One of the key challenges in the implementation of a Goods and Services Tax (GST) is with regard to exemptions from the tax for specified goods and services. In the Indian context, given the plethora of exemptions that currently exist in regard to numerous goods and services, under the respective Central and state laws, the challenge is a larger one. The matter gets complicated if one were to consider that in addition to the exemptions, there exist exemptions from the tax, both Central and State, that are based on the geographic locations of the manufacturing units. These are commonly known as area based exemptions.
Since the GST proposed to be introduced in India April 1, 2010 is a dual one, comprising both a Central and State GST applying uniformly to all taxable goods and services, the aforesaid challenges in relation to exemptions are doubly relevant. Consequently, the Empowered Committee of State Finance Ministers (EC), with the mandate to roll out the dual GST, is significantly preoccupied with the matter of exemptions from the GST for specified goods and services.
If one were to consider the premise of the GST as a ‘win-win’ model between the government and the taxpayers i.e. the business community, and also as a ‘grand bargain’, to use Kelkar’s words, between the Centre and the States, the fundamental building block of the GST would be a significant broadening of the tax base both for goods and for services. It is only with such broadbasing can a lowered aggregate indirect tax incidence on consumption of goods and services be realised. If this were to be true, it then follows from a GST design standpoint there ought not to be any exemptions. The reality however is that there will always be goods and services which will continue to be exempt from the ambit of the GST. These exemptions, which are inevitable if the GST were to be politically acceptable and hence capable of being implemented, would be typically based on the following considerations:
* To ensure items of mass consumption are not unduly taxed. Food and other staples would typically be exempt.
* Considerations of social policy. Thus, public health, education and such services would be out of the tax net.
* Difficult to tax areas. Financial services is a good example.
As a result, it is undoubtedly the case that under the proposed dual GST, several goods and services will continue to be exempt from the tax. Earlier, the EC had indicated that there would be a small and defined list of goods which would qualify for the exemption and that the list would be a common one for the Central and State GST. In other words, the earlier understanding was that not only will the list of goods to be exempt be a small one but that there would be uniformity in the tax treatment of goods in the form of exemptions, at both Central and the state levels. However, it is now understood that consensus has not been possible on the above lines and that states have sought and obtained the right to exempt certain goods from the State GST, should they so wish. Therefore, differentiated tax treatment in the form of exemptions could be a reality for a small set of goods in the states. Thus, a product could be chargeable to the Central GST and not to the State GST in a State. Equally, a product could be chargeable to the State GST in one State but not in another. It appears that such an accommodation with the States has been found necessary to build consensus and agreement around the dual GST.
Another aspect of the matter is that given the need to prune the list of exemptions at both Central and State levels, there could be products currently exempt from the one or the other tax i.e. CENVAT or VAT, which would now be chargeable to the GST. Since the GST on goods is understood to be a dual rate and not a single rate, this would mean such goods presently exempt could now be chargeable at either the normal rate of 8 or 9 per cent or at the concessional rate of 4 or 5 per cent. Hence, a number of industries currently outside the indirect tax net could come within the purview of the GST. This would fundamentally alter the economic reality of these industries.
On a different note and coming back to the matter of area bases exemptions, it is now more or less certain that such exemptions will be modified so that the goods exempt so far are now brought within the GST net and hence charged to tax. The idea is to not break the GST chain for these goods so that an offset of input taxes is available to both units manufacturing these erstwhile exempt goods and also to units consuming the aforesaid erstwhile exempt goods in subsequent manufacture or trade. In such a situation of requiring the erstwhile exempt units to start discharging the GST on their manufacture, the benefit of exemption promised to such units could be retained as post tax cash refunds to be effected by the Centre, in relation to the central excise free areas like the North East, Uttaranchal and so on, and by the States, in all cases where exemptions from VAT were granted to units as per the industrial policy of those states. This fact of changed treatment of area based exemptions under the dual GST will have profound implications for units which have so far enjoyed exemptions, notwithstanding that the benefits will likely be preserved through a grant of refunds.
Clearly, the topic of exemptions to specified goods and services from the GST is a complex and vexatious one but is also central to the dual GST. A comprehensive and well thought out response to exemptions will be key to the ultimate success of the GST.
(The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers.
E-mail: pwctls.nd@in.pwc.com
