just a week before the next Goods and Service Tax (GST) Council meeting on November 3 and 4, the view of states being compensated through a cess rather than a hike in the proposed GST rate has gained strength, with the Centre telling them that an increase in the tax rate has to yield around Rs 1.72 lakh crore. On the other hand, a cess which will yield Rs 50,000 crore a year would be enough to compensate states.

The Centre has proposed a four-slab structure — 6 per cent, 12 per cent, 18 per cent and 26 per cent— under the proposed GST and a cess beyond 26 per cent on luxury and sin goods. States are expected to lose around Rs 50,000 crore a year, which would be compensated by the Centre in full for the first five years. If the GST rates are raised beyond 26 per cent on luxury and sin goods, it must yield Rs 1.72 lakh crore to the states and the Centre, government sources said. This is so because half of this would be state GST, and of the remaining half— Rs 86,000 crore — 42 per cent, or around Rs 36,000 crore would go to states. This would leave Rs 50,000 crore in the Centre’s hands to compensate states.

The other option could have been to raise direct taxes, which did not find favour with the Centre, sources said.
While there has been demand from various quarters to have a maximum rate of 18 per cent, the government sources said it would have meant a Rs 1 lakh crore revenue loss to the Centre’s exchequer. This would have to be offset from increasing tax rates on items consumed by the poor, they said.

On the other hand, a 26 per cent peak tax rate would be mainly on consumer durable goods such as refrigerators which already are taxed at the combined rate of 25 per cent. So, there is not much of the difference between existing rate and the one proposed under the GST regime.

Moreover, there is no cascading and leakages under the GST regime which would save another 2-4 per cent on taxes, which should also be taken into account while comparing the present structure with the proposed peakGST rate.

The proposed GST, including a cess, would lead to a total of Rs 9.32 lakh crore to the Centre’s kitty.
The sources said that one can argue that the proposed GST is not an ideal one, but the government’s hands were tight.

While many experts have crticised the multiple tax rates proposed by the Centre for GST, the sources said even in Europe there are specific rates for products. while Luxembourg has four rates, other countries in theEuropean Union have three slabs. Former finance secretary Vijay Kelkar who headed the 13th Finance Commission that gave recommendations on GST, recently said the proposal was disappointing as it would rob the GST of its efficiency enhancing potential.

He had said the impact of the tax rate proposals on the economy would be only one fourth of the high potential impact that the 13th Finance Commission had estimated.

The next GST Council meeting’s agenda will be a packed one as it is expected to decide on the much-awaitedGST rates. Also, the issue of administrative control over tax assesses or dual control — claimed to have been settled earlier — has been cropped up and it will be decided upon at the meeting slated for November 3-4. In the last meeting on October 19, the Centre and states did manage to reach a broad agreement on the formula for compensation to loss-incurring states and a cess over the peak rate to fund the compensation.

The details of these, however, would be worked out at the next meeting, before tax rates can be fixed. Source - [26-10-2016]

GST will be game changer for media, entertainment industry

October 26, 2016
Minister of Information and Broadcasting M Venkaiah Naidu on Tuesday said the Goods and Services Tax (GST) will be a game-changer for the media and entertainment industry.

He also said that the media and entertainment industry needed to outline a firm roadmap to ensure the convergence of networks, devices and content, the core elements of the digital entertainment process.
“The Make in India, Skill India and Digital India campaigns are clearly positive signals of the new transformation including GST which is expected to be a game changer for the sector,” he said.

“The growth of varied platforms such as 4G, broadband, mobile technologies, digital media has enabled the sector to move towards convergence across platforms and content,” Naidu said addressing the 5th edition of the CII Big Picture Summit here.

“The Indian media and entertainment industry needs to outline a firm roadmap to ensure the convergence of networks, devices and content, the core elements of the digital entertainment process,” he said.

He also called upon the industry to give recommendations for tackling the “acute shortage” of professionals across different segments and assured the government’s commitment to work with the industry to develop infrastructure.

He said that there is a huge opportunity to transform India into a global hub for film shooting location and digital media.

“Our films, actors, content, technology are expanding footprint to new and emerging global markets, and the aim of the government is to make this transition smooth by creating an enabling regulatory environment,” added Naidu.

Speaking on the occasion TRAI Chairman R S Sharma said India was in the midst of a digital revolution which warranted creation of new business models.

“Given the changes and the convergence that this digital revolution is bringing, it is essential that a clear regulatory framework is put in place in order to minimise potential litigation,” said Sharma. Source –[26-10-2016]

Who killed GST?

October 26, 2016
It is becoming increasingly clear that what was expected to be a game-changing reform by ushering in the goods and services tax (GST) may end up being closer to a name-changing exercise. This statement is likely to be perceived by some as an exaggeration, but just consider the facts.

The proposed GST regime was to have replaced a plethora of taxes paid at different stages with a destination-based tax to be levied at one or two different rates with the benefit of a set-off for the taxes paid out in earlier stages of the value chain. The idea was also to avoid exemptions so that the overall rates remained reasonable without being unduly inflationary.

