In an earlier article in this column, the unfinished agenda on the design of the GST framework was discussed. In this article, an attempt is made to highlight the need for policymakers to design a simple and comprehensive structure for administering the GST uniformly across the country and in ensuring a smooth transition to the impending GST regime and to describe the current efforts in this regard.
As is now evident, the proposed introduction of the dual GST is perhaps the most comprehensive tax reform ever attempted in India. An important dimension of any tax reform is simplification of the tax administration and the compliance procedures related to the tax. It is also the case that the three key factors contributing to the success of a taxation system are the design of the tax, the infrastructure for the tax administration and the degree of harmonisation between the different tax administrative agencies , wherever relevant. Now , the Organisation For Economic Co-operation and Development (OECD) Framework for consumption taxes lays down the fundamental principles of taxation of neutrality, efficiency, certainty & simplicity, effectiveness & fairness and flexibility. A tax which is designed on these principles is easier to administer and encourages greater compliance, thereby leading to greater revenue generation for the governments and increased economic activity in the country. This is what is being attempted in India as well.
Under the proposed dual GST, the three federal taxes of the excise duty on manufacture, the service tax and the countervailing & additional duties of customs that are administered by the Central Government would be subsumed into a Central GST (CGST) while the current State level levies such as the VAT or the sales tax applicable on sale of goods, the entertainment and luxury tax as well as the cesses and surcharges would be subsumed in the State GST (SGST). As a corollary to this , the dual GST envisages the two different tax administrations to charge their respective GST on every transaction and that too on a common tax base. Further , various tax administrative functions such as assessments, enforcement, scrutiny and audit procedures are expected to be undertaken by the respective authorities, in relation to the taxpayers undertaking these transactions. The challenge for the policymakers is therefore to ensure adequate oversight on tax compliance by both administrations without placing an unacceptably high compliance cost on the taxpayers and also avoiding duplication of efforts by the respective tax administrators.
There is also a thought process about whether it is feasible and worthwhile for the administration of the two taxes to be differently visualised than that described above, in that the Central Government collects the taxes upto a point in the supply chain and then for the State Governments to step in to collect the subsequent stage taxes. In keeping with the aforesaid objectives , the Task Force on the GST (Task Force) set up by the Thirteenth Finance Commission has made a number of recommendations in relation to tax administration . With respect to overall tax administration, the Task Force has recommended that the jurisdiction of the CBEC and the State Governments be divided in such a manner as to ensure that the interface for the taxpayer is confined to one administrator only. It has also recommended that the tax base should be the same for the levy of the CGST and the SGST and that the unit of taxation for both the CGST and the SGST should be ‘persons’, as defined in the Income Tax Act, and that each taxpayer should be allotted a PAN based taxpayer identification number.
In respect to tax administration procedures, the Task Force has recommended that all such procedures under the CGST and the SGST should be uniform. For instance, it has recommended that the compliance requirements such as filing of returns, reporting sta-tements, etc should be common under both taxes. Further, the current cumbersome process of exchanging declaration forms for inter-state movement of goods is proposed to be done away with and a robust system of data exchange amongst the States as well as the Centre is proposed. For the purpose of effective administration of the GST, the Task Force has recommended establishing a common IT infrastructure, which will fulfill the information requirements of both the tax administrations as also pro-vide an easy interface for the taxpayers.
The various recommendations of the Task Force are in consonance with the principles laid down by the OECD and geared towards easing the burden of compliance on taxpayers. These are hence very welcome. However, at this juncture, the administrative mechanisms with respect to various critical aspects of the dual GST , such as in regard to the levy of the IGST on inter-State transactions, to the clearing house mechanism for transfer of funds between the State and the Centre etc are yet to be finalised. It is absolutely critical that the design and the roll-out of the IT infrastructure for a successful pan India introduction of the dual GST by April 2011 is finalised without delay. Due cognisance of global best practices in IT infrastructure for both efficient and effective tax administration as well as facilitating taxpayer interface and compliance must be taken. This can significantly advance the success, both real and perceived, of the GST. Very recently, the Finance Ministry has constituted a Technology Advisory Group for Unique Projects (TAGUP), which will submit a report on the road map to roll out five major projects, the GST being one of them. This TAGUP initiative is seen as critical for the success of the GST.
Apart from the IT infrastructure, strategies for change management in the tax administrations and training the tax officials in the new taxation regime are critical for success as well and this has therefore been given equal importance by the policymakers. The lessons learnt during the implementation of the State VAT would come in handy in anticipating the likely challenges that could arise in this regard. Stakeholder management and capacity building are fundamental to tax reform , particularly in respect of one so ambitious as the GST. Further, the functioning and the role of the existing tax administrative mechanisms such as the Large Tax Payer Units (LTUs) in the proposed GST regime would also require due attention of the policymakers . It has been the case elsewhere that the LTUs have been very useful in ensuring that the tax administrations are focussed in their efforts and that appropriate risk management procedures are in place on tax audits etc. besides also providing taxpayer friendly interfaces . Here again , the IT support around the tax administration would facilitate the LTUs to work effectively.
Thus, tax administrative reform is intrinsic to tax reform. A good tax administrative setup is essential to the success of tax reform. In many ways therefore, the move towards the GST affords a very significant opportunity to pursue ambitious goals on administrative reform as well and while it is of course true that the present respective Central and State tax administrations will continue to play similar roles in the dual GST as well, there must be efforts in rationalisation and simplification in relation to a number of different dimensions, so that the GST can truly change the way taxes are administered and collected and how taxpayers and businesses are expected to comply with their tax obligations and, finally, how taxpayers who pay their taxes correctly and in fulfilment of their obligations can expect to be treated.
The author is Leader Indirect Tax Practice PricewaterhouseCoopers E-mail: pwctls.nd@in.pwc.com
(Supported by Rahul) Renavikar)
