Indian Economy, 5th edition (81 page)

Goods and Services Tax

The Goods and Services Tax (GST) is a proposal
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of tax in India which will emerge after merging many of the state and central level indirect taxes. Important points of the proposed GST are as follows:

(i)
It will be a tax collected on the VAT method—having all the benefits of a VAT kind of tax.

(ii)
It will be imposed all over the country with the uniformity of rate and will replace multiple central and state taxes (a
single VAT
it will be known). The taxes to be withdrawn or merged into the GST are—

Central Taxes:
CENVAT, service tax, sales tax and stamp duty.

State Taxes:
State excise, sales tax, entry tax, lease tax, works contract tax, luxury tax, octroi, turnover tax and cess.

(iii)
The proposed tax has a single rate of 20 per cent of which centre and state will have a share of 12 per cent and 8 per cent, respectively.

The Union Budget 2006–07 repeated its commitment towards inplementation of GST. The major challenges in the path of its implementation as per the experts are as follows:

(i)
States are collecting VAT with five rates—0 per cent, 1 per cent, 4 per cent and 20 per cent. The fifth rate is 12.5 per cent known as the RNR (revenue neutral rate). Now the challenge is to convince the states to be satisfied with their share of only 8 per cent in the GST at one hand and making it politically happen from the consumers point of view.

(ii)
The next challenge is to decide the things like how and where to integrate central taxes and the state taxes as VAT or as the GST.

(iii)
What to do with the custom duty is also a matter of concern as there is a move to integrate it with the GST at present.

The Government has announced (
Union Budget, 2013–14
) to implement the GST from the next fiscal year, i.e., 2012–13.

Recent Attempts to Implement GST

To operationalise the GST, the Constitution (115th Amendment) Bill
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has been introduced in the Lok Sabha in March 2011 to enable the Parliament and state legislatures to make laws for levying GST on every transaction of supply of goods or services or both. Some goods, namely crude petroleum, diesel, petrol, aviation turbine fuel, natural gas and alcohol are not to come under the purview of the GST.

The constitutional amendment bill also seeks to empower the President to set up within 60 days of the passage of the legislation, a GST Council with the union Finance Minister as chairperson and union Minister of State for Revenue and Finance Ministers of all the states as members. The GST Council is to work on the basis of consensus and make recommendations on issues like GST rates, exemption lists, and threshold limits.

Further, the bill provides for setting up of a GST dispute settlement authority, comprising a chairperson and two members to resolve disputes arising out of deviations from the recommendations of the GST Council either by the central or state governments. The draft Bill has since been referred to the Parliamentary Committee on Finance for examination.

Among the other steps that are being taken for the introduction of the GST is the establishment of a strong information technology (IT) infrastructure. For this purpose the government has set up an
Empowered Group
headed by Nandan Nilekani, Chairman, Unique Identification Authority of India (UIDAI).

Significant progress has been made in the conceptualisation and design of the GST Network (GSTN), which is a common portal for the centre and states that will enable electronic processing of the key business processes of registration, returns and payments. For this purpose, the structure of these processes is in advanced stages of finalisation. The National Securities Depository Limited (NSDL) has been selected as technology partner for incubating the National Information Utility that will establish and operate the IT backbone for the GST. In this regard the NSDL has set up a pilot project in collaboration with eleven states prior to its roll-out across the country.

Additional Excise Duty

There is a tax in India known as the Additional Excise Duty (AED) imposed and collected by the centre. Basically, this is not a form of excise duty. At the same time, though the centre collects it the total corpus of collected tax is handed over to the states.

On the request of states, the central government passed the Goods of
s
pecial Importance Act, 1957 which empowered the centre to collect the AED on tobacco, textile and sugar in lieu of states’ sales tax on them so that these regionally produced goods (which are consumed nationally) have uniform and affordable prices across the country.

Once VAT is fully operational in the economy this responsibility will be handed over to the states (as proposed) to be integrated with their VAT with the condition that none of these commodities will be charged VAT exceeding 4 per cent.

