GST Diaries - Part 1

The Goods and Service Tax is widely expected to lessen the overall burden of indirect taxes on the ultimate consumer. In public finance jargon, GST is expected to reduce the regressiveness of the existing indirect tax system and uphold the principle of equity in taxation. The advocates of GST argue that the GST levy will seamlessly transfer the Input Tax Credit through the Supply Chain and consequently reduce the effective impact of the tax. However, all this talk on seamless transfer and progressivity of taxes come while there is absolutely no consensus on the rate of levy.

There are several issues lying loose in the discourse on rates. There is a certain degree of ambiguity as to what kind of rate differentiation will GST adopt. Will the State and Central levy be uniform? Will there be a serious of rates for different goods? Will there be a rate differentiation between goods and services?

The following illustrate the consequences of the several propositions being made on rates.

(i) Different Rates for Services and Goods: In case of a works contract, the existing indirect tax regime values the consideration paid towards the service of works contract as the Gross Amount received by the service provider minus the value of the goods in property transferred by the service provider to the service receiver. This rule is introduced to help an assessee to clearly identify the value of service (and pay service tax on that value) as against the value of property transfer made while rendering the service. However, the degree of clarity achieved in the valuation of works contract has not been achieved with respect to other services like catering contracts, business auxiliary services etc. This led to several litigations and consequent administrative hassles. Now, by continuing a differentiated rate system, between services and goods, in the GST regime, one may end facing similar litigations and administrative hassles in the proposed regime.

(ii) Different Rates for Different Goods: By charging multiple tax rates, the GST regime may fall prey to the same problems that the erstwhile sales taxes faced. Some state governments, in order to uphold the principle of ‘equity’, have, at one point of time, courted as many as 10 different rates. I sincerely wish that the policy makers will take note of the fallouts from multiple rate structure and make GST a single or, maximum, a dual rate levy.

(iii) Effective Rate: The effective rate of indirect taxes in India (ignoring Customs and CST) is 12.56% (CENVAT + VAT). There are reports in the media which suggest that the finance ministry and the empowered committee is looking at a rate of around 16% (8%+8%). This steep levy, in spite of all the efficiency gains from administrative smoothening and seamless Input Tax Credit transfer, will dampen the growth of businesses.

There are several pressing issues confronting GST implementation, and that on Rate, mind me, have got far reaching consequences.