Revenue Secretary Hasmukh Adhia is a man on a mission. While taking charge in September 2015, Adhia had singled out the implementation of the Goods and Services Tax (GST) in a “time-bound manner” as his top priority. His resolve is close to fruition, with the GST — considered the biggest indirect tax reform since Independence — set to roll out from July 1. With the countdown for the unveiling of the reform having begun, Adhia is at the forefront of creating awareness about the GST regime, touring states across the country and interacting with the industry. While he concedes there will be difficulties and problems after the rollout, the government, he says, is trying to ensure that every single loose-end is tightened before the GST launch.
Ahead of the July 1 rollout of the Goods and Services Tax, Revenue Secretary Hasmukh Adhia explains nuances of the tax regime and why manufacturers and consumers need not worry about prices rising. Edited excerpts from The Indian Express Explained event in New Delhi:
On the history of indirect taxation, GST
If we go into the brief history of indirect taxation in India since Independence, the powers of taxation between the Centre and the State were divided. In the Constitution, there is a separate entry for powers of state governments, one for the central government and then there is the Concurrent list. The power to levy excise duty, custom, service tax… was part of the central government’s entry. Sales tax, which means taxes on goods, was part of the state government’s entry. All state governments used to levy sales tax, which is a single-point tax; it was never a value added tax — till April 1, 2005. As for excise duty, it was levied right from 1947 — on manufacturing. There again, it was not a value added tax, but was levied only at one stage of manufacturing. Service tax did not exist until 1994 when, for the first time, the Government of India introduced it on a few items. Then the service tax net was expanded. Today, income from service tax is almost one-third of the total indirect tax. So we’ve got custom, excise and service tax. Customs duty, of course, is on imported goods that brings us something like Rs 2.25 lakh crore. An equal number comes from service tax and the rest, about Rs 3 lakh crore, from excise. In 2003-04, the Empowered Committee of Finance Ministers mooted the idea of a GST. But then they found that having a common value added tax for both the Centre and state governments would be very complicated; it would require a Constitutional amendment. So they went in for a compromise — let us at least start a value added tax at the state level, instead of a single-point sales tax. All the states decided jointly to start VAT from April 1, 2005. Most states joined on the same day but there, unlike in GST, there was no compulsion that all of them had to join on a single date. Couple of states joined later.
Many other countries had got VAT or GST quite early, but we started only in 2005… In India, we are now going to implement a single value added tax across the value chain, which is a single tax levied by Centre as well as state governments. So you must have heard terms such as CGST, SGST — Central GST and State GST. Why are there two different nomenclatures? It is only to denote that some portion of it will go to the Centre, some to the state government. As far as the consumer is concerned, it is a single GST — the same rate on a single product anywhere in the country.
So if a product attracts 18% tax, it will be the same rate of tax across the country. This will be divided between states and the Centre. So 18% may be put in the bill as 9% SGST, 9% CGST, but they are not two different taxes. But unlike most other countries, where there is only one government collecting GST and then giving it to state governments, in our country we have a dual GST, in which the state governments want to keep a separate control, they want to know how much of goods and services are consumed in their state and they want to keep a control on that number. That’s why it is a little more complicated. Particularly for the service sector, which used to have the luxury of a single registration, paying a single tax to one authority. There it is going to be a little difficult because of this requirement of the states. It’s a little more complex in that sense, but this complexity has been removed by discussion.
The first time it was decided that we will bring a comprehensive GST — states and Centre combined — was in the Budget speech of Pranab Mukherjee in 2006. It was announced that we will introduce GST in India from April 1, 2009. We have missed it only by a small margin of eight years, but better late than never. It took us so many years mainly to finalise the Constitutional amendment — what should be the powers of the state, the Centre… because we had to exchange our powers. The Constitution gave power to put value added tax on the distribution chain only to the states. It was not with the Centre. Service tax powers were only with the Centre — we had to exchange those powers. From 2006 to 2016, there were 10 meetings of the Empowered Committee and many more meetings of sub-committees of officers. So many sub-groups of officers worked on the Constitutional Amendment and simultaneously… work on the GST law started early 2010 onward. It is such a long journey that has happened in this entire tax process.
