Pratap Vikram Singh | October 24, 2015
As a special secretary with the department of revenue, Rashmi Verma oversees developments related to goods and services tax (GST). In an interaction with Pratap Vikram Singh, she explains how GST and IT can create a system to curb tax evasion.
What will be the impact of goods and services tax (GST) on the economy?
The introduction of GST will be the biggest tax reform in the indirect tax sector in post-independence era. It will subsume many taxes at state and centre level into one tax. The draft GST legislation proposes to change the constitutional position on tax structure. For the first time, we have proposed to amend the constitution and give concurrent powers to state and centre to tax the same goods and services.
It will mitigate the cascading effect of present tax system. Currently, excise is levied on manufactured goods and thereafter sales tax or value added tax, VAT (not on the base price but on base price plus excise). This creates cascading effect which leads to higher cost of production and bring other inefficiencies in the economy.
So this leads to artificial inflation of prices of goods and services?
Yes, because it is a ‘tax on tax’. The VAT is levied on the total cost of the goods, i.e., the actual cost plus the excise duty. At present, we are not giving the complete input tax credit. This means we are indirectly taxing the production by way of levying excise duty, whereas under GST, 100 percent tax credit will be given to the manufacturers. For example, a furniture manufacturer buys wood worth Rs 100. On that he pays GST of 14 percent and the total cost of wood becomes Rs 114. He makes it into a chair and sells it for Rs 500. 14 percent VAT is levied on this amount. Eventually, he doesn’t get credit for 14 percent tax he paid on the raw material. So the tax paid on raw material is not adjustable.
When wood is converted in chair the total cost of the chair includes that 14 percent tax which is not offset. And when chair is sold the consumers pay the entire amount. On one hand the cost of chair increases for the consumer and on the other manufacturer doesn’t get the input tax credit. But in GST we are taxing the consumption. Neither the sale nor the production will be charged. GST will be levied on the entire supply chain and at every stage inputs credit will be given. This will mitigate cascading effect, as there will be no ‘tax on tax’. This will bring efficiency in the tax system. It is only the final consumer who pays GST. Each product is taxed only once. This will naturally spur economic growth.
Currently, there is arbitrage in tax rates in states. Each state has got its own VAT rate. Similarly, central excise rate is different and so is service tax. The difference between inter-state rate and intra-state sale of goods is huge. For example, in case of inter-state movement of goods, only two percent central sales tax (CST) is levied. If goods from Haryana move to Delhi, traders will have to pay two percent CST to Haryana. If the same goods are sold in Haryana then traders will have to pay 14 percent VAT. This encourages traders to show lot of intra-state sales as inter-state sales. Under GST, there will be only one rate.
In GST there will be a third tax called integrated GST (IGST) levied on interstate sale of goods – equal to state and central GST. Also, we propose to do away with inter-state barriers and create a common national market.
Manufacturing states are sceptical of the new tax regime, and feel they might lose on revenue.
There are some apprehensions on the part of some manufacturing states like Gujarat and Tamil Nadu. Currently, when one good is transported from one state to another the originating state charges two percent CST. Under GST, CST will not be applicable. The final revenue on all interstate revenue will go to the consuming states. If a car manufactured in Gujarat is sold in Madhya Pradesh the actual benefit will go to the latter, the consuming state. However, we should remember that all these manufacturing states are also huge service tax consumers.
Hitherto, only the centre was levying and collecting service tax. Under GST, the services tax will also go to the states, which will compensate for loss of revenue on account of CST.
This will lead to better compliance, less leakage, and the revenue of every state will go up. Till the initial period, we are not sure how it will impact the manufacturing states. Therefore, the centre has given assurance that if there is any loss on the part of states then the centre will provide 100 percent compensation. There will be a benchmark against which compensation will be decided.
There are doubts about one percent additional tax levied under GST?
To allay fears of the manufacturing states about their anticipated loss, one percent additional tax has been introduced only for a period of two years.
Is there any clarity on GST rate?
There are two committees which are working on R&R of states and the centre. One is a committee headed by the chief economic advisor (CEA). The other one is National Institute of Public Finance and Policy (NIPFP). So two parallel studies are being done. The decision on the final rate will be taken by GST council, which will only be set up when the constitution is amended.
How significant will be the role of IT?
IT will play a key role in all front-end services that will be provided by GST SPV, especially for creating national-level IT infrastructure for rolling out GST. Every taxpayer will have to pay taxes online only. There will be a common portal. Every trader (taxpayer) will have a GSTN number. Based on this number they will have access to the common portal. They will have to file their returns through that portal. It will show their tax credits and liabilities. First, they have to get registered, file return and based on their tax liabilities they will pay their taxes through that portal after utilising their credits. GSTN has already identified Infosys as a technology partner.
Will IT system also curb leakages?
The leakages which were there because of manual system will go away. It is primarily because taxpayers will have to upload all transactions on the portal. Suppose, I sold something to you but you can’t claim a credit unless I have paid the tax. There is a responsibility on my side to pay the tax so that you can claim your credit. There is a pressure on me from your side so as to pay tax. The system is built in a manner that no one can evade it.
It will curb tax evasion to a large extent. Another way we can curb tax evasion or black money is through 360 degree profiling of the taxpayer. The transaction data that taxpayers will file in return will also be shared with central and state tax authorities.
Currently, traders show different turnover to different tax authorities. There is no way of checking whether they are showing the same. Under GST everyone will have access to the same portal. So people will be able to check if any trader has reported wrongly.
A trader can be showing a different turnover for the purposes of paying income tax and a different turnover for the purposes of paying excise duty. Under GST, the data will be available to each of the tax authorities.
(The interview appears in the October 16-31, 2015 issue)