A constitutional amendment bill for the introduction of a harmonized GST in India at the federal level and its 28 provinces and 7 centrally administered territories was introduced in the parliament in March, 2011. The bill is now before a parliamentary committee for detailed examination. The procedure requires passing of the Bill by special majority in both houses of parliament and ratification by at least half the states, making it necessary to achieve some broad-based consensus.
While the stakeholder consultations by the parliamentary committee are not yet concluded, there are some indications that the Bill may not see passage in the present form. Practically, all states are pitching for explicit autonomy in the fixation of tax rates within a reasonable band. Some states have argued the need to protect their existing revenues from origin-based taxation on inter-state movement of goods that has already been reduced from 4% to 2% and is expected to be completely eliminated in the GST. Many sections of the business are advocating a more comprehensive GST by including petroleum, electricity and alcohol, which presently are left out.
While these discussions are underway, the central government has been moving fast to bring its own legislation as close as possible to the impending GST. This is expected to reduce the lead time after the constitutional bill is passed as well as acclimatize both the businesses as well as tax administrators to the impending changes.
An important component of these changes has been some path-breaking changes in service tax, introduced during the budget presented by the Union Finance Minister, which have come into effect from July this year.
NEGATIVE LIST OF SERVICES
The foremost amongst these changes has been the introduction of negative list of services, replacing the selective taxation of specified services that were being incrementally added year-after-year since the introduction of service tax in 1994.
Many fiscal experts believed that despite a fairly long positive list of nearly 120 heads at the last count, service sector contributed only about 25% to the consumption taxes, far less than its potential evident from its close to 60% contribution to GDP. The innumerable legal disputes due to possible overlaps and conflicting interpretations between various taxable services had accentuated the problem to a level where a one-time streamlining appeared to be the only sensible solution.
The negative list comprises seventeen heads capturing both the services that are beyond the taxing powers of the Union under the present constitution and a variety of other services justified on socio-economic or administrative grounds. The list covers formal education, public transport, renting of a residential dwelling, services related to cultivation of agriculture (which includes animal husbandry) or marketing of agricultural produce, margin-based financial services, core activities of government and funeral or burial services. Though the list may appear a little unwieldy, it will stand pruned once the constitution is amended allowing both the centre and states to levy tax on all services at the time of GST.
The negative list is supplemented by a list of exempted services. This list comprises mainly such services that are presently outside the tax net but may need a closer look at the time of introducing GST. The list covers transportation of essential items of mass consumption, construction services in the areas of basic infrastructure or low-cost housing, and services by intermediaries that do not make any net contribution to revenue but add significantly to administrative burden. Additionally it includes many social sector services such as health and animal care, recognized sports, classical and folk arts, activities of charities and public libraries.
The relative long list of exemptions needs to be seen in the light that the government still does not have a comprehensive data base of the national identity of a vast majority of its poor, together with the problem of their financial inclusion, to be able to offset the burden of taxes as is commonly prevalent in many developed countries.
Of greater concern at this stage are exemptions at intermediate stage that break the tax credit chain and add to cascading. The GST will be backed with very advanced IT, making it possible to reduce the cost of compliance and phase out many such exemptions.
PLACE OF PROVISION RULES
The introduction of negative list required elimination of service-specific provisions in a number of areas. Two such areas relating to import and export of services have now been replaced with the place of provision of services rules, which determine the geographical location where a service will be deemed to be provided.
As the service tax is today entirely handled by the federal government, the rules for the present will mainly address cross border services and to a minor extent transactions with the State of Jammu and Kashmir, where the present statue does not apply. However they provide the required setting for GST where the distribution of revenue from services amongst states will depend on the place of their consumption.
The rules are aligned largely with international best practices. The default rule, which covers a large majority of B2B transactions, is entirely based on OECD guideline that the place of supply is the location of the recipient. The transactions under global arrangements are all well explained in the Education Guide that was released together with these changes making the task of understanding the mammoth changes quite easy.
One major difference from similar rules elsewhere is contained in rule 7 which applies to performance and location-specific services when provided in multiple locations within India and outside. This rule retains the place of performance in taxable territory even when the portion performed outside outweighs the former. Primarily the rule is aimed as an anti-avoidance provision in location-specific services, where there could be a tendency to reflect invoicing from establishments located in non-taxable territories even though it would be desirable to issue independent invoices for services rendered from different locations.
The other significant deviation from global practice is rule 8 which holds that the service will be provided at the location of the recipient where both the service provider and service receiver are located in the taxable jurisdiction even when the service could otherwise fall elsewhere under another rule. As a mirror image an exemption has also been granted where both the parties to the transaction are located outside India.
The rules may undergo some changes at the time of GST in the light of suggestions from the states but principally provide the basic framework for taking the discussion further.
POINT OF TAXATION RULES
Point of Taxation Rules were introduced in 2011 to align the time of taxation of services with international practices and to a considerable extent with accrual based taxation in the case of goods.
Put in simple words, the rules provide that the time of taxation of services will be the time of issue of invoice or time of payment, whichever is earlier. A period of 30 days (45 days for banking industry) is provided to issue an invoice from the date of completion of service, failing which the date of completion of service will reckon as the time of taxation.
Budget 2012 has further streamlined the provisions to remove some of the irritants that industry had pointed out. Here again the rules are aligned with global practices making the task of adaptation to the new changes quite easy.
INPUT TAX CREDITS
OECD guidelines relating to neutrality advise that the burden of taxes should not be borne by business but recovered from the end consumer. Failure to do so distorts business practices in a variety of ways.
Budget 2012 has removed cascading in a number of services like hotel accommodation, restaurants, construction, life insurance, transportation by railways by permitting utilization of tax credits that were earlier blocked by a rather complex system of taxation of partial values of such services.
GST RELATED CHANGES
Besides the above changes, there are some changes which are meant to send a strong signal about the federal government’s seriousness to move towards the GST at a quick pace. A common goods and service tax return: a one page return replacing the nearly 15 pages of the two separate returns earlier, alignment of registration formalities and appellate remedies between goods and services are some of the specific measures that have been taken in this area.
Another change relates to streamlining the system of refunds relating to export of both goods and services.
The new method provides for refunds of services electronically at a specified rate on the export of goods, which are automatically credited to the account of the exporter on the lines of drawback.
The other procedure allows refunds of input services used in export goods or services in the ratio of export turnover to total turnover, doing away with the earlier system of establishing nexus between the exports and such input services.
COMMITTEE ON COMMON CODE FOR GOODS AND SERVICES
While considerable convergence has been achieved in the tax law relating to goods and services, there remain many areas where the two provisions can be further aligned. Many tax experts have been advocating that the Central Government could consider one common law for goods or services or a Central GST that could lead the journey for the eventual introduction of GST on a nationwide basis.
As the situation stands the Excise Act 1944, which applies to goods, is applicable for the whole of India, whereas the Finance Act 1994, which deals with service tax, cannot be made applicable to the State of Jammu and Kashmir unless ratified by the legislature of that State.
Complete convergence between the two taxes will therefore have to await the introduction of a comprehensive GST. But at the same the Central Government has set up a working group to suggest a common tax code that could form basis for maximum possible convergence under the existing constitutional constraints. The report of this group is awaited by the end of September, 2012.
On the whole, despite some delay in meeting the deadline to usher GST, India is much closer to the eventual GST and the both the business and tax administrators far more confident to handle it whenever it finally arrives. By the recent indications that date does not appear to be too far.
The author is Joint Secretary with the Ministry of Finance, Government of India and heads its Tax Research Unit (“TRU”). He is also a key member of the team assigned with the task of implementing GST in India. An officer of the Indian Revenue Services, he has nearly 30 years of experience in the design and implementation of indirect tax laws in India and is the recipient of the President of India Award for distinguished record of service. The views expressed are personal.
By Mr V K Garg