In September 2016, we got it notified and in a period of eight months, 15 meetings of the GST Council were held in which all decisions were taken by consensus between the states and the Centre and we are glad that the country is now going to see the face of GST, a composite GST which will have many facilities. First, multiplicity of taxes will go. There are 15 kinds of different taxes… all these taxes will now merge into one. Second, seamless law of credit. Earlier there was cascading… somebody would pay excise duty on the production of goods. Say, on Rs 100 worth of goods, Rs 12 of excise duty would be paid and the VAT will apply on Rs 112. So, cascading of taxation or tax on tax. This will go away now… Today when the consumer is paying VAT , he doesn’t know that there is already an excise which is hidden into it. But now, excise and VAT will become one and the final bill will say this is my total incidence of tax. On the whole, we should see the consumer and the common man in this country getting some kind of relief.
On ‘compromises’ made for resolution
In any process of negotiation, each party has to compromise somewhere. Sometimes, one party does it and sometimes the other. But what I found to my pleasant surprise was that no discussion ever took place on party lines. So states would fiercely protect their interests, independent of which party they come from… They would always all argue in favour of their interest and they would not agree with the Government of India even if both states and the Centre are from the same political party. That’s something pleasant I found. Some of the toughest negotiation points, something which took a lot of time, was, of course, the compensation for five years because the Constitution says that if there is any loss to the states because of the implementation of GST, then the same will be protected by way of compensation. So that took a lot of time because the states wanted not only their interest to be protected but also a fairly reasonable growth rate to be given on top of it… So it took us so much time to decide this but ultimately, we had to give in and the Finance Minister (Arun Jaitley) was very generous in agreeing to a growth rate of 14% per annum. The states’ revenue will be protected by a growth rate of 14%. If, after GST, there is any deficit from this figure, we will have to make it good.
On exclusion of certain sectors
If you see the total income from petroleum products, there are a few items which are still with the state government; they are not merged with GST. One is stamp duty on all property registration. Second is electricity duty on sale of electricity. The third is the five petroleum items — crude oil, diesel, petrol, natural gas and aviation turbine fuel. On the whole, the income that they get out of these items in their kitty is about 33-35%. It’s a significant amount of income and the states were not sure whether they would be able to sacrifice all this income in the first year itself. The uncertainty involved in the revenue flows after implementation of the GST, they didn’t want to take the entire risk in one year. We have not excluded them from the Constitutional amendment. Today, if the GST Council decides, we can bring these five products into the GST. But the Council itself is not willing to do that now, it may do after a year or two, or five years. It is a kind of a risk insurance for them.
On a single GST rate
Ultimately, GST should have a single rate. That is the ideal GST. In Singapore, there is a single rate of 7%. We have two problems. One, we are starting from a legacy which is so bad because we have so many rates. If you combine the total incidence of entertainment tax, luxury duty, VAT, service tax, sales tax, everything put together, the total incidence runs into, say, from zero to 35…40…50 % for various commodities. Now, if you want to bring such a large spectrum of commodities into one basket and choose a median rate of 18% on all these items, what will happen? Just imagine. Immediately, the items which were attracting 40% rate, the luxury items, will become cheaper and the items which had a 5% rate or no tax, will all become very, very costly. So for India, (a single GST rate) would have been a very regressive action to take immediately. What we decided was that we will narrow the number of bands and a large part of commodities, at least 50% of items in the CPI basket have been put in the exempt list. We don’t want the common man to be hit by the introduction of GST. And we have put many other items in the CPI basket in the 5% band. So that’s why we didn’t want to have a single rate to begin with. We started with a lot of imperfections. We are trying to improve it over a period once we find that revenues are stabilising, everything is okay. Then, we can slowly reduce the number of slabs.
