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Goods and Services Tax (GST)

There was a burden of "tax on tax" in pre-existing Central excise duty of GOI and sales tax

system of SG. introduction of Central VAT (CENVAT) has removed cascading burden of "tax ontax" to a good extent by providing a mechanism of "set off' for tax paid on inputs andservices upto stage of production, and has been an improvement over pre-existing Centralexcise duty. Similarly, introduction of VAT in States has removed cascading effect by givingset-off for tax paid on inputs as well as tax paid on previous purchases and has again been animprovement over the previous sales tax regime.

But both CENVAT and the State VAT have certain incompleteness. Incompleteness in CENVATis that it has yet not been extended to include chain of value addition in distributive tradebelow stage of production. It has also not included several Central taxes, such as AdditionalExcise Duties, Additional Customs Duty, Surcharges etc. in overall framework of CENVAT, andthus kept benefits of comprehensive input tax and service tax set-off out of reach ofmanufacturers/ dealers. These taxes still are complex due to existence of exemptions andmultiple rates and the extent structure of the levels. The introduction of GST aims to removethese deficiencies.

Goods and Service Tax is a tax on goods and services, which can be levied at each point of

sale or provision of service, in which at the time of sale of goods or providing the services theseller or service provider can claim the input credit of tax which he has paid while purchasingthe goods or procuring the service.

similar to VAT which is at present applicable in most of states and can be termed as Nationallevel VAT on Goods and Services with only one difference that in this system not onlygoods but also services are involved and rate of tax on goods and services are generallythe same.

Generally, dealers registered under GST (Manufacturers, Wholesalers and retailers and

service providers) charge GST on price of goods and services from their customers and claimcredits for GST included in price of their own purchases of goods and services used by them.While GST is paid at each step in supply chain of goods and services, paying dealers don'tactually bear burden of tax because GST is an indirect tax and ultimate burden of GST has tobe taken by last customer. This is because they include GST in price of goods and servicesthey sell and can claim credits for most GST included in price of goods and services they buy.

The cost of GST is borne by the final consumer, who can't claim GST credits, i.e. input credit

of the tax paid. GST shall have two components: one levied by Centre or Central GST (CGST), and other levied

by States or State GST (SGST). Rates for Central GST and State GST would be prescribedappropriately, reflecting revenue considerations and acceptability. This dual GST model wouldbe implemented through multiple statutes (one for CGST and SGST statute for every State).However, basic features of law such as chargeability, definition of taxable event and taxableperson, measure of levy including valuation provisions, basis of classification etc. would beuniform across these statutes as far as practicable.

Export of goods and services will be zero-rated and in that case GST paid by exporters of

these goods and services is refunded. This is the basic difference between Zero rated goodsand services and exempted goods and services.

Since the Central GST and State GST are to be treated separately, taxes paid against the

Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST andcould be utilized only against the payment of Central GST. The same principle will beapplicable for the State GST.

Cross utilization of ITC between the Central GST and the State GST would not be allowed

except in the case of inter-State supply of goods and services under the Inter-state GST(IGST) model.

The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on alinter-State transactions of taxable goods and services with appropriate provision forconsignment or stock transfer of goods and services. The inter-State seller will pay IGST onvalue addition after adjusting available credit of IGST, CGST, and SGST on his purchases. TheExporