A Goods and Services Tax (GST) is on the anvil. From the kind of discussions I see around in the media and Government circles, the only issues which are holding back its rollout is the lack of consensus on the compensation mechanism for the expected loss of some States on account of its implementation, inclusion or exclusion of specific products from scope of GST and the threshold limit. Even these issues are said to have more or less been sorted out.
So the all round expectation is that slightly beyond one year down the line, a dual GST structure will be in place across India with two different levies namely the Central GST (CGST) to be levied and collected by the Centre on all supplies beyond the threshold limit and the State GST (SGST) to be levied and collected by the States. There will also be an inter-State GST (IGST) equivalent to CGST plus SGST, to be levied and collected by the Centre on inter-State supplies, which will be transferred to the destination State using the GST Network.
The tax base for both CGST and SGST would be identical. Except for the tax rate, all other parameters of levy such as classification, valuation, place of supply, point of levy and the documentation requirements would be the same for both these levies. So once the tax base for the levy gets determined for say the CGST, it would get automatically determined for IGST and SGST as well.
In such a situation, is it necessary to have two tax administrations one at the Centre and another at the States to implement the CGST and SGST separately? For the trade, two administrations would mean two of everything for the same supply - two returns, two assessments, two refund claims, two audits, etc., though some of it would be information technology (IT) based. This may also imply say two demands, two hearings, two adjudications, two appeals, etc., and hence double the compliance cost!
So the question which should actively be agitating the minds of the trade is: will there be an administrative overhaul on introduction of the GST or will it be only a rehash of the existing administrative set up? If the latter, will GST actually reduce compliance cost for them at all? Tax administration, as they say, is the tax policy!
Is there a lesson to learn from other countries which also have dual GST systems? Let us look at Canada and Brazil which also have a Federal structure and a dual GST.
Canada has a complex GST-HST-QST-RST ‘system’ wherein, in all cases involving a common tax base for both the Federal and provincial levies, the tax administration is Federal except in Quebec where it is provincial. So there is no duality in tax administration though there is dual levy on a common tax base.
As regards Brazil, it has one Value Added Tax (VAT) namely the IPI for the Federal Government and one VAT each namely the ICMS, for each of the state governments. Brazil has been facing complex technical and administrative problems as to how to apply different VATs in different states in addition to the Federal VAT and is still grappling with key questions relating to integrating the IPI and ICMS and developing a system for interstate transactions. I am not sure there is any case to follow Brazil as even under the existing structure, as per a study, VAT compliance time in India is lesser than in Brazil!
So we may not have much of a precedent to go by from other countries. Not much has also been heard from the Government so far on the administrative set up to be put in place for implementation of the GST. What has been indicated is that the problem of dual control will be addressed through a compounding scheme as well as administrative simplification for small dealers through measures such as registration by single agency for both SGST and CGST without manual interface, no physical verification of premises, simplified return format, electronic return filing, risk assessment based audit in 1-2% cases and lenient penal provisions. Will the trade be comfortable with only these measures?
The fact is that the GST story has not fully been told as yet. But this does not mean that we should not also take proactive action. It is perhaps the right time for the trade to study the likely impact of GST on their compliance costs, and represent to the Empowered Committee and the Government before it is too late!
[The author is a Director, Lakshmikumaran & Sridharan, New Delhi]
12 December 2014