THE good news at the beginning of the financial year is that the vehicle for bringing in GST is moving fast. Reportedly, the Panel set up for sorting out the pending technical issues like Threshold and Dual Control met in Patna, and some tentative views have been taken, which may be placed before the next meeting of the Empowered Committee of State Finance Ministers, expected to meet at Mussoorie in the second week of May. The tentative decisions of the Panel are reported to be as follows:
++ The threshold for levying GST by both the Centre and the States would be common at annual turnover of Rs. 25 Lakhs : This is a welcome step. In GST regime, the taxes of both Centre and the States should have a common incidence, common tax-base and hence common threshold. Further, Rs. 25 Lakhs of annual turnover would be a fairly reasonable cut-off, which would keep small traders and service tax payers at the low end out of the GST net.
++ The other welcome decision is that of having a Composition Scheme for dealers with an annual turnover of up to Rs. 60 Lakhs. By opting for a compounded levy, a dealer will be inside the ambit of GST, but he would not be bound by strict GST rules. Thus, another sizeable part of small traders would be outside the ‘rigours’ of GST control, leaving the rest of the tax-payers within the ambit of dual control by the Centre and the States.
On the issue of dual control over small taxpayers, views are different. The States are of the view that Centre should not have control over the small tax payers. As for bigger tax payers, the States have no objection to dual control of both the Centre and the States. Three important questions arise here. The first question is, – having accepted the Dual Control model for GST, as evident from the First Discussion Paper of the Empowered Committee of State Finance Ministers released in November 2009, how important and necessary would it be to ensure that the small tax-payers are kept under single control of the States. The second question is – how small is the small? To some, tax-payers with an annual turnover below Rs. 5 Crores would be small and those above it only should be kept under Dual Control of the Centre and the States. To some others, Rs 1.5 Crores would be a decent cut off since at present the Central Excise authorities follow this cut-off for exempting small scale manufacturers. There is a third question which hits at the very premise of Dual Control. And it is – why go in for Dual Control at all; the best would be to consider a high cut-off above which both CGST and SGST will be administered by the Centre, and SGST amount would be disbursed to States appropriately. The design would be somewhat like how a Large Taxpayers Unit (LTU) functions today. As for taxpayers below that cut-off, the States would administer both CGST and SGST, and subsequently disburse the CGST amount to Centre. On a rough estimate, 20% of taxpayers who are at the high taxpaying bracket would pay 80% of the total tax. So, with this scheme, the Centre’s assessee-base would be very small, but the percentage share of revenue would be high. Conversely, the assessee base of the States would be very high, but with a low percentage of revenue share.
Thus, sorting out the issue of dual control would be a ticklish one, which warrants a solution, sooner than later. Before we delve into this issue, it would be instructive to glance through the international practice on the issue of dual control in administering GST. For the uninitiated ones, GST is nothing but recently favoured modern name for VAT. One may say, GST is full-fledged VAT with total integration of tax on goods and service. Any reference to VAT, therefore, would also be valid for GST as well.
Let us see the example of Canada first, since there is similarity in political structure of Canada and India. Both are federations and in both the countries, there is a dual structure for consumption taxes, and hence both face similar problems. GST was introduced in Canada by replacing the prevailing Federal Sales Tax (FST) at manufacturing level, known as Manufacturer’s Sales Tax (MST), similar to India’s Central Excise duty. In the GST scenario, there are three types of situations in Canada.
(1) Federal GST and Provincial Retail Sales Tax (PST) administered separately: PST is levied by five States like British Columbia, Ontario etc in addition to GST which is administered federally. This is a model of GST with dual role of Centre and the States.
(2) Joint federal and provincial VATs, known as Harmonised Sales Tax (HST) administered federally. Besides Federal Government, three States follow this scheme. HST is collected by the federal government and the State’s share is given to the States. This is a model of GST with single role of the Centre.
(3) Separate federal and provincial VAT administered provincially by the State of Quebec, a predominantly French speaking area. Quebec collects VAT at the provincial level, known as Quebec Sales Tax (QST) in addition to the GST which is levied by the federal government but collected by the State of Quebec. Here is a reverse case of the State collecting for the Centre and reimbursing the same to the Centre. This is a model of GST with single role of the State of Quebec.