CST Reforms

The Central Sale Tax (CST), being an origin—based non-rebatable tax, it is generally agreed, is inconsistent with the concept of VAT. That is why it needs to be phased out; the CST reforms is a part of the tax reforms in India. The critical issue involved in phasing out of CST is that of compensating the states for revenue losses on account of such a phase out. Since phasing out of CST will entail a revenue loss, states have been insisting on a mechanism to compensate them on a permanent basis. The 4 per cent rate of the CST has to be phased out in stages with 1 per cent phase out in one financial year and the states duly compensated through tax devolution. Because of phasing out, it is now at 2 per cent.

Service Tax

The share of the services sector in the GDP of India has been going upward for the last decade. The introduction of service tax in 1994–95 by the Government of India has started paying the government on its tax revenue front. Introduced to redress the asymmentric and distortionary treatment of goods and services in the tax regime, the service tax has seen gradual expansion in the country. The tax was introduced with only three services liable for taxation, gradually extended to over 100 services by 2007–08. The rate of tax has been risen to 12 per cent by the
Union Budget 2012-13
which becomes 12.33 per cent on account of the education cess.

In 2011-12, growth in service tax revenue was 37.4 per cent amounting to Rs. 97,579 crore, which indicated that service tax has been emerging as an important source of revenue (Union Budget 2012-13 had a growth target of 30.5 per cent in the revenue from service tax over 2011-12).
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As
against the usual practice
of expanding the list of services, the Budget for 2012-13 introduced a
‘negative list’
approach effective July 1, 2012. Service of
transportation of passengers
with or without accompanied belongings by railways in
first class
or
an air conditioned
coach and services by way of transportation of goods by railways has been subjected to service tax effective October 1, 2012.

Voluntary Compliance
Encouragement Scheme

Announced in the
Union Budget 2013-14
, the Service Tax
Voluntary Compliance Encouragement Scheme (VCES)
is a one-time amnesty for those who have collected service tax but not deposited the same with the government. Those service tax providers that have not filed service tax return since October 2007 can disclose true liability and get an interest or penalty waive off.

Commodities Transaction Tax
(CTT)

The
Union Budget 2013-14
has introduced (basically,
reintroduced
) the CTT, however, only for
non-agricultural
commodity futures at the rate of
0.01
per cent (which is equivalent to the rate of equity futures on which a
Securities Transaction Tax
is imposed in India). Alongwith this, transactions in commodity derivatives have been declared to be made
non-speculative
; and hence for traders in the commodity derivative segment, any losses arising from such transactions can be set off against income from any other source (similar provisions are also applicable for the securities market transactions).

Like all financial transaction taxes, CTT
aims
at discouraging excessive speculation, which is detrimental to the market and to bring parity between securities market and commodities market such that there is no tax/regulatory arbitrage.
Futures contracts
are financial instruments and provide for price risk management and price discovery of the underlying asset commodity / currency / stocks / interest. It is, therefore, essential that the policy framework governing them is uniform across all the contracts irrespective of the underlying assets to minimize the chances of regulatory arbitrage. The proposal of CTT also appears to have stemmed from the general policy of the government to widen the tax base.

Commodities Transaction Tax (CTT) is a tax similar to Securities Transaction Tax (STT), proposed to be levied in India, on transactions done on the domestic commodity derivatives exchanges. Globally, commodity derivatives are also considered as financial contracts. Hence CTT can also be considered as a type of ‘financial transaction tax’.

The concept of CTT was
first
introduced in the Union Budget 2008-09. The government had then proposed to impose a commodities transaction tax (CTT) of 0.017% (equivalent to the rate of equity futures at that point of time). However, it was withdrawn subsequently as the market was
nascent
then and any imposition of transaction tax might have adversely affected the growth of organised commodities derivatives markets in India. This has helped Indian commodity exchanges to grow to global standards [MCX is the world’s
No. 3
commodity exchange; globally, MCX is
No. 1
in gold and silver,
No. 2
in natural gas and
No. 3
in crude oil].

