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GST Council plans to take up three contentious laws for discussion; targets 1 July roll-out Aiming towards a smooth roll out of Goods and Services Tax (GST) from 1 July, the GST Council will look into the three GST laws in its next meeting, scheduled for 18 February. The session by the Secretaries Panel at CNBC-TV 18 Mint’s ‘Budget 2017: The Verdict’ programme in New Delhi on Thursday evening discussed in detail the GST and its power to arrest, disinvestment plans, mergers and acquisitions, proposals for a new financial year, and other factors. West Bengal finance minister Amit Mitra, who also heads the empowerment panel on GST. AFP file image “Industry is looking forward to the laws and rules. Once they are finalised by the GST council, it will pave the way towards the implementation of GST from 1 July. The agenda of the next meeting is to look into all the three laws. In the subsequent meetings, we’ll take up the rules. As far as rates are concerned, it’s going to be a simplistic formula. The council has said that there would be four slabs: 5 percent, 12 percent, 18 percent and 28 percent, ” said revenue secretary Hasmukh Adhia. After the announcement of the Budget on 1 February, West Bengal finance minister Amit Mitra, who also heads the empowerment panel on GST, sent 16 demands to the Finance Ministry to look into, including the arrest clause, which was described as “draconian” by the West Bengal government. “The power to arrest tax defaulters is already there under excise and service tax laws, and also under VAT in some states. After an extensive debate, a majority in the GST Council decided that no arrests should be made in cases of tax evasion up to Rs 2 crore. However, evaders between Rs 2 and Rs 5 crore could face bailable arrest. Above tax evasion of above Rs 5 crore, it may invite non-bailable arrest, ” he said. Is there a new financial year on cards? Economic affairs secretary Shaktikant Das said, “The report to change the financial year is under consideration by the government. We are examining it, and once the decision is taken, it will be communicated.” On IDBI Bank’s disinvestment plan The government announced in the Budget that it hopes to raise Rs 72, 500 crore in FY18 by divesting stakes in public sector firms. Compared to the revised estimate of Rs 45, 500 crore for FY17, this is an increase of around 60 percent. While discussing the disinvestment plan of the state-run IDBI Bank, Das said, “The divestment of IDBI Bank is not off the table. The work is in progress. Its share value in the market doesn’t reflect the real estate it holds in Mumbai. The real estate valuation needs to be done carefully and a transparent decision needs to be taken in this case.” “We’ve not derailed from the path of financial prudence. Today, our economy needs investment in certain sectors. As per the NK Singh panel, our fiscal deficit target is 3 percent and we’ll improve it in 2017-18, ” Das added. Priorities in 2017: “To ensure people pay tax and society becomes more tax compliant”: Ashok Lavasa, finance secretary. “Budget 2017 is very strong on reforms, and our focus is on implementation”: Shaktikant Das, economic affairs secretary. “Roll out of GST from 1 July 2017 will be the Year of GST”: Hasmukh Adhia, revenue secretary. “Look for a stable and buoyant market”: Neeraj
Is a progressive GST possible? The short answer is no. The long answer then is to focus on correcting the unfairness and skew in goods and services tax (GST), with greater redistribution India has one of the lowest direct tax to GDP (gross domestic product) ratios in the world. This was documented in last year’s Economic Survey. When it comes to taxing income, we have a very generous threshold for exemption. As Praveen Chakravarty pointed out in a BloombergQuint column, India is the second-most generous country, among 20 major countries, when it comes to granting exemption from income tax. Tax liability kicks in only when your income exceeds 2.4 times the national per capita income. So, a lot of income earners legitimately escape the income-tax net. For instance, if the income exemption limit had been kept at Rs1.5 lakh in in 2012-13, then tax collection would have increased by Rs31, 500 crore and we would have had 16.5 million new taxpayers. Those are automatic additions to the tax net, since incomes rise with GDP, and taxable brackets need not. In these days of demonetization post-mortems, it is claimed that 2.2 million entities, mostly consisting of individuals, but a few trusts and companies as well, deposited a total of Rs2 trillion. All these 2.2 million entities have never paid income tax. Since the average deposited amount is Rs9 lakh, much more than the annual exemption limit, it is possible that a significant number of individuals may have to pay tax. Of course, it is entirely possible that the entire amount that was deposited was savings accumulated over several years. The process of determining if there has been tax evasion involves inquiry, investigation, scrutiny, charges, judicial decision, appeals and tribunals. This can take a lot of time. If a handful of the cases revealed by the Panama Papers leaks have still not reached their logical conclusion, one can only speculate how long it will take to pursue hundreds of thousands of cases thrown up by suspiciously high deposits in the aftermath of demonetization. In short, it is easier to get people into the income-tax net simply by avoiding exemption-bracket generosity every year. The total exemption granted to capital gains is another glaring loophole. It was recently extended even to gains made on sale of real estate, by reducing the holding period to two years. Last year’s Economic Survey gave extensive details of the loss to the exchequer due to exemptions to long- term capital gains in the past few years. For instance, in assessment year 2014-15, the capital gains that went tax free were Rs64, 521 crore. In later years, this figure could be much higher. The prime minister is on record urging the capital markets (where much of the tax-free capital gains are made) to bear their fair share of the tax burden in the economy. He hinted that the tax burden on stock market profit should be higher than it is. This leads us to the other big anomaly of India’s tax revenue. It is that the share of direct taxes in total tax revenue (both state and Centre) is only 35%. Indirect taxes, now made up chiefly of the nationwide goods and services tax (GST), are inherently regressive. They hurt the poor more than the rich. GST is a consumption tax. For the poor, almost their entire income (or more) is spent on consumption, and is hence subject to the tax. The rich have a big share of their income go into savings, which is not taxed (or even subsidized). With the widening of GST, and higher tax slabs, the unfairness of the indirect system becomes more acute. The global average rate for consumption taxes is 16%. Most Asian countries have rates of 10-15%. But India’s modal rate is 18%. This hurts the poor much more. To reduce the regressivity inherent in GST, most items consumed by the poor are taxed at a low 5% or 12%. It