Taxing Times: Taxation Enters A New Era?

The stringent compliance rules bring with them a host of complexities. What exactly are the CFOs dealing with now? How has the taxation landscape changed? What are the new challenges?

V S Krishnan
India signed tax super treaty along with 67 other countries in June. BEPS is a multilateral instrument that will swiftly modify more than 2,000 active tax treaties and is aimed at expanding the global tax net, easing the flow of information between countries, and curbing tax avoidance by multinational corporations. On the domestic front, the mother of all tax reforms, the GST, rolled out on July 1 amid much misgivings. The stringent compliance rules bring with them a host of complexities. What exactly are the CFOs dealing with now? How has the taxation landscape changed? What are the new challenges?
First of all, we are witnessing sub-nationalistic pressures over the world. Scotland wants to get away from Great Britain; Catalonia went through a referendum; Britain got out of European Union and Quebec’s issues with Canada. India, on the other side, went through the reform, where 29 states of the Indian Union, voluntarily gave up their unilateral right to change indirect tax rates and come together in a fine example of pooled sovereignty. The Centre and the states formed the GST Council to cooperatively, collaboratively carry out the indirect tax policy reform, which he termed as a fine example of cooperative federalism. He said there are transitional issues, but we’re prisoners of the short term but that doesn’t mean that we should not look at the broader picture. 
What is so transformational about the GST? There are two things which are transformational. First is the value chain. Earlier, the value chain from raw material to retail was structured for the purpose of taxation. The Centre levied tax on the manufacturing portion of the value chain, while state levied the tax on the trading portion of the value chain. The constitution amendment bill connected both into an integrated structure for taxation.
The Centre was empowered to tax the value addition in training, and the states were empowered to tax value addition in manufacturing and services. Now GST has brought in an integrated value chain where both Centre and the state concurrently tax the value addition across the chain — what’s called the dual GST. It’s not the perfect thing. But it does go forward in taking our tax reform. 
What are the implications of the changes in the structural chain, where the entire value chain has been integrated for the purpose of taxation?
The scale of cheating on taxes in India is enormous, which is why I have stuck my neck out and said after one-year tax revenues will boom so much that the Centre will not need to compensate the states, and the cesses can be abolished, maybe six or seven months going forward. He believes tax cheating cases will come because cheating will become less profitable, and not because there is a moral transformation in the people. Lots of the non-compliance, if you study, takes place on the leading portion of the value chain. The trader lived in a shadow economy, he didn’t pay too many taxes, he bought things from somebody who didn’t pay too much taxes. He remained in the shadow portion of the trading part of value chain. He didn’t need much credit because credits were not available. The central taxes paid on input goods, input services and capital goods were not available to him as credit in the pre-GST scenario.
It is foolish not to declare your turnover because if you declare your turnover, you get the benefit of offsets of taxes of central taxes which are available to you now. 
The first significant part of the GST reform is that noncompliance will come down. It’s not because of gov­ernment policy but because of self-policy. The second transformational aspect is the unification of the com­mon market. We were one nation, one political entity since 1947 but we were not one common market. Now that has been ensured by two things. First, entry 52 of the Constitution stands abolished in the amendment bill, which means no state can impose entry tax into any goods coming into its frontiers. Goods now will move faster than before, and that’s the big market effect. 
The biggest beneficiaries of GST are the organised manufacturing and the goods segments. This industry is going to see a big boost in the times to come. First, the average incidence of duty on manufac­turing has come down. Sometimes the computations done by industry don’t match with the ones done by the gov­ernment, as the industry sometimes doesn’t factor in the CST element, the entry tax and the embedded tax. Once you do the calculation, the aver­age incidence of duty on organised manufacturing goods comes down. Second benefit is the logistics cost that will come down because of efficiencies in the supply chain. Today there are about 12 to 13 per cent costs, while the world average is 7 per cent, so you can expect a reduction. 
About the author:
V S Krishnan is Advisor, Tax Policy Group, EY India. In a career spanning over 30 years, V S Krishnan has been entrusted with a variety of assignments. He was a member of the tax research unit of the Finance Ministry from 1983 to 1987. He was conferred the Presidential Award for distinguished Record of Public Services in 1999.

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