GST in India: An Assessment of the base

1
GST in India An Assessment of the base

• R. Kavita Rao
• Pinaki Chakraborty

2
Structure of presentation

• Summary of features of GST Discussion Paper
• Comments on the design proposed
• Assessment of the base
• Conclusions

3
Design of GST in India

• Dual GST a central and state GST to apply on the
  same base.
• For inter-state transactions, IGST proposed - the
  exporter charges IGST in place of GST and remits
  net of input tax claims to the central
  government/central administration. Exporting
  state remits input taxes to central
  administration. Importing dealer claims input tax
  credit of IGST against subsequent sales.
• The claims across states will be cleared by a
  central clearing house kind of mechanism. It is
  proposed to cover both B-B and B-C transactions.
• Uniform state GST threshold is argued to be
  desirable proposed at Rs 10 lakh
• Threshold for central GST for goods could be kept
  at Rs 1.5 crore and for central GST on services
  may also be appropriately high.
• For composition scheme upper limit of Rs 50
  lakh and a floor rate of 0.5 percent across the
  states, with option for GST registration if
  desired.

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Design contd.

• Rate structure
• all present exemptions of goods to continue
• Three rates on the rest of the transactions two
  rates for goods a lower rate for necessary
  items and goods of basic importance and a
  standard rate for the rest, and a third rate for
  services
• It is suggested that a similar approach be
  adopted by the centre for taxation of goods.
• Exports to be zero-rated and all imports in to
  the country would be subject to GST.
• Central and state taxes to be subsumed in GST
  include
• central excise, additional excise duties, service
  tax, additional customs duty, special additional
  duty of customs, surcharges and cesses, for the
  centre
• state VAT, entertainment tax, luxury tax, betting
  taxes, state cesses and surcharges on supply of
  goods and entry tax not in lieu of Octroi.
• On purchase tax there is no clear view
• On tobacco, alcohol and petroleum products, it is
  proposed that status quo remains. In other words,
  alcoholic products and tobacco would be subject
  to GST, with traditional excises imposed by
  states on the former and by centre on the latter.
  In the case of petroleum products, it is proposed
  that crude, motor spirits, diesel and ATF would
  be kept outside GST.

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Design contd.

• Multiple statutes one for centre and one each
  for each of the states. The Discussion paper
  proposes that the basic features of law such as
  chargeability, definition of taxable event and
  taxable person, measure of levy including
  valuation provisions, basis of classification
  etc. would be uniform across these statutes as
  far as practicable.
• Rules for taking and utilization of credit for
  the Central GST and the State GST would be
  aligned
• To the extent feasible, uniform procedure for
  collection of both central GST and state GST
  would be prescribed in the respective
  legislation while separate returns are mandated
  for the two taxes, it is proposed to aim for a
  common format.
• Tax administration by respective tax departments
• Timely refund where credit accumulation takes
  place be avoided by design where feasible.
• PAN-linked taxpayer identification number, to
  allow for easy sharing of information across the
  different tax administrations, including income
  tax
• Keeping in mind the need of tax payers
  convenience, functions such as assessment,
  enforcement, scrutiny and audit would be
  undertaken by the authority which is collecting
  the tax, with information sharing between the
  centre and the states.

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Comments on the Design

• Definition of necessity and goods of basic
  importance is critical
• In VAT number of inputs got classified as goods
  of basic importance, which undermines the
  incentive to claim input tax credit
• why two rate structure for centre as well?
• Why not align rate on services to the standard
  rate for goods
• No coverage of model for treatment of services
  that span more than one state
• Two critical taxes are not proposed to be
  subsumed electricity duty and passenger and
  goods tax
• Some cascading continues and it is not clear what
  the intended benefits are
• Purchase tax results in tax exportation and
  violates the destination principle no consensus
  yet on this levy

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Comments contd

• Keeping crude, petrol, diesel and ATF outside the
  purview of GST too contributes to some intended
  and some unintended cascading could adversely
  affect investment into these sectors
• While a uniform threshold is proposed for the
  states, having a sharply higher central threshold
  divides the tax payers into 4 categories, for
  goods and potentially 3 categories of services.
  At each of the boundaries, there is a transition
  cost, undermining compliance
• Administration the paper proposes uniformity
  to the extent feasible. It leaves two questions
  unanswered
• What will definitely be uniform?
• Where will differences be acceptable?
• No effort to merge functions or operations is
  mentioned, but central support for the
  information system is discussed.

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Contentious issues in the paper

• Mechanism for upholding harmonious structure
• Options range from a constitutional amendment
  making uniformity binding to an institutional
  mechanism for dispute resolution
• The form and content of such a mechanism needs to
  be elaborated, especially since it could be
  enshrined in the constitution
• Demand for the compensation of revenue from CST
  on a permanent basis
• Compensation for CST could be through taxation of
  services, but may not work for all states. Some
  states could be adversely affected
• Mineral rich states
• States imposing an entry taxes on specific goods

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Assessment of the tax base for states

• Reference year 2007-08
• Taxes to be replaced VAT, CST, Electricity,
  passenger and goods tax
• For goods component turnover associated with
  present revenue is estimated
• 30 of revenue from goods outside VAT/GST
• In balance taxable turnover, 2 percent attributed
  to 1 percent rate, 33 percent to 4 percent rate
  and rest to standard rate
• For services, turnover of firms reported in
  PROWESS database considered as a first
  approximation
• Accounts for 7 percent of total GDP, 14 percent
  of services sector GDP and 33 percent of taxable
  services GDP.
• PROWESS covers large firms in the private sector
  incomplete base
• Adjusted using
• Dis-aggregate service tax collections,
• Information on revenue from passenger transport
  from railways
• railway freight on exempt commodities,
• electricity revenues from supplies to domestic
  consumers and exempt sectors
• air fares

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Assessment contd.

• For all the services, to arrive at incremental
  base, two adjustments made,
• deduction for taxable inputs used for service
  provision
• deduction of services provided when used as
  inputs into taxable activities.
• Deductions based on I-O table for 2006-07
• Estimated figures Rs 259119 crore
• The above added to the figure for total turnover
  for goods provides an estimate of the total
  taxable base
• Real estate and computer related services
  excluded from the base for conservative estimates
• Real estate dogged by valuation issues and
  computer related services are contended to be
  export oriented, and hence potentially zero-rated

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Incremental base major states
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The Revenue Neutral Rates
RNR with a comprehensive Base
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Conclusions

• Some details of the design of the tax are not yet
  known
• Some potentially contentious issues need
  detailing
• In terms of the base, including electricity duty
  and passenger and goods tax would not change the
  rate substantially and might be worth exploring
• A trimming of the tax base under 4 percent can
  potentially reduce the standard rate
• Ambitious integration of potentially tricky tax
  bases in deriving revenue neutral rates can
  undermine confidence in the new regime