Remove Anomalies before imposing GST across sectors, says ASSOCHAM-KPMG paper

Sharp   anomalies   in   the  taxation  rates  and structure  across  different  industries  such  as telecom,  tobacco,  textiles,  food processing and tourism  ,  should  be addressed to as the country moves  in a transition period for implementing the Goods and Services Tax, the ASSOCHAM-KPMG paper has said in a joint paper for the GST Council.

The   exhaustive   paper   stated   that  taxation structure,  say,  for, tobacco industry should not be  based  on  some emotive issues and be rational enough  to  check  a  huge amount of illicit trade which  stays  outside  the  taxation  net. It said instead of subjecting the  tobacco  and tobacco products  at  a higher than the standard rate, the entire  sector should be placed under the standard rate  with  the  focus  of bringing exempted items under the GST net to eliminate the rampant illicit trade.  As  per IMF report high rates of GST / VAT lead to manipulation and fraud.

Similarly,  for  the  telecom  sector,  the  paper cautioned  that  GST  may  negatively  impact  the working capital cost since initial landed price of purchases  including  imports  may increase due to increase  in  tax  rates.  Cost  of procurement of services  may  increase  to  more than 18 per cent from  the  current rate of 15 per cent, which will be  a  challenge  for  the industry, especially if CENVAT  credit  on passive infrastructure and fuel consumption is continued to be denied.

Likewise, the ASSOCHAM-KPMG also went into the impact  of GST on the textile sector and suggested ways to find an ideal situation.  It said in case, India opts for higher tax rates under the proposed GST regime, and  then  in the long-term, it will lose its market share to the developing and highly competitive economies.

Hence,   it   is   recommended   that  India  also implements   policies   that   capitalize  on  the potential  of  its textile and apparel industry so that  the country has a higher bargaining power in procuring export orders in the international trade vis-à-vis  other  developing  economies. Thus, the Government  should make a conscious call to retain lower  rate  for  this  industry  by introducing a special  lower  slab  of  4 per cent to 6 per cent under  the  proposed  GST  regime  along with full input tax credit of GST paid on goods and services used in the supply chain.

“As   we  are  in  a  transition  period,  several industry  sectors  are  faced  with  challenges of adapting  to  new  tax  regime. While the GST is a path-breaking reform, its implementation should be calibrated  in a manner to cause least disturbance to   the   existing   taxation   structure.   “The Government should unshackle its mind if it really wants to achieve the objectives of GST –       Expanding   the tax  base,  reduction  in exemptions;   mitigating   cascading   and  double taxation,    enabling  better  compliance  through lowering of overall tax burden.

The Government  should follow the recommendations of eminent economist like Dr. Vijay Kelkar and Dr. Arvind  Subramanium,  which  suggest that moderate rate  of  taxes will expand the tax base resulting in  high collections, which will be the success of GST.  Otherwise  it  will  be  ‘Old  Wine in a New Bottle’.  ”  Mr.  D  S  Rawat,  Secretary  General ASSOCHAM said.

Elaborating,  the  paper said the tobacco industry has  been the second largest contributor to Indian excise  revenue  after the oil and gas sector. The combined   tax   revenue  collected  from  tobacco industry  (Centre  and  States)  was  more than Rs 29,000  crore  in FY 2014-15. Tobacco products are being  cultivated  in  an  area of about 4.68 lakh hectares  (0.24  per cent) of total arable land in the  country  with  a  production  of  800 million kgs13. The tobacco industry provides employment to nearly  4.5  crore people in India comprising farm labourers, farmers, traders, etc. Thus, the sector gives  livelihood  to  a  considerable size of the population,  particularly rural women, the tribals and   labourers  who  are  under  stress  with  no employment  alternatives  especially when India isexperiencing  jobless  growth  for  the  last many years.

Under  the GST regime, it is proposed to levy both dual  taxes  as  well  as higher rate of GST.  The endeavor  should  be  to tax the hitherto untaxed/ insignificantly  taxed  segments  of  the  tobacco industry   i.e.   tobacco   products   other  than cigarette  as  the consumption of such products is way  higher  than  that of legal cigarettes. Thus, levy  of  standard GST rates with excise duty on a wider  tax  base  will  yield a higher tax revenue collection than continuing with levy of high rates of  taxes  on  only  one  segment  of  the tobacco industry i.e. cigarettes.

For   tourism   sector,   at   present,  different abatement  schemes addressing different situations are  available  under  service  tax such as 30 per cent  in case of composite package and 60 per cent for  dining  in  a  standalone restaurant. This is leading to ambiguity and complexity in determining the  value  on  which  service  tax is payable. In order  to  overcome  such  situation,  uniform tax treatment  i.e. one standard rate dealing with all the situations should be introduced.  The   rates   should   be   moderate   to  remain competitive.

Besides,   in   current   regime,  all  the  taxes cumulatively  applicable to restaurants (i.e. VAT, Service  Tax and other applicable taxes) increases the value on which tax is payable to more than 100 per  cent. Such a situation increases the tax cost substantially.  Therefore,  a  mechanism should be introduced  whereby  value  on  which GST would be applied  should  not  increase 100 per cent in any case.

As  for the food processing, the industry is taxed at  a  concessional rate/ zero rate. GST is likely to  be  based on minimal exemptions regime leading to   increase   in  the  tax  cost  for  the  food processing  industry  and inflation. A distinction needs  to be made based on the ‘necessity’. Taking from  the  example  of  Canada  the food products, which  are essential for human consumption, should be  taxed  at zero rate. As food comprises a major part  of the WPI, which is nearly 14.3 per cent, an  increase  in  tax on food items will adversely impact  WPI  leading  to  higher  inflation in the country.