is claimed that most of the CPI (consumer price index) basket is taxed at these lower rates, or some items are completely exempt (e.g. foodgrain). This nobly intended classification brings its own distortions, disputes, lobbying and corruption. The ultimate aim of converging to a single GST rate becomes a distant dream. Consumption taxes are less distortionary, easier to administer and monitor, are applicable to every transaction, and can be buoyant even with slight tweaks. Consumption cannot be hidden, unlike income or savings. Hence despite being unfair and regressive, they have become more popular worldwide. Renowned tax expert John Kay recently observed that the share of income tax in OECD (Organisation for Economic Co-operation and Development) governments’ revenue had fallen, whereas consumption tax share had gone up. This is a matter of great joy and success for the tax collector, but a matter of great dismay to the economist. We even have strident demands for reduction in income-tax rates, as a supply-side stimulus for pushing up GDP growth rates. What is to be done then? The initial collection figures for GST in India already show higher than expected revenue. As implementation gets streamlined, and registration becomes complete, with interlocking incentives and completely computerized returns, GST revenue will grow handsomely. In fact, GST will race ahead of income taxes. How then to make it more fair? Is it possible to have a progressive GST? The short answer is no. The long answer then is to focus on correcting the unfairness and skew, with greater redistribution. This could be through greater spending on public goods, including primary health and education. Or it could be through larger redistributive transfers aided by superior targeting through Aadhaar, or as universal transfers. Without these antidotes, the skew will only get worse.
GST’s real gain is efficiency and sustainability By all counts, GST and the demonetisation-led formalisation of the economy is as big a transformation as the 1991 economic reforms. As we navigate through the current disruption, the GST narrative will change to productivity gains, formal jobs and better competitiveness. Finance minister Arun Jaitley at the 23rd GST Council Meting, Guwahati. The effects of GST on compliance and resulting teething issues for small businesses are well documented. The implementation of the Goods and Services Tax (GST), considered to be the most important policy change in India since economic liberalisation, has the potential to bring about large-scale economic impact. The initial commentary on the GST has revolved around benefits in terms of uniformity of tax structure, removal of cascading effect, efficient tax administration and improvement in government finances. On the flip side, the short-term impact of the transition is seen as a cause of lower growth in the economy. However, as we navigate through the current period of disruption, I believe that the narrative will change to productivity gains, formal jobs and better competitiveness. There is a need to delve a bit deeper to understand the forces at play. With the benefit of hindsight, we now know that the impact of demonetisation went beyond unaccounted money; the real gain came from digitisation and formalisation of the economy, accompanied by an unprecedented move from physical to financial assets . The recapitalisation of public sector banks has been partly enabled by this tide of massive liquidity available with the banking system. Similarly, beyond efficiency transformation in taxation, the impact of the GST-led initial disruption has been underestimated because millions of enterprises are expected to make a shift in their approach towards cash, compliance and customer interaction. The GST is likely to have a positive impact by way of increase in competitiveness and productivity through improvement in quality of jobs, access to formal credit and significant reduction in the overall tax burden. The effects of the GST on compliance and resulting teething issues for small businesses are well-documented globally. Notwithstanding the pain associated with this adjustment and compliance challenges, these changes are at best a short-term phenomenon. The effect on jobs on the other hand has not been considered significant internationally. However, the key difference in India is that 85% of the enterprises are in the unorganised sector, which is much more than any of the industrialised countries which have implemented some form of the GST. First, the informal sector is almost 40% of the Indian economy and employs almost 75% of the labour force. However, a significant part of SMEs (in the informal economy) do not have economies of scale or a technological edge. They survive on the cash economy to evade taxes, provident fund liabilities and minimum wages to employees. This directly impacts competitiveness of other SMEs who do business by the rules. Too often, informal enterprises have taken advantage of an archaic tax system, impractical labour regulations and an ineffective oversight at the local administration level. The GST, therefore, shall result in a shift in business from the informal to formal sector. Quality of jobs in formal enterprises will improve, giving a fillip to the government’s Skill India initiative. Going ahead there will be an increase in demand for better skills as firms try to build sustainable enterprises. Second, with formalisation and digitisation, financial institutions would be able to cater to the credit needs of SMEs who were hitherto outside the purview of the financial system, by providing greater access to working capital. A lot of the traditionally strong sectors of the economy such as footwear, leather, textiles, plastics, chemicals and food processing shall be the early beneficiaries of this trend. Third, the measures of the government to ease the compliance burden on SMEs (single-return filing in a quarter, higher limits under the compensation scheme, significantly reduced penalties on delayed tax filing, etc) are likely to give a fillip to better-run enterprises by reducing compliance cost. Reduction in the rate of corporate tax and a one-time waiver for bringing past records of labour and production can be an additional boost. A small intervention earlier this year, allowing firms to come clean on their actual staff strength without getting penalised led to a 26% rise in the EPFO subscriber base from 38 million in December 2016 to 48.1 million by June this year. We might be underestimating formal jobs by a huge margin anyway. Fourth, relocation of productive resources, including capital, within the SMEs shall lead to immense improvement in productivity. Jobs in such enterprises would be unlike ‘subsistence’ jobs in the informal sector, with no social security benefits. In addition to direct job opportunities for the entire fraternity of tax consultants, accountants and compliance officers, the GST could lead to 11-18% growth in formal jobs in sectors including cement, logistics and e-commerce. The evolution of e-commerce has already expanded the scope of the market for these SMEs who now have a global market to cater to.
