New Delhi: Sharp anomalies in the taxation structure across different industries such as telecom, tobacco and textiles should be addressed as the country moves towards the goods and services tax (GST) regime, said a paper submitted to the GST Council.
Taxation structure for sin goods like tobacco should not be based on emotive issues, but on rational parameters like the need to check illicit trade, said the Assocham-KPMG paper.
It said that instead of taxing tobacco and tobacco products at higher than the standard rate, the entire sector should be placed under the standard rate, with focus on bringing exempted items under GST net to eliminate the rampant illicit trade.
The next meeting of the GST Council is on November 3-4. For the telecom sector, the paper cautioned that GST may negatively impact the working capital cost since initial landed price of purchases, including imports, may increase due to increase in tax rates.
It said the cost of procurement of services may increase to more than 18 per cent from the current 15 per cent, which will be a challenge for the industry, especially if CENVAT credit on passive infrastructure and fuel consumption is continued to be denied.
“While GST is a path-breaking reform, its implementation should be calibrated in a manner to cause least disturbance to the existing taxation structure,” Assocham Secretary General D S Rawat said.
The paper also went into the impact of GST on the textile sector and suggested ways to find an ideal situation. It said that in case India opts for higher tax rates under the proposed GST regime, the country will lose its market share in the long term to developing and highly competitive economies.
It recommended that India should implement policies that capitalise on the potential of its textile and apparel industry so that the country has a higher bargaining power in procuring export orders.
“Thus, the government should take a conscious call to retain lower rate for this industry by introducing a special lower slab of 4-6 per cent under the proposed GST regime along with full input tax credit of GST paid on goods and services used in the supply chain,” the paper, which was submitted recently to the GST Council, said.
The paper noted that the tobacco industry has been the second-largest contributor to Indian excise revenue after the oil and gas sector. The combined tax revenue collected from tobacco industry was more than Rs 29,000 crore in 2014-15.
It is proposed to levy both dual taxes and higher rate of GST. The endeavour should be to tax the hitherto untaxed/insignificantly taxed segments of the tobacco industry i.e. tobacco products other than cigarette as the consumption of such products is way higher than that of legal cigarettes, the paper suggested.
It argued that levy of standard GST rates with excise duty on a wider tax base will yield higher revenue collection than continuing with levy of high rates of taxes on only one segment of the tobacco industry, for example cigarettes.
The paper mentioned that for the tourism sector at present, different abatement schemes addressing different situations are available under service tax such as 30 per cent in case of composite package and 60 per cent for dining at a stand-alone restaurant.
It said the differential rates are leading to ambiguity and complexity in determining the value on which service tax is payable, pitching for a uniform tax treatment to overcome such a situation.
Besides, in the current set-up, all the taxes cumulatively applicable to restaurants (i.e. VAT, service tax and other applicable taxes) increase the value on which tax is payable to more than 100 per cent.
“Such a situation increases the tax cost substantially. Therefore, a mechanism should be introduced whereby value on which GST would be applied should not increase 100 per cent in any case,” the paper noted.
As for the food processing, it said the industry is taxed at a concessional rate/zero rate. GST is likely to be based on minimal exemptions regime leading to increase in the tax cost for the food processing industry and inflation.
According to the paper, a distinction needs to be made based on the ‘necessity’ principle as in Canada whereby food products essential for human consumption should be taxed at zero rate.
As food comprises a major part of the wholesale price index-based inflation, an increase in tax on food items will add to the price rise, the paper further noted.