In European Union, VAT is imposed only by the States and not the Union. Yet, VAT in EU is almost like federal VAT inasmuch as the member countries, while having their own individual structures of VAT, follow the destination principle, thus forming a type of fiscal federation. For joining EU it is a precondition that the member countries agree to impose only VAT for intra-community sales and no other tax. However, VAT rates and Threshold continue to vary from country to country. Even, the administering of VAT has followed different models. In Germany and Austria, tax design and administration are controlled by the Centre, but revenue is shared with the States on a formula basis. Spain had initially followed the German model but gradually moved in the other direction.
In Brazil, a variety of taxes are levied by all three tiers of the government viz Federal, State and Municipal Governments. VAT was introduced with Federal VAT (IPI) on manufacturing sector and the State VAT (ICMS) on consumption covering agriculture, industry and a number of services. While variations prevail among different States over administration of ICMS, the National Public Finance Council (CONFAZ) plays an important role in harmonising the interstate tax under ICMS.
VAT in the above mentioned countries like Canada, EU and Brazil are examples of National GST coexisting with Sub-National GST. Australia is the most recent example of National GST, where the two levels of government i.e. Centre and the States combine their levies in the form of a single national GST which is levied and collected by the Centre and the proceeds are allocated to the States. In China, the VAT laws and administration are centralised, but the revenues are shared with the provinces. In Mexico, the establishment of a VAT at the Centre replaced State Sales Taxes, but the States had an automatic share of the revenues generated from all federal taxes.
In the foregoing paragraphs, the administering of VAT/GST only in the context of the role of the federal (Centre) and the States has been discussed. There are many other aspects of administering of VAT like Registration, Filing of Returns, Payment of tax, Self assessment of tax, Accounting obligations, Exemption, VAT Rates etc. which have not been discussed here. It can however be said that many types of VAT/GST may exist with variations in the following: administering model (single or dual control), the breadth of the tax base (gross product, net income, and consumption), treatment of foreign trade – origin and destination, the method of collection – addition, subtraction, invoice – credit. But no country administering VAT/GST follows the system of cut-off for dual control. There is cut-off for threshold, but not for dual control. It is also clear that there is no ‘one size fits all’ solution while choosing a particular form of GST. Richard Bird, the famous Canadian economist specialising in public finance has said “Much more attention needs to be paid to working out in detail exactly how countries can move over time from their initial VAT – which is almost certain for political and practical reasons to be unsatisfactory in some respects – to a good (or at least better) VAT.”
The point I’m trying to make is that there are different models of GST being practised in different countries in different circumstances and contexts, and that one will have to choose a model that is best for the politico – economic context of one’s own country. No doubt, there will be tough negotiations between the Centre and the States. But the end result of the negotiations should be such that it is respectful to the aspirations and expectations of both the parties. Otherwise things are likely to fall apart over time. In this context, let us have a look at the estimated assessee bases for the Centre in different situations with different cut off for dual control that are being reported.
The current assessee base for Central Excise and Service Tax Department is 8.30 Lakhs. The Central Excise covers 1.30 Lakhs with cut off at Rs 1.5 Crores, and the Service Tax covers 7 Lakhs with cut off at Rs. 10 Lakhs. With the introduction of GST, if we keep the cut off for taxability at Rs 25 Lakhs for both goods and services, the assessee base for the Centre will reportedly go up to 22.50 Lakhs. The newly subsumed VAT would cover around 20 Lakhs of assessees and the Service tax assessees would come down to 2.50 Lakhs, because a sizeable portion i.e. around 4.5 Lakhs of Service tax payers would be below the cut off of Rx. 25 Lakhs. There is no need to count Central Excise assessees again since they would already be covered as VAT assessees.
Now if we bring in another higher cut off for dual control, the assessee base for the Centre to administer would shrink considerably. Let us first see the assessee base with the cut-off of Rs 5 Crores of annual turnover, below which Centre will not administer CGST. In that case, the Central Excise assessee base will come down to 70,000 from the current base of 1.3 Lakhs. The Service Tax base will come down to 50,000. Addition of new VAT assessees would be around 3 Lakhs. Thus the Centre’s assessee base with taxpayers having more than Rs.5 Crores of turnover, will become around 3.5 Lakhs. The Central Excise assessees would be included in the new VAT assessees.
