Bye bye, tax sops PDF Print E-mail
Thursday, 11 August 2016 05:16
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States can no longer offer tax holidays unilaterally


Though there is some confusion on whether cesses and surcharges levied by the Union government and the compensation that has to be given to the states will raise the revenue neutral rate (RNR) of 15-15.5%—the states have yet to agree to this proposal by chief economic advisor (CEA) Arvind Subramanian—the CEA has made some interesting observations.

For one, since the compensation will be for a short while—it will depend upon the tax buoyancy, especially the new service tax receipts for states—it doesn’t make sense to raise the RNR on a permanent basis. Indeed, with 3-5 billion invoices being matched automatically by the computer each month, he feels compliance will rise dramatically—this is why he says GST rates won’t go up in the manner VAT rates did. More important, once GST starts, states will no longer be free to unilaterally give sales tax concessions to entice large investors—these concessions will have to be cleared by the GST Council, pretty much making them a non-starter. If at all states have to offer concessions to investors, these will have to be in the form of cheap land, access to good infrastructure like ports, or straightforward cash subsidies.

While this new discipline of GST will also imply the Centre will have to rework its CVD benefit to mobile phone manufacturers—two years ago, the budget decided that those who manufactured phones in India would not have to pay the CVD of 11% that importers had to—as Subramanian says, a very big advantage of GST is the chance this gives to clean up India’s messy sops, at least on the indirect tax front.

Apart from the delays and inefficiencies brought in by trucks stopping at each state border, the CST hugely disadvantaged manufacturing in India—while the Congress protested the 1% tax the producing states wanted, imagine what the 2% CST did and how bad things were when it was 4%. An article that Subramanian co-authored with Arbind Modi, who headed the risk assessment function in the income tax department, quantified the negative protection to Indian industry by various tax exemptions.

That Indian producers get penalised when there is no excise exemption for them but imports get a CVD exemption is obvious, but the duo talk of a case where both excise and CVD are exempt. While you would assume this would be neutral, it is not since the excise exemption means all the taxes paid on the inputs to the good can no longer be set off while the imported good bears no input taxes. While Subramanian-Modi make a case for removing all exemptions as these hit Indian industry, obviously this will depend on the GST Council—the less the exemptions, the better for Make-in-India.



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