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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
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.
GST boost for logistics With many state and central taxes subsumed in GST, the logistics industry will be ridden of inefficiencies April 1, 2017, marks the beginning of the new financial year (FY) 2017-18. In many ways, FY 2017-18 is going to be a landmark one. First, this would the first FY when the budgetary outlays are available for expenditure right from the onset. This was made possible by preponing the Union Budget and realigning Parliament sessions to facilitate early passage of the Finance Bill 2017. Second, after decades of work in progress, Goods and Services Tax (GST) is finally expected to be rolled out from July 1, 2017. Possibly the biggest and boldest tax reform since Independence, GST seeks to overhaul the indirect taxation regime. And the logistics sector is likely to be one of its biggest beneficiaries.Studies estimate the average logistics cost in India to be around 13-14 per cent of GDP. This is much higher compared to other developed countries (which is around 8-9 per cent of GDP). Though various issues contributed to this, the structure of indirect taxes that exists today is a significant cause. Currently both Centre and states levy a bunch of taxes on goods. Note that we are saying “goods” here, as states are not empowered to levy service taxes. To continue, Centre’s levy includes taxes such as Excise, Customs, and Central Sales Tax, while states levy includes VAT/Sales tax, Octroi, Entry tax and Luxury Tax. Additionally, both Centre and States may levy other duties, cesses, surcharges over and above these. While levy of multiple taxes by Centre and states itself makes the tax structure complex, limitations to offset taxes paid along the value chain amplifies the problem further. For example, excise and VAT cannot be offset. So they cascade. So taxes get levied upon taxes. Further, it is difficult to claim VAT credits across states. The GST is poised to be a game-changer for the logistics industry. With GST, India will become a seamless unified market without any difference between inter-state or intra-state sales. This will essentially disrupt the existing inefficiencies and facilitate structural re-engineering of the logistics network. Service providers would be incentivised to leverage hub-and-spoke supply chain networks by operating large central warehouses and remodeling transportation routes. This can enable increased consolidation in the industry with large players operating efficiently. Phasing out the inter-state check posts would significantly reduce transportation costs and enhance “ease of doing business”. For industries, this would mean lower logistics cost and possible opportunities for increasing margins and/or reducing prices. For government agencies, all this may translate to increased formalisation and tax compliance. In fact, independent analyst estimates suggest that GST implementation can reduce overall logistics cost by around 30-40 per cent, thereby leading to an overall saving of about 0.3-0.4 per cent of GDP. All this would ultimately benefit the public. That said, there are still some issues that need to be resolved. The All-India Transporters Welfare Association (AITWA) and All India Motor Transport Congress (AITC) had recently organised a technical session on GST. The authorities were apprised of key areas that need more clarity. There could be some teething troubles but the government is determined to sort all these as we go along. Meanwhile, there is another interesting development. The government is reportedly considering changing the fiscal year from April-March to Jan-Dec. An expert committee has recently submitted its recommendations which is yet to be made public. But, if the government does go ahead with effecting this change, then FY 2017-18 could as well be the last FY to start from 1st April. Will this impact the existing scheme of GST? Mostly should not, but we are not sure. Only time will tell
81% items to be taxed below 18% rate under GST: Government NEW DELHI: The Goods and Services Council finalised tax rates for 1, 211 items with a majority of items being kept at under 18 per cent rates. “GST Council approved 7 GST rules in a meeting held in Srinagar, while legal committee is looking at remaining 2 GST rules ( return, transition rules), ” Finance Minister Arun Jaitley said. Briefing the media after the meeting in Srinagar, Jaitley said, today’s meet was focused mainly on fitment of goods under slabs. GST Council may meet again if final rates not decided tomorrow. Clearing air over the GST rate slabs, Revenue Secratery Hasmukh Adhia said: “Nearly 81 per cent of the items will fall under below-18 per cent GST rate slabs and only 19 per cent of the goods will be taxed above 18 per cent.” Sugar, Tea, Coffee (except Instant) and edible oil to fall under 5 per cent slab, while cereals, milk to be part of exempt list under GST. In a big boost to industry, Council has set the rate for capital good, industrial intermediate items at 18 per cent. Coal to be taxed at 5 per cent against current 11.69 per cent. Tooth paste, hair oil, soaps will be taxed at 18 per cent, it is being tax at 28 per cent, currently. Common man items have gone into 12 per cent and 18 per cent slab. Indians sweets or mithai in 5 per cent slab. Council will discuss the rate slab for important goods like gold and beedi rates tomorrow. No decision has been taken on Services tax rates and rates over auto sector. The two-day meeting began here in Srinagar to finalise the nuts and bolts of the new tax framework, proposed to be rolled out from July. The council has begun discussion on the list of items that will attract 0 per cent GST. Most states have pitched for keeping items sensitive to their states out of the list. For example Uttar Pradesh wants Puja material out of tax net. Some other states want cotton yarn and silk yarn out. The Centre is keen on keeping the list small as a large list of exemptions would hurt the objective of base expansion. Exemption of essential services will also be discussed. The Council also discussed exemptions and items in the 5% slab. All raw food items, including foodgrains to be exempt. Processed food of daily needs to be in the 5% slab. If you are catching up now, here’s a primer 1.What’s so good about the new tax? Those 17 or more state and federal levies on everything from electricity to Gucci handbags complicate efforts to sell products to India’s population of 1.3 billion (about four times bigger than the U.S.). Under the current system, a product will be taxed multiple times and at different rates. Every day, for instance, more than 20, 000 truck drivers wait in queues up to three kilometers (1.8 miles) long to pay an entry fee at the New Delhi checkpoints, with food rotting, tempers fraying and costs rising. In another change, the GST will apply to goods at the point of consumption, rather than where they are produced. That will reduce the cascading effect of taxes, allowing producers to easily claim credits and minimising the opportunity for corruption. 2.What gets taxed, and at what rate? The tax will comprise four basic rates: 5 percent, 12 percent, 18 percent and 28 percent. While officials are yet to reveal final details of what will fall into each bracket, Finance Minister Arun Jaitley has said 50 percent of items in the retail inflation basket won’t be taxed in order to protect consumers from price rises on basics such as food grains. As well as those four rates, there’ll be higher rates for tobacco products (65 percent) and luxury goods. 3. Is there a downside to so many rates? Most countries use a single rate applied to virtually all goods. Critics say this complex system increases the chances of companies and consumers trying to game the system, as well as adding to the workload of bureaucrats. 4.Will the tax impact the economy? Citigroup’s economists say countries like Canada, Australia and New Zealand experienced a one-time bump in inflation after introducing GST but that prices soon normalised. Looking at the wider economy, the GST could lift growth by as much as 2 percentage points, according to Jaitley. Greater tax compliance and efficiency has the potential to increase government revenue, helping narrow Asia’s widest budget deficit and freeing up funds for schools and highways. And by streamlining the process of buying and selling stuff, the government is betting on a boost to Modi’s “Make in India” manufacturing push. 5.What about the businesses themselves? Companies will have to overhaul their accounting systems, which may involve one-time investment costs. Logistics firms stand to gain as it becomes easier to ferry goods across India. Other winners and losers will be determined by those rulings on which goods belong in which tax bracket — and by any exemptions included in the fine print. 6.Do many other countries use this type of tax? India will join 160 nations that have a value-added tax, including Poland, Canada and Japan. At the top rate, India’s GST will be among the highest. And with 29 states, 22 official languages and 9 million businesses, the logistics of overhauling India’s tax system are likely to make any tax changes by U.S. President Donald Trump look easy by comparison.
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.
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