‘A competitive environment will be created under GST... Uniform tax will improve local competition’

Nihal Kothari, executive director, Khaitan & Co., discusses the GST in an interview with Olga Tellis and says that it will create a competitive environment which will ultimately benefit the consumer

Now that the GST is close to becoming a reality it is expected to boost GDP growth by 1-2 per cent. How will this happen Currently, there are a number of tax barriers within India, like Central sales tax, entry tax and partial restriction of input tax credit when goods move from one state to another. This results in tax to state-specific manufacturing and distribution models, thus fragmenting the market. The replacement of these taxes by GST will make India a single common market. This will bring scale economy in manufacturing, distribution and the entire supply chain, which will improve productivity and efficiency. It will also expand business leading to higher economic growth.

How exactly will GST be a game changer A competitive environment will be created under GST. Removal of cascading effect of taxes from cost of indigenous manufacture will improve the competitiveness of Indian manufacturers vis-à-vis imports. Uniform tax across the country will improve local competition. The creation of a common market and change in the tax structure will force business entities to improve efficiency to take advantage of the opportunity to restructure and become competitive.

Transparency in the tax system and use of digital process in tax administration will improve tax compliance and reduce human intervention, reducing tax evasion. IGST is levied on imports as well as inter-state sale at uniform tax rate, which will be available as input tax credit. Hence, the present disparity between imports and inter-state supplies will be done away with. Once a level-playing field is created in tax treatment, the business houses are free to design their efficient supply chain and be competitive in a single Indian market.

How will consumers benefit The aggregate effective tax rates on goods covering Central and states taxes at present is quite high (generally 28 per cent), plus there is a cascading effect of tax on the cost of production. Once GST is introduced, not only will the tax rate go down but there will be seamless tax credit. So, the overall cost with GST will be much lower. Although, in the case of services, the tax rate may go up from the current 15 per cent (from June 1), part of this increase will be neutralised by seamless credit for inputs and input services used in providing services. Overall, consumers will benefit once GST is introduced and after the initial months.

What is needed by way of GST law and rules to ensure that the objective of GST is met The objective of GST is to ensure ease of doing business without tax barriers, remove cascading of taxes and ensure seamless tax credit flow. The laws and rules have to be compatible with these objectives. Some suggestions: (a) Seamless credit of input tax should made available without putting any unreasonable conditions to withhold credits; (b) Exports be zero-rated and refund of input taxes for exports should not be held up by time-consuming procedural scrutiny; (c) Easy to follow Tax compliance, no multiple audits and roving enquiries which are not based on risk-assessment. No procedural bottlenecks; (d) The law should provide a unified and uniform tax platform across India and a seamless credit flow with minimal exemptions; (e) GST law should also be based on an automated platform with minimum human intervention; (f) It should not have vague definitions/drafting or loopholes, which lead to litigation and harassment; (g) Taxpayers should have only one administrative authority for Central and state GST since the tax structure is uniform and both have the same tax base. Centre and states can divide responsibilities. This will reduce harassment; (h) No discriminating rates if there is more than one tax rate and exemptions should be minimum.

What is the next step after the passage of the GST amendment The next step is that at least 50 per cent of the 29 states should also vote in favour of the Constitution (122nd Amendment) (GST) Bill. Then the GST council, which will determine the tax rate and recommend model GST law, has to be constituted.

Will GST be against the interest of states as they can’t impose taxes in case of calamities and will have to go to the Centre for funds Tamil Nadu for instance, says they could lose over Rs 9,000 crore. Any loss of revenue to any state during the first five years will be compensated by the Centre. This is guaranteed. In fact, states may gain in revenue due to increase in their tax base. If there’s an unforeseen situation or calamity, the GST council has to recommend appropriate action. In my personal opinion, this council should recommend the creation of a corpus from the very beginning, so that such situations can be addressed without delay.

The service sector is expected to be affected adversely by GST. Will this lead to inflation In case of services, the tax rate may go up from the current 15 per cent. However, part of this increase will be neutralised by seamless credit for inputs and input services used in providing services. Moreover, under the present regime, the service sector has not been getting full input tax credit of VAT, CST, etc., paid on their capital goods. This sector has been spending a huge sum on capital investment. It can be seen from the fact that the Indian services sector has attracted the highest amount of FDI equity inflows in the period April 2000 to March 2016, amounting to about $50.79 billion, which is about 18 per cent of total foreign inflows.

Once GST is implemented, credit of all such taxes paid will be available to them. Hence, even if there is some inflationary impact, it will be for some services and that too within an affordable range.

Indirect taxes will go up. Does this make GST anti-poor The indirect tax collection will go up due to the expansion of the Indian economy and due to increase in tax base and compliance. The prices of goods are expected to come down, particularly those items used by the poor. The current average indirect tax incidence on goods is over 27 per cent, which will come down to approximately 18 per cent. So there is no rate hike hurting the poor. An increased tax base will offset tax rate reduction. Moreover, efficiency and competition will reduce the cost of goods and services in medium terms.