Securities Transaction Tax (STT)

The STT is a type of ‘financial transaction tax’ levied in India on transactions done on the domestic stock exchanges. The rates of STT are prescribed by the Central government through its Budget from time to time. In tax parlance, this is categorised as a
direct tax
. The tax came into effect from
October 1, 2004.
In India, STT is collected for the Government of India by the stock exchanges. With charging of STT, long-term capital gains tax was made
zero
and short-term capital gains tax was reduced to 10 per cent (subsequently, changed to 15 per cent since 2008).

The STT framework was subsequently reviewed by the central government in the year 2005, 2006, 2008, 2012 and
2013
. The STT rates were revised upwards in the year 2005 and 2006 while it was reduced for certain segments in 2012 and 2013. The STT provisions were altered in the year 2008 such that for professional traders (brokers), STT came to be treated as an
expense
which can be deducted from the income instead of treating the same as an advance tax paid. [The 2004 STT provisions provided that the STT payments of professional traders, whose ‘business income’ arising from purchase and sale of securities could be set off against their total tax liability.]

As on date, STT is not applicable in case of
preference shares, Government securities, bonds,
debentures, currency derivatives, units of mutual fund other than equity oriented mutual fund,
and
gold exchange traded funds
and in
such cases
, tax treatment of short-term and long-term gains shall be as per normal provisions of law.

Transactions of the shares of listed companies on the floor of the stock exchange or otherwise, mandated under the regulatory framework of SEBI, such as
takeover, buyback, delisting offers,
etc. also does not come under STT framework. The
off-market
transactions of securities (which entails changes in ownership records at depositories) also does not attract STT.

Capital Gains Tax

This is a direct tax and applies on the sales of all ‘assets’ if a profit (gain) has been made by the owner of the asset – a tax on the ‘gains’ one gets by selling assets. The tax has been classified into two –

(i)
Short Term Capital Gain
(STCG): It applies ‘if the Asset has been sold within 36 months of owning it’. In this case the ‘rate’ of this tax is similar to the normal income tax slab. But the period becomes’ 12 months’ in cases of shares, mutual funds, units of the UTI and ‘zero coupon bond’ – in this case the ‘rate’ of this tax is
15
per cent.

(ii)
Long Term Capital Gain
(LTCG):
It applies ‘if the asset has been sold after 36 months of owning it’. In this case the ‘rate’ of this tax is
20
per cent. In cases of shares, mutual funds, units of the UTI and ‘zero coupon bond’ there is ‘exemption’ (zero tax) from this tax (provided that such transaction is subject to ‘Securities Transaction Tax’).

Investment Allowance

Announced in the
Union Budget 2013-14
, a tax break given to companies for high value investment in plant and machineries, over and above depreciation benefits enjoyed by them. A company investing Rs. 100 crore or more in plant and machinery during the April 2013 to March 2015 will be entitled to deduct an investment allowance of
15
per cent of the investment. This is expected to see enormous spill-over benefits to small and medium enterprises.

The proposed investment allowance scheme should be seen a drain on the government’s tax collections – it may be seen as a kind of
tax exemption
.

Collection Rates

Given the large number of exemptions to rate of customs, the increase in value of imports does not necessarily imply similar magnitude in customs revenue. Collection rates are an indicator of overall incidence of customs tariffs including countervailing and special additional duties of imports. These are computed as the ratio of revenue collected from these duties to the aggregate value of imports in a year (or period) and thus represent trade-weighted tariffs. The trends in the rates for important commodity groups as well as for all commodities taken together over the years are shown in Table 3.5. A major reason for the fall in rates has been the lower levels of duties on many items including on petroleum, oil, and lubricants (POL), which has significant import value and of course the impact of the various exemptions. At overall level, the effective rate of taxes at around 6 per cent in 2011-12 as against the level of simple average tariff rates of basic customs duties and the CVD indicates the impact of exemptions.
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