The tax structure needs to be made clear

GOODS AND SERVICES TAX DEBATE/ SERVICE TAX

The central question relating to the GST debate in India as to whether the single unified GST is the preferred model or whether a dual GST model is the preferred one, was emphatically answered recently through the announcement that was made by the Empowered Committee of State Finance Ministers, which has accepted, in principle, the recommendation for a dual GST.

As a result, the debate now decisively shifts to the particular model of the dual GST "" and there are several models "" which India will choose to adopt effective April 2010.

Dual GST models are currently in place in Canada and Brazil and it appears, based on details that are available, the chosen model for India is a closer approximation to the Canadian model. There will be two parts of the dual GST, the Federal GST and State GST.

Further, the Federal and the State GST will, in turn, be comprised of a goods tax and a service tax. Thus, both taxes will apply on goods and services. It appears that the Federal GST and the State GST will both comprise of multiple rates, insofar as they relate to goods, and will comprise a single rate, insofar as they relate to services. Full input tax credits would be available in regard to the Federal GST and the State GST, which will operate in parallel.

The recommended model may, thus, not be materially different from what is currently the position, from a rate structure standpoint. At present, both the excise duty as well as the State VAT have multiple rates, with a typical 8 per cent/16 per cent two-rate structure for excise, and a typical 4 per cent/12.5 per cent two-rate structure for the State VAT.

There are, of course, other rates that operate in excise and VAT, on a limited set of products. It appears that the HSN will form the basis for product classification for both the Federal and State GST. There is no communication on the GST rates as yet.

On the services front, it is not clear as to whether the Federal and the State GST will apply on the same set of services or they will operate on a mutually exclusive basis. Also, the present rate of service tax is 12 per cent and it is a moot point as to what the single rate of the Federal and the State GST will be on services.

The cumulative incidence of the excise duty and the State VAT at present works out to between 26 per cent to 28 per cent of the retail sales price. There is an expectation that under the GST, the aggregate incidence of the tax will be significantly lower.

There is much debate on the likely aggregate rate of the GST and there appears to be a consensus that it may approximate 20 per cent. The additional benefit, apart from the reduction in rate, is that the base on which Federal and the State GST will be charged will be uniform and this will ensure that there is no cascading, i.e. there is no tax on tax.

Apart from the uncertainty on the rates, there is also a lack of clarity as to how an assessee is expected to discharge his obligation to the dual GST. If the base on which the two taxes will be charged is to be uniform, it would imply that the tax ought to be collected at a common point in time. Indeed, the single most important benefit of the dual GST, from a compliance standpoint, is that the obligation to pay both taxes will be discharged based on a single tax document.

What is therefore required to be determined is the taxable event, which gives rise to the two taxes. The understanding is that the taxes will both apply at the point of sale. Internationally, the GST is typically predicated on supplies of goods/services, rather than on sales, and there are fairly elaborate rules governing the time and place of supply. It is very likely that the dual GST in India would also incorporate detailed rules in relation to determination of the taxable event and also the taxing jurisdiction.

This aspect of jurisdiction is an important one, since the State GST will operate within the specific boundaries of the respective State. It will, therefore, be important to determine which particular State will be able to charge and collect the applicable GST, in relation to an inter-State transaction. One answer is that the State in which the goods are consumed would be eligible to collect the GST. This is however not the end of the matter since the Central Sales Tax, which is an origin tax, is proposed to be discontinued with the advent of the GST.

The connected point is that the discontinuation of the GST will need to be accompanied by the introduction of a possible import VAT so as to track and monitor inter-State transactions. There are several variations of this import VAT, including that of a reverse charge by the importer in the recipient State, which may be considered for adoption and the recommendations will hopefully throw light on this aspect.

There are various other aspects relating to the structure of the GST that need to be clarified by the Committee. Once the recommendations are out, a vigorous debate is expected on the design elements of the dual GST. Further articles in this column will focus on the other non-structural elements of the dual GST model that is proposed.

The author is leader, Indirect Tax Practice, PricewaterhouseCoopers. Views expressed are his own.