1st Feb, 2017GST will hit tax collections, but boost GDP in medium run : Over the medium run, the implementation of GST and enactment of other structural reforms should help the economy realise its real potential GDP growth of 8-10%+ , chief economic advisor (CEA) Arvind Subramanian has said in the Economic Survey. However GST, which will be implemented from July 2017 if the finance ministry sticks to the new deadline, is likely to affect revenue collections adversely, particularly that of the Centre as the states' revenues are guaranteed. The survey pointed out that the transition to the GST is so complicated from an administrative and technology perspective that "revenue collection will take some time to reach full potential". Combined with the Centre's commitment to compensating the states for any shortfall in their own GST collections relative to a baseline of 14% increase, the outlook must be cautious with respect to revenue collections, the survey said. Source - TOI Business
GST roll out next fiscal: Is the govt looking at changing the financial year? Aiming towards a smooth roll out of Goods and Services Tax (GST) from 1 July, the GST Council in its next meeting on 18 February will look into the three laws in GST. The session by Secretaries Panel at ‘Budget 2017 The Verdict’ of CNBC-TV 18-Mint at Hyatt Regency in New Delhi on Thursday evening discussed GST and its power to arrest disinvestment plan, merger & acquisition, proposal for a new financial year among others in detail. “Industry is looking forward to the laws and rules. Once they are finalised by the GST Council – it’ll pave way towards implementation of GST from 1 July. The agenda of the next meeting is to look into all the three laws. In the subsequent meetings we’ll take up the rules. As far the rates are concerned, it is going to be a simplistic formula. The council has said that there would be four slabs of rates—5%, 12%, 18% and 28%, ” said Revenue Secretary, Hasmukh Adhia. After the announcement of Budget 2017 on 1 February, West Bengal’s finance minister, who also heads the empowerment panel on GST, sent 16 demands to finance ministry to look into, including the arrest clause. The arrest clause has been described as ‘draconian’ by the West Bengal government. “Power to arrest the tax defaulters is already there in excise and service tax, and also under VAT law in some states. After an extensive debate, majority in the GST Council decided that no arrest would be made in the case of tax evasion up to Rs 2 crore. However, evader between Rs 2-5 crore will face arrest but get a bail. But above, Rs 5 crore, it’s non-bailable, ” he said. Is there a new financial year on cards? Economic Affairs secretary, Shaktikant Das said, “The report to change the financial year is under consideration by the government. We’re examining it, and once the decision is taken, it will be communicated.” On IDBI Bank’s disinvestment plan The government announced in the Union Budget on 1 February that it hopes to raise Rs 72, 500 crore in FY18 by divesting stakes in public sector firms. Compared to the revised estimate of Rs 45, 500 crore for FY17, this is an increase of around 60 percent. While discussing the disinvestment plan of the state-run IDBI Bank, Das said, “The divestment of IDBI Bank is not off the table. The work is in progress. The share value of it in market doesn’t reflect real estate it holds in Mumbai. The real estate valuation needs to be done carefully and transparent decision needs to be taken in this case.” “We’ve not derailed from the path of financial prudence. Today, our economy needs investment in certain sectors. As per the NK Singh panel, our fiscal deficit target is 3% and we’ll improve it in 2017-18, ” added Das. Priorities in 2017 Ashok Lavasa, Finance Secretary: To ensure that people pay tax and it should be a more a tax compliant society. Shaktikant Das: Budget 2017 is very strong on reforms and our focus is on implementation. Hasmukh Adhia: Roll out of GST from 1 July. Year 2017 will be the Year of GST.
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