The Hindu Business Line : GST: A formidable challenge

The Finance Minister has, once again, reiterated the Government’s intention to take all necessary steps to facilitate the introduction of the Goods and Services Tax (GST) by April 1, 2010.

While the declaration in itself holds no surprises, given that it has found a place in all the Budgets since 2006; what stands out significantly in the Budget analysis is the challenge that implementing such a structural change continues to pose in th e way of indirect tax reforms.

The Budget has spelt out that the efforts of the Empowered Committee of State Finance Ministers have translated into a proposal for a dual GST model, comprising a Central GST and a State GST. The Centre and the State would each legislate, levy and administer the Central GST or the State GST, as the case may be.

Clearly, a suitable compromise has, in principle, been arrived at between the need of the States to retain their fiscal autonomy and the requirement of industry for harmonisation of tax laws and their administration processes.

However, even 140 days after the Finance Minister’s previous announcements in the same forum; the mechanism for implementing the GST remains a mystery from the industry’s viewpoint.

This is in stark contrast to the 45-day timeline set to bring about similar structural changes in direct taxes by way of releasing the Direct Tax along with the Discussion Paper to the public for debate.

The GST model

Considering that the GST marks a fundamental change in the indirect tax landscape, the new legislation would require enterprises to ensure thought leadership, knowledge sharing and technological readiness prior to its implementation.

At the outset, any dual GST model suggested by the Empowered Committee would require certain key constitutional amendments. The exact contours of such amendments would, however, only be determinable after the precise details of the proposed dual GST have been conclusively worked out.

The Budget-related papers tabled before the August House also indicate that much work remains to be done in terms of convergence of the goods and services taxes. For instance, it is desirable to reduce the multiplicity of taxation rates. A single tax rate is easier to administer as it reduces classification disputes and accounting issues.

In keeping with this need, the exemptions under the excise laws have been pruned and the rate of duty has been increased to the mean rate of 8 per cent on nearly all products.

However, taking into account the fact that the rate at which either the Central GST or the State GST would be administered remains undecided, the efficacy of this rate selection remains to be seen. The challenge created by the blurring of the traditional distinction between goods and services still needs redressal. The Finance Minister has provided a stop-gap measure for packaged software by way of a partial excise duty exemption on the component, representing the consideration towards the transfer of the right to use.

However the problem of double taxation in areas such as intellectual property rights, leasing transactions, etc., continues to be a source of concern.

Sales Tax rates

The reduction of the Central Sales Tax rates continues to be held in abeyance while the details are being worked out by the Empowered Committee. Given the proposal to abolish Central Sales Taxes in a phased manner, the lack of adequate movement on this front raises doubts about the administration’s conviction about such a process. This year’s Budget has re-emphasised the near approaching deadline while refraining from specifying any well detailed timelines in place, the fear of being lumped with a half baked legislative effort cannot be undermined.

A greater anxiety is also a repeat of the implementation of the VAT processes in the States wherein the Indian polity as a whole did not accept the VAT regime at the same time but executed it in a phased manner. Such an attempt in the case of GST would only pave the way for failure of the entire reform process.

Clearly, the need of the hour is to address the substantial procedural and practical concerns which are perhaps more than, if not as many as, the political considerations in calibrating an indirect tax reform as colossal as the GST.

(The authors are Partner and Senior Associate, respectively, in the Tax Practice at Amarchand Mangaldas.)