September 27, 2016 1:38:51 am
With the April 1 deadline for a nationwide rollout of the Goods and Services Tax (GST) looming large, the GST Council—the crucial body comprising representatives of the Centre, states and Union territories that has been entrusted with the task of thrashing out a consensus on the implementation details— has moved with a sense of purpose.
A week after its first meeting that spanned two consecutive days, where the Centre and states ironed out differences regarding two important issues of exemption limit and dual control, the Council will meet again on Friday to finalise rules, processes, list of exemptions and incentives for industries under GST.
Yet, a smooth sailing seems unlikely going ahead, with crucial issues of rates and compensation formula still to be finalised. The Centre and states are expected to spar over other pending issues of list of exemptions, legislative framework of draft rules and laws of model GST, state GST and integrated GST and dispute resolution mechanism in the ensuing meetings of the Council.
Both sides are looking at a multiple rate structure, in line with suggestions of last year’s report submitted by a committee headed by chief economic adviser Arvind Subramanian. Even though the Centre has clarified that all cesses will be subsumed in the GST, states might be given the freedom to retain some of the state levies in their respective SGST laws. There still is no clarity whether the GST rate will be specified in SGST/CGST laws and thus, make it binding for every state. Tax experts are of the view that if states are given the freedom to fix their own rates, it will go against the very idea of having a uniform rate structure under GST, which was supposed to arrest the cascading effect with availability of input tax credit under the new indirect tax regime.
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“The biggest issues before the GST Council will be of rates and distribution of control between states and Centre. On the issue of control, there has been a consensus, but the issue of rate still remains. Centre would want to have a single standard rate under GST, while states might insist on having different rates, which is not desirable,” Amit Bhagat, partner indirect tax with PricewaterhouseCoopers, said.
The committee in its report on revenue-neutral rates had recommended a revenue neutral rate (RNR) of 15-15.5 per cent and standard rate of 16.9-18.9 per cent for the proposed GST and a high rate of 40 per cent for luxury goods. Currently, goods attract an effective tax rate of 24-25 per cent (including both the central and state levies), while services attract a levy of 15 per cent. While the National Institute of Public Finance and Policy sub-group had suggested a rate of 27 per cent for both states and the Centre, finance minister Arun Jaitley last year had termed it as too high. The GST rate ranges from 16-20 per cent globally, with countries such as Australia and Japan having it at lower rates of 10 per cent and 8 per cent, respectively. The RNR is supposed to be such as to not to cause a revenue loss to states after implementation of GST.
On the other big challenge of compensation to states for any potential revenue loss when GST gets rolled out, the GST Council has agreed only on the selection of 2015-16 as the base year for compensation. The complete calculation of revenue base will again come up for discussion in the next meeting of the Council on Friday. Some states like Tamil Nadu have suggested calculation of compensation based on three years out of previous five years after removing two outliers, while other states have suggested a fixed rate of revenue growth for all states. The exact quantum of compensation, which will be paid regularly in quarterly or bi-monthly installments, will be clear only after the GST council ascertains the formula though Centre has assured states for compensating for any revenue loss for a period of five years.
The legislative framework is also likely to witness some tweaking. The Centre is targeting the finalisation of draft CGST and SGST laws by November to enable their passage in Winter Session by Parliament and state assemblies, respectively. While Centre is expected to float a draft SGST law to states, it may not be binding and could become a possible source of friction between Centre and states. The tax department on Monday placed three draft reports on relating to registration, invoice and payments in public domain. The draft model GST law, which was placed for public comments in June 2016, will also see some corresponding modifications and will come for approval of the GST Council in subsequent meetings.
Also, there is no clarity regarding the tax collection authority in states and where the tax collected will go. Tax experts say even on the issue of dual control, wherein GST Council agreed on a limit of Rs 1.5 crore for jurisdictional control for states, there is a possibility of an overlap. “Though Centre has announced exclusive control over service tax assessees for now, there is still no clear line of demarcation. Unless it is clearly specified in law and rules, there is scope for an overlap. Even now, multiple officials are authorised to look into service tax cases,” Santosh Dalvi, partner, indirect tax, KPMG said.
The final place of supply rules will also be closely eyed. “There has to be clarity regarding duality of control among states. If a trader is producing in Maharashtra and supplying in Gujarat, it will be important to see which all rules will apply on the trader,” Dalvi said.
The GST Council will also have to finalise a mechanism for dispute resolution. Congress, which had earlier demanded an independent dispute resolution authority headed by a retired high court judge, later agreed for a final call to be taken by the GST council. The Constitution (One Hundred and First Amendment) Act relating to GST states that the GST Council shall establish a mechanism to adjudicate any dispute, including between the Centre and states or between two or more states.
The destination-based tax will subsume all central and state indirect taxes and levies, including excise duty, additional excise duties, service tax, additional customs duty, surcharges and cesses, value added tax, sales tax, entertainment tax, central sales tax (levied by the centre and collected by states), octroi, entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling.
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