What is the way out? Implement it without compromising on J-K’s revenue, pass own service-tax legislation without delay
BILAL HUSSAIN
Faced with a number of challenges, New Delhi might miss the deadline of April 1, 2010 to roll out the Goods and Services Tax (GST). Many states in the country would be happy if it’s delayed but the Jammu and Kashmir government is set to adopt the tax reforms — implementation of Goods and Services Tax— because it’s imperative to be in the race. The state government, however, has to go for introspection on some basic questions: infrastructure accessibility, capacities in the state, administrative structure that the new tax reform would require.
In the country, there has been an open opposition to the implementation of the GST on many grounds. Orissa has made it amply clear that it is not prepared to implement the GST this year. “We are not at all ready to go for GST system now. We have to make certain preparation before implementing it,” Orissa Finance Minister P C Ghadai was quoted as saying this to the media.
The Orissa government, which collected about Rs 600 crore as Central Sales. Tax at the rate of 2 per cent last fiscal, had got a Rs 324 crore compensation in 2008-09 from the Centre. On the other hand, Uttar Pradesh traders have demanded single GST as it opposes the proposed dual GST. UP traders want the GST implementation to be deferred by at least two years allowing the traders to develop better understanding of the new and advanced tax regime.
“The first discussion paper on the GST circulated by the Centre is ambiguous on several points and appears as complicated as was the Value Added Tax (VAT),” UP Adarsh Vyapar Mandal president Sanjay Gupta was quoted saying by newspapers.
While states like Madhya Pradesh and Chhatishgarh have expressed their opposition to the GST regime, most of the states have sought reasonable time period to put in place the IT infrastructure.
This is enough indication that the April date line for the new system is likely to be missed. States that do not want to come under the proposed GST regime will tend to lose more in terms of revenue sharing, Revenue Secretary P V Bhide told the media. How much will J&K loose, what about IT infrastructure is to be seen.
Many state governments in the country have roped in the services of public finance experts to assist in assessing the revenue impact of the proposed GST. Since assessing the service tax potential has remained an area of concern for most of the states, Jammu and Kashmir has started consultative meetings with the business chambers, industrial bodies and other stake holders. Nothing concrete has come out of these consultations so far.
Let us have a look at the tax revenue of J&K over the years. With the introduction of the VAT in the state, the tax revenue has increased by 42.25 per cent from Rs 1799.00 crore in 2006-07 to Rs 2559.00 crore. For the year 2008-09, the tax revenue has been estimated to be Rs 2693.00 crore, which indicates 5.24 per cent increase over 2007-08 figure.
The present Own Revenues: GSDP ratio stands at 10 per cent. As J&K’s economy is expected to grow at an annual rate of 8 per cent over 11th FYP period, as per government claims Own revenues: GSDP ratio would increase by 1 per cent over the existing level. In short, Own Revenues: GSDP ratio is expected to touch 11 per cent by Financial year 2011-12.
The revenue from Sales Tax/VAT not only contributed major share of tax revenue (70.54%) for 2007-08 and 68.80% for 2008-09 (RE) but also increase by 55.74% and 2.66% during 2007-08 and 2008-09 (RE) over respective previous years. Contribution of State Excise in the receipts for 2007-08 was 9.54% and for 2008-09 it was 9.28%. Land Revenue has the lowest share of less than 1% for 2007-08 and 2008-09. In fact, ‘Land Revenue’ has been abolished in the State. Receipts from other taxes, which include taxes on goods and passengers and other duties on commodities and services would have a share of 14.10% and 16.60% for 2007-08 and 2008-09 (RE) respectively.
For the year 2007-08, contribution of central tax transfers is 11.79 per cent to the total revenue receipts as against 12.98 per cent for 2008-09 (RE) and 12.64 per cent for 2006-07 with Rs 1774.00 crore, Rs 2053.00 crore and Rs 1413.00 crore respectively. Central tax transfers have risen by 25.55 per cent and 15.73 per cent during 2007-08 and 2008-09 (RE) over respective previous years.
Experts, unequivocally, here have always been of the view that the state should pass own Service-Tax legislation without delay in case Central Legislation is not being preferred. This would increase the revenue tax to the state’s kitty. J&K’s finance minister A.R. Rather should at this juncture stress more on passing own service tax. Similarly, all the state governments have sought firm mechanism for compensation as they fear revenue loss after migration to the new system of tax collection. J&K is yet to come up with a concrete plan to shit to the new tax system. The first discussion paper on Goods and Services Tax in India by the Empowered Committee of State Finance Ministers --- which was made public on November 10, 2009 --- seems as a first step towards implementation of GST in India.
The document talks about the Dual GST Model (Central GST and State GST) to be implemented through multiple statutes (one for CGST and SGST statutes for individual states). Notwithstanding the success of VAT, certain shortcomings continue in this tax regime in the form of cascading effect due to inclusion of central taxes like Central Excise, Additional Custom Duty, Central Sales Tax and Service Tax etc. in its overall framework.
In contrast, countries that have benefited from switching over to GST (notable among them are New Zealand and Canada), managed the transition largely because they had a political leadership that gave an unequivocal support to the new taxation system and put in place a large autonomous body in charge of planning and implementing it within a stipulated time frame. In India, neither the committee nor the finance ministry has any team in place to plan and manage the transition. China, which has just begun talks on moving over to GST, is already busy putting in place a strong team of experts and technocrats.
The challenges of implementing the GST are enormous. First, it requires a constitutional amendment to allow the central and state governments to expand their tax bases, which are now narrowly defined. Second, the process of tracking inter-state transactions is extremely complex and requires a foolproof IT system. Third, the entire orientation of the tax administration has to be changed. The current system is based on taxation of the production and sales of specific goods and services. The GST will have to be designed as a consumption-based tax on all goods and services. The challenge is particularly daunting in the case of services, where it is often hard to define the exact amount of the service rendered.
Considering these challenges, it may be sensible to postpone the implementation date from the April 1, 2010 deadline for all states including J&K and the government should work on the up-gradation of infrastructure in J&K. The significant step in the J&K context shouldn’t be to meet the deadline to be in the race but to pass own Service-Tax legislation without further delay.
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