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International Tax and Public Finance

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01.08.2013 | Policy Watch

Preparing the way for a modern GST in India

verfasst von: Sijbren Cnossen

Erschienen in: International Tax and Public Finance | Ausgabe 4/2013

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Abstract

A modern Goods and Services Tax (GST) would do much to alleviate the problems of India’s current indirect tax system which is a serious impediment to the formation of a single common market and further economic growth. The Centre and the States should both have access to the full GST base, which means that the tax assignment issue (who should tax what?) should be separated from GST design aspects (what should be the precise base and rate structure?). It is not necessary or desirable to have a uniform GST for the Centre and the States. Neither is an integrated GST to tax transactions between States required. Last but not least, the system of taxation by classification and valuation should be replaced by a self-assessment system mainly monitored through checks upon books of account.

Vorheriger Artikel The size and scope of government in the US states: does party ideology matter?

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The words between quotation marks are from the Bagchi et al. report (1994, p. xvii) on the Indian indirect tax system. The author was a consultant to the Bagchi team.

Throughout this article, references to ‘States’ should be deemed to include ‘Union Territories’.

For a general discussion of the need for reform of the Indian tax system, see Rao and Rao (2010) and for an extended description and analysis of the ills of the indirect taxes, see Cnossen (2012).

That State VATs are in need of reform is echoed in the report of the Thirteenth Finance Commission (2009, p. 2), which observes that ‘the VAT, like its predecessor the Sales tax, continues to be characterised by narrow base, plethora of exemptions, multiple rate structure and cascading effect on account of break in the input-credit chain. The introduction of VAT is, at best, a toddler’s tentative step towards indirect tax reform’.

In India, the term Goods and Services Tax (GST) is used for the broad-based consumption tax proposed for the Centre (CGST) and the States (SGST), while the consumption taxes of the States are called VATs. As is well known, a VAT is in principle identical to a GST, but this article adheres to the terminology used in India. For the reports, see, among others: Chelliah et al. (1992–1993), Kelkar et al. (2002), and Poddar and Ahmad (2009). Much early pioneering work was done by a team under the able leadership of Amaresh Bagchi and laid down in Bagchi et al. (1994).

In fact, I believe that it would be better to postpone the introduction of the dual GST than to try to design it without straightening out the tax assignment issue.

For a thorough review of excise taxes on smoking, drinking, gambling, polluting, and driving, see the contributions in Cnossen (2005).

The Comptroller and Auditor General of India (2010, p. v) observes that there are ‘wide scale differences between the basic design proposed in the White Paper [of the Empowered Committee of State Finance Ministers] and the corresponding provisions included in the different State VAT Acts and Rules.’

Some reports believe that a dual GST should deal with the problem of non-arm’s-length transactions between branches of the same business, for instance. However, under a properly administered CGST transfer pricing issues would not arise because any ‘under-’ or ‘over-taxation’ would be automatically corrected in subsequent stages of production or distribution through a lower or higher tax credit.

See McLure (2000), who acknowledges that his proposal is based on an idea launched earlier for the Brazilian states by Ricardo Varsano. It should be noted that McLure’s proposal is limited to cross-border transactions in goods. Accordingly, it would have to be tailored to handle services under some kind of reverse-charging mechanism (imports declared by first in-State recipient), which raises the question of why goods should not also be taxed under the same mechanism.

The high-profile proposal was developed by Keen and Smith (1996). See also Crawford et al. (2010). Note that the VIVAT, unlike the CVAT, was proposed for an EU context in which there is no higher level of government. The Indian situation, like the Canadian, is that of the CVAT with an overarching central administration.

In a recent Communication on the issue (COM (2011) 851), the European Commission indicates that it will pursue the establishment of cross-border audit units. Interestingly, in Europe, the mismatches, mostly non-fraudulent, between returns for interstate exports and returns for imports totaled €80 billion in 2006 (involving €12 billion VAT revenue, calculated at the EU-wide agreed minimum standard rate of 15 percent), while the major exporting states would have to pay some €30 billion VAT to importing states (something which, no doubt, they would not do wholeheartedly). (For the figures, see Cnossen 2010.) This does not augur well for the automated interstate processing and verification system envisaged for India.

I base this estimate on the calculations of the Thirteenth Finance Commission (2009, p. xv), which expects the gains to India’s GDP of a modern GST to lie in the range 0.9–1.7 percent. In my view, this gain, and hence the cost of continuing with the present system, is on the low side.

Bagchi, A., et al. (1994). Reform of domestic trade taxes in India: issues and options (Report of a Study Team). New Delhi: National Institute of Public Finance and Policy.

Bird, R. M., & Gendron, P.-P. (2010). Sales taxes in Canada: the GST-HST-QST-RST ‘system’. Tax Law Review, 63(3), 517–582.

Chelliah, R. J., et al. (1992–1993). Report of the tax reforms committee—I&II. In Reports of India’s tax reforms. New Delhi: Academic Foundation.

Cnossen, S. (Ed.) (2005). Theory and practice of excise taxation: smoking, drinking, gambling, polluting, and driving. Oxford: Oxford University Press.

Cnossen, S. (2010). VAT coordination in common markets and federations: lessons from European experience. Tax Law Review, 63(32), 583–622.

Cnossen, S. (2012). Introducing a modern GST in India: need for further debate. Tax Notes International, June 25, 1267–1283.

Comptroller and Auditor General of India (2010). Implementation of value added tax in India: lessons from transition to goods and services tax—a study report. New Delhi (June).

Crawford, I., Keen, M., & Smith, S. (2010). Value added tax and excises. In J. Mirrlees et al. (Eds.), Dimensions of tax design: the Mirrlees review.

Empowered Committee of State Finance Ministers (2005). First discussion paper on goods and services tax in India, New Delhi (November 10).

Empowered Committee of State Finance Ministers (2009). A white paper on state-level value added tax. New Delhi (January 17).

Keen, M. (2009). What do (and don’t) we know about the value added tax? A review of Richard M. Bird and Pierre-Pascal Gendron’s The VAT in developing and transitional countries. Journal of Economic Literature, 47(1), 159–170. CrossRef

Keen, M., & Smith, S. (1996). The future of value added tax in the European Union. Economic Policy, 23, 373–420. CrossRef

Kelkar, V. L., et al. (2002). Report of the task force on indirect taxes. In Reports of India’s tax reforms. New Delhi: Academic Foundation.

McLure, C. E., Jr. (2000). Implementing subnational value added taxes on internal trade: the compensating VAT (CVAT). International Tax and Public Finance, 7(6), 723–740. CrossRef

Poddar, S., & Ahmad, E. (2009). GST reforms and intergovernmental considerations in India (Working Paper No. 1/2009-DEA). New Delhi: Department of Economic Affairs, Ministry of Finance, Government of India.

Rao, G. M., & Rao, R. K. (2010). Tax reform in India. In R. Gordon & J. Stiglitz (Eds.), Taxation in developing countries: six case studies and policy implications. New York: Columbia University Press. Chap. 4.

Smart, M., & Bird, R. (2012). VAT in a federal system: lessons from Canada. University of Toronto, unpublished.

Thirteenth Finance Commission (2009). Report of the task force on goods & services tax (December 15).

Zee, H. H., Stotsky, J. G., & Ley, E. (2002). Tax incentives for business investment: a primer for policy makers in developing countries. World Development, 30(9), 1497–1516. CrossRef

Titel: Preparing the way for a modern GST in India
verfasst von: Sijbren Cnossen
Publikationsdatum: 01.08.2013
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 4/2013
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-013-9281-0

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