If we take a cut-off of Rs 1.5 Crores the assessee base for the Centre would be around 8.5 Lakhs with 50 thousand Service Tax assessees and 8 Lakhs new VAT assesses which will also include the Central Excise assessees. I must admit, these are ball-park figures; but these are based on available data and reliable facts, and won’t be quite off the mark.
Summing up, the Centre’s assessee base in different situations of dual control with different cut off based on annual turnover is tabulated below:
|Centre’s Current Assessee base (C.Ex & Service Tax with cut off of Rs. 1.5 Cr and 10 Lakhs respectively )||Centre’s GST Assessee base with cut off of Rs. 25 Lakhs for Threshold and Dual Control||Centre’s GST Assessee base with cut-off of Rs.1.5 Crores for Dual Control||Centre’s GST Assessee base with cut-off of Rs. 5 Crores for Dual Control|
|8.30 Lakhs||22.50 Lakhs||8.50 Lakhs||3.5 Lakhs|
Thus, the Centre’s assessee base for the Dual Control of GST will depend heavily on the cut-off set for dual control. If we accept that the threshold as well as dual control would be common for both Centre and States at Rs. 25 Lakhs of annual turnover, the Centre’s assessee base would be 22.5 Lakhs as compared to the current assessee base of 8.3 Lakhs. Since GST is envisaged to be administered with robust IT infrastructure in the form of GST-Net with optimal contact between tax-payer and tax-men and simplified e-business processes, it may not be difficult for the present staff strength to manage the additional assessee base efficiently. Proper HR development and capacity building programmes should be able to make the current workforce of the Central Excise and Service Tax Department prepared to handle this workload. But if the cut-off for dual control is taken at a higher altitude for the Centre to say Rs. 1.5 Crore or Rs. 5 Crore, there may be a problem of ‘surplus’ , particularly in the background of simplification through e-management of GST Net, which would entail less requirement of manpower. We may then have to think of alternative placement of the surplus staff and officers. These issues are important before deciding on doing away with Centre’s role for small tax-payers.
It is everybody’s case that the small taxpayers should be subjected to the minimum control. There are ways to meet that end. With GST Net in place, the return scrutiny would be automated thus requiring no interface with taxpayer in routine manner. Interface with small taxpayers can be based only on the risk parameters. In administering the system, Centre and the States would have to identify risk areas jointly. Further, compliance requirements like audit, inspection etc. may be minimised for small tax-payers through administrative directions. But, keeping a section of the taxpayers, albeit small ones, out of the radar of the Central GST authorities will be fraught with revenue risk. One particular risk area of concern would be the issue of fake invoices by a taxpayer under control of single tax authority, say the State to a taxpayer under the control of other tax authority, say the Centre. A study of the tax frauds detected in VAT countries will give a clear picture of the revenue risks.
GST is a joint venture which has to be implemented with an adequate degree of mutual trust, and more appropriately, mutual respect for each other’s competence. That is how dual control works in Canada and many other federations. I conclude by referring to what Sijbren Cnossen, the international VAT expert based in EU had to say on bringing in a good GST: “If you don’t do it right the first time, you will not get a chance to correct your mistakes later.”
[The author is Indirect Tax Ombudsman, Delhi and former Chairman, CBEC. The views are personal. In writing this article, following books and papers were referred to :
• The VAT in Developing and Transitional Countries – by Richard M. Bird & P.P. Gendron.
• Economics of VAT – by Sukumar Mukhopadhyay.
• Value Added Tax – by Mahesh C. Purohit.
• VAT Coordination in federations and common Markets: lessons for India – A Paper by Sijbren Cnossen.
• Reflections on GST/VAT as the Central Measure in Tax Reforms – A Paper by Dr. Partho Shome.
• GST Reforms and Inter governmental Considerations in India – A Paper by Satya Poddar & Ehtisham Ahmad]