But what you may actually have instead are seven different rates of taxation under GST. Government officials would of course have you believe that there would be only four rates of taxation — the lowest being six per cent, followed by 12 per cent, 18 per cent and 26 per cent on what are called demerit or sin goods including luxury items. What they do not count, however, are three more rates — a zero rate for items that will remain outside the new tax regime, a four per cent tax on gold and acess rate on the highest slab of 26 per cent, aimed at compensating the states for their revenue loss.

Even after assuming that there would be four rates – ostensibly to protect the poor from high taxes and to tax the sin goods at a higher rate – the multiplicity of tax rates, along with a long list of exemptions will be enough to damage the fundamental structure of GST. Four rates would inevitably give rise to classification disputes over what items should be taxed at what rates, allow discretion to the taxman and his political masters in deciding what rate should be levied on what items and, most harmfully, encourage business lobbying, often resulting in illegal gratification of a few powerful people in the system.

In contrast, all the problems arising out of classification of disputes, discretion and lobbying by vested interests could have been addressed by opting for two rates —one standard and the other lower to address concerns over inflation in basic essential items like food. Remember that most expert committees have recommended an average revenue-neutral rate of 12-18 per cent.

The committee headed by Chief Economic Advisor Arvind Subramanian has suggested a standard rate of 18 per cent and a lower rate of 12 per cent and explained that the inflationary impact under such a structure with a revenue-neutral rate of 15 per cent would be minimal. The committee has also convincingly argued that precious metals like gold should not be taxed at a low rate as now but at ahigher rate as these are not items of purchase by the poor.

Yet, the die seems to have been cast in favour of aGST structure that will have at least four tax rates, several exemptions and a cess on sin goods. There are many other imperfections in the current proposal. For instance, the service tax could well be levied at three different rates, instead of just one standard rate (with 10 abatement rates) at present, which might give rise to a new set of classification disputes. The dispute between the Centre and the states over the jurisdiction of service tax assessment has not been fully resolved. The registration requirements for trade and industry are not yet fully free of complications. But these problems will pale into insignificance when compared to the larger problem of multiple rates, many exemptions and the continued levy of cess.

So, who is responsible for the GST dream turning sour? Is it India’s tax bureaucracy that continues to enjoy a tremendous clout in the administration of tax policy? Imagine a GST structure where there are only two rates for both goods and services, with virtually no exemptions and no cess! There will be no disputes over classifications and no scope for shifting some items from the highest rate to the lowest or the one above that. Discretion will go away. The tax appellate bodies will have less work.

Could it be that the revenue departments of the Centre and states were not comfortable with the idea of two rates and had argued that it would adversely affect revenue collections? For finance ministers, this would have been an alarm signal. No finance minister would like to lose revenue and widen the fiscal deficit. Some finance ministers in the states could have even seen merit in retaining the flexibility of multiple rates which would have given them the leeway to juggle around with rates to address concerns of specific interest groups. Finance ministers are also politicians and none of them probably would like the idea of a GST that could have been accused of having fuelled inflation. Hence, perhaps, their desire to keep a low rate and more exemptions, never mind that it would have undermined the spirit and long-term gains of GST.

Ranged against all these powerful forces was a lonely group of economists, who had headed committees to recommend fewer and reasonable rates under GST with a very small list of exempted items. Remember that the GST Council that is discussing and debating the rate structure and its secretariat have a preponderance of representatives of the revenue departments and finance ministers. For now, therefore, it seems the economists have lost out to the combined force of the tax bureaucracy and politics.  –[26-10-2016]

Congress backs Pradhan over GST on petroleum products in MP

October 26, 2016
Opposition Congress today backed Union Oil Minister Dharmendra Pradhan’s suggestion that the BJP government in Madhya Pradesh should levy Goods and Services Tax (GST) on petroleum products in the state.
Speaking at the just-concluded Global Investors Summit here, Pradhan had asked states to agree on bringing all petroleum products under the GST regime and made specific appeal to Chief Minister Shivraj Singh Chouhan in this regard.

“In public interest, we demand the MP Government give permission to GST Council to levy GST on petroleum products in the State as wished by Pradhan. But no other taxes should be levied on petroleum products in the State,” MP Congress spokesman Narendra Saluja told reporters here.

“The State Government had been collecting huge revenue from taxes like VAT on petroleum products. As a result of this, these products have become too costly, especially for the common man in Madhya Pradesh in comparison to other States,” he added.

Pradhan, during the meet, told Chouhan consumption of petroleum products had shot up in the last 3-4 years.
“I urge the Chief Minister to accord permission to bring petroleum products under the GST ambit. This won’t hit revenue collection (of the Government),” he had said.

The Oil Minister had said petroleum is currently under ‘state list’ for the purpose of taxation under GST.
“GST Council will decide on this (taxation of petroleum products). On behalf of the industry, I would request the States to allow petroleum products to be brought under GST taxation,” he had said.

As per the GST Constitutional Amendment Bill, petroleum products such as LPG, kerosene and naptha would attract GST.

However, other items — crude oil, natural gas, petrol, diesel, high speed diesel and aviation turbine fuel –have been excluded from GST for initial years. Hence, these products will continue to be taxed in the hands of the states as they are being taxed at present.  Source – [26-10-2016]

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