On legislative, IT preparedness
All the four laws that we needed to pass have been passed by Parliament. All states need to pass the State GST — 24 states have done; only 7 are remaining and those states, unfortunately, have no option but to pass them before July 1. If they don’t pass, then they will be hit because if any goods go from the rest of the country to that state, they would have already paid IGST and that state will charge its own VAT… so there will be double taxes for the consumer. Also, a producer in that state would have paid VAT and when they transfer goods to any other state, they will have to pay IGST again. It’s not possible for any state to remain outside GST. So they will pass it eventually. There’s not a single state which has come and told us that we are not going to do GST. All of them are actively participating and are on board.
The second is IT network. Work on it started long back, in 2013. The contract was given in 2015, the service provider was selected by GST in 2015 and they are working on it. The entire hardware and software are in place. It is also linked to the back-end infrastructure servers of the Central Board of Excise and Customs. So everything — connectivity, hardware, software… all the processes, forms — is in place.
On industry’s price concerns
I don’t think any of the manufacturers would be worried because what we have done is that we have not increased the tax in many cases. We have taken the existing incidence of tax on them, including embedded taxes. Some of them are calculating a pure and simple excise duty rate and a VAT rate on the commodity… but there are a lot of embedded taxes. And then there is a mandatory 2% extra when you transfer your goods from one state to another, a 2% CST burden. Now that burden will not be there. If you calculate all this, the rate will be less than what it is now in case of most commodities. I don’t think they should have any reason for worry. But if there are any calculation mistakes, we will check it out.
On consumer’s price concerns
The first thing is, when we have got too many retailers selling the same product, the competition itself should take care of this. Because if there is competition at the retail level, I don’t think one person will increase arbitrarily even when the tax rates have not gone up. That is something that will not happen. But we’ll have to watch and see. The second thing is, we’ll be doing consumer education in a big way — consumers need to be told about the existing incidence of tax on each product, including the hidden tax which they do not see. There is an excise element in the tax and until now, consumers only saw the VAT rate given in their bill. Excise duty was never reflected in the bill. Now the trader may say, look here, I used to charge 5% VAT from you, now GST is 18%, so I will charge you more. So we will have to tell the consumer that one, earlier too there was an element of excise duty hidden in the commodity. Second, we will have to say that now there is a seamless input tax credit which this seller can avail because of which his overall incidence is not going up. I will give you an example. When you are buying a flat, you are told that there is a 4.5% tax of the Government of India, a service tax. In the making of a house, there are two elements — goods and services. On goods we cannot charge anything, we can only charge on the service component. We used to presume that this much is the component of service, so we used to charge one-third of the normal service tax rate, 4.5 %. On the other side, on goods, without input tax credit, all states used to charge 1% tax. So, on the whole, your total visible incidence was 4.5 plus 1 % , about 6%. Now, what happens is that we have come out with a GST rate of 12%. But this 12 % will give you complete input tax credit. Earlier, there was no input tax credit. In the construction of a flat, whatever building material the builder uses, including cement, steel, aluminum, glass, paint, ceramics, floor tiles, roof tiles — and most of these items are in the 28% slab — he will get an input tax credit for all these items. So virtually, if he keeps a proper record and if he buys all these building materials in white, he will have zero-tax liability on the output. So he will get a complete credit of 12%. The builder cannot tell the consumer now that earlier I used to charge 4.5 plus 1%, about 5.5%, now it is 12%, give me 7% extra. He will get much more than 7% by way of input tax credit. Now this can only be told to public by way of consumer education. We’ll have to do a lot of this consumer education.
On anti-profiteering measures
That is the last step that we’ll have to take. If there are companies, which are oligopolies, and where they have very huge market share in that product — say, toothpaste or some such item where there has been a significant reduction. Now those companies, if they don’t reduce their price commensurate with the decrease in the tax rate, then we will think of a framework which will take care of that. In which case, we could mandate that company to pass the benefit to the consumers, we can ask them to reduce their prices. If they don’t do it, we can also ask them to… suppose it’s not possible to refund it to the customer… we have a provision for a consumer welfare fund. So this entire money, which will come from the company, or profiteering, will go to the consumer welfare fund.