Harmonising Taxes in India

Category: International Finance Sub-category: International Taxation
Document type: news

On 6th July 2009 along with the Finance Minister’s speech became evident the objective of the Central Government to simplify the tax procedures and make a one window tax structure. First mentioned in the Union Budget 2006-07, further emphasis was laid on the implementation of the Goods and Service Tax (GST) and it was announced that an effort will be taken to make a roadmap such as to implement the GST w.e.f. 1St April 2010. The Union Budget 2009-10 also had a mention of the Direct Tax Code, a system that would compound the direct tax system to one window as well,   discussion of which shall be open in public forum within 45 days.

Goods and Service Tax (GST) is a tax which would be applicable on almost all (except a few as shall be mentioned) goods as well as services under one head, under the same tax structure and system. This shall be a comprehensive tax system which will bind all the indirect taxes together. So if the GST is implemented excise duty and service tax will be replaced by GST at the central level and the GST shall replace VAT at the state level. Hence the introduction of goods and services tax will lead to the abolition of taxes such as octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom license fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, and eliminate the cascading effects of multiple layers of taxation. However, as of now the GST lacks transparency on tax rates and various other aspects of this system.

The key point in implementation of GST is that that the tax shall be payable only at the point of consumption (in total) rather than at various stages of production and selling like earlier. This will reduce a lot of paperwork of the government and save cost of collection too. Also the chances of officers manipulating taxes shall drastically reduce as one point of taxation will remove the opportunity to manipulate with taxes, though its practical application shall be the real judge for the same.

A question arising in implementation of GST the uniform rate to be followed across the nation at state and central level , where today there exists different rates on various goods at state and central level. Also this would probably change the tax rates on various goods and services thereby having negative impact on various goods as well.

A look at the GST already in force in different nations across the globe shall give us a better picture of this unknown tax system in India. In Australia the rate of GST is at 10 % whereas in Canada it is at 5 % and 7% (raised from 5% earlier) in Singapore. However keeping in mind the lower income group, imports and exports, the authorities of these nations have taken corrective steps to assist the citizens. For instance if we take the case of Canada , there GST has been exempted on necessary goods like basic groceries , life saving drugs and medical and assistive devices , certain transportation and so on. Hence we may see a glimpse of GST to be imposed in India from these structures.

A glimpse of GST to be imposed in India from these countries

As India has parallel systems of indirect taxation at the central and state levels, each of the systems needs to be reformed to eventually harmonize them. The central excise duty has to be converted into a full fledged manufacturing stage VAT on goods and services and the states sales tax systems should be transformed into a retail stage destination based VAT, before the two are integrated. At the central level, beginning has been made by converging widely varying tax rates and extending input tax credit to convert excise duties into a CENVAT.

The major analysis has to be done on the prices of commodities. Only once GST framework is announced by the government, can one get a clear picture on the exemptions (if any) on various goods and services. The current nature of indirect taxes would lead to change in prices of commodities as a uniform rate would make some goods better off and the rest worse off. Also different goods are taxed at different rates in within the same state, so with GST even that would become uniform across different goods and services and lead to fluctuations in prices with the implementation of GST.

Another important mention by the Finance Minister is the development of a Direct Tax Code. A code that is being formulated to reduce the various exemptions one gets in direct taxes. Another objective of drafting the new code is to make the law simple and easy for taxpayers while bringing in major policy changes regarding corporate taxation, non resident taxation, SEZ exemption, Exempt-Exempt-Tax (EET) method of taxation and so on. Also this may bring the various direct taxes i.e. Capital Gains Tax, Income Tax and so on under one head. There is no clear picture provided by the government as to what this code would be. The Finance Minister has declared that a draft code on the same shall be released for public comments.

The federal set-up of India has a major role to play in the implementation of the above mentioned.  Also a question arises that would it be a right time for such structural changes leading to the extra burden of litigation and other major expenses in such implementation? The efficiency of the portfolio holders in the Union Cabinet is also up for test and only after the implementation of the plans can one say whether it was worth the wait.