One of the key expectations from the finance minister’s speech last Friday on Budget 2012-13 was regarding the Goods and Service Tax (GST). Most importantly, there was a strong anticipation that the finance minister would forcefully reiterate a date for its introduction, given that the country had missed several earlier deadlines that were set in this regard.
On the first and foremost point of a possible date for the introduction of the GST, alas, the speech was completely silent. This is indeed unfortunate since, while it is recognised that the GST will only come about if there is unanimity and agreement between the Centre and the states, it would nevertheless have occupied peoples’ minds if the finance minister had indeed put down a date. In fact, he had done so in earlier Budget speeches, so it is doubly disappointing that he had not done so this year, even though we have evidently made progress in this regard since he last spoke on the matter in Budget 2011-12. Perhaps he has considered the magnitude of the unfinished task ahead and has hence wisely refrained from indicating a date. One would sincerely hope that this prognosis is proved false and that we are indeed able to introduce the GST at least by April 2013.
If one were to go beyond this and look to the positives in the speech regarding the GST, there are several references therein to the various enablers that would facilitate and are indeed essential for the introduction of the GST. These are discussed in detail below.
Evidently, the most important of these is the Constitutional Amendment Bill. The finance minister states that this Bill, which was introduced in Parliament in 2011, is awaiting discussion and debate in the Parliamentary Standing Committee (PSC). The finance minister has thereupon stated that as Parliament awaits the recommendations of the PSC, drafting of the model legislation for both the Central and state GST is under progress. As is well known, the proposed GST is a dual one comprising both the central and the state GST which would apply on all transactions throughout the supply chain.
Beyond the Constitutional Amendment Bill, the single biggest enabler to bring in the GST is the information technology backbone in the form of the GST Network (GSTN). The finance minister informs that the GSTN, which is now approved by the Empowered Committee of State Finance Ministers, will be set up as a National Information Utility and will become operational by August 2012. This is clearly a major milestone. As the finance minister has stated in his speech, the GSTN will implement a common PAN based registration, returns filing and payments processing for all states on a shared platform. He also states that the use of the PAN as a common identifier for both direct and indirect taxes will enhance transparency and check evasion.
Other references to the GST in the speech are regarding the following:
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On taxation of services, the finance minister has stated that there is a need to widen the tax base and strengthen its enforcement, given that the tax has been in force for a full 18 years. Accordingly, the finance minister has mooted the need to move towards taxation of services based on a negative list. It may be recalled that the negative list basis of taxation was put out for public debate by the Centre and several comments and suggestions were received in that regard. It may also be recalled that several articles in this column had also addressed the pros and cons of the negative list basis of taxation and as to the appropriate time of its introduction. The speech states that there has been overwhelming support for this basis of taxation and hence the government proposes to introduce the negative list basis of taxation from a date to be notified after the passage of the Finance Bill for the year. It is also stated that the negative list comprises 17 different heads of services and has been drawn up keeping in view the federal nature of polity, the best international practices and our socio economy requirements. The finance minister has also stated that in addition to the negative list, there would be several exemptions from the service tax as well. The speech concludes the reference to the negative list by informing that the changeover will result in reducing the nearly 290 definitions and descriptions in the law to 54 and in reducing the exemptions from the existing 88 to a mere 10. Clearly therefore, the changeover to the negative list basis of taxation is one of the key announcements in this year’s Budget speech and industry has to majorly gear up to both fulfill its obligations under service tax law as well as to ensure that the input tax offsets are fully availed.
On the place of supply rules, the speech states that draft rules will shortly be placed in the public domain for stakeholders’ comments and these will be notified when the negative list comes into effect. It is stated that these rules will determine the location where a services shall be deemed to be provided and will also provide a possible backdrop to initiate an informed debate on the issues that may arise in the taxation of inter-state or cross-border services under the dual GST. As regards the Point of Taxation Rules (POTR), the speech states that the extant rules are being rationalized for providing greater clarity and for removing irritants.
On the next enabler on aligning the central excise and service tax code, the speech states that a study team will be set up to examine the possibility of such a common code which could be adopted to harmonisation both the central excise law and the service tax law to the extent possible at the appropriate time. It is hoped here that the study team is not set up as an internal one and that its members extend to subject matter experts and others. Pending the constitution of the study team, the minister states that as a measure of harmomination between central excise and service tax, a number of alignments are proposed. These include a common simplified registration from and a common periodic return for central excise and service tax, to be named as EST1. As a very welcome measure, the speech states that this common return will comprise just one page, which will be significant reduction from the 15 pages of the two independent returns at present.
In conclusion, it must be stated that while it is indeed very disappointing that Budget 2012-13 has not set a date for the introduction of the GST, it nevertheless contains several significant measures which will accelerate and progress the agenda of the GST. As a key stakeholder, industry must continue to actively engage on the GST and bring about its introduction at the earliest possible time.
The author is Executive Director, PricewaterhouseCoopers Pvt Ltd pwctls.nd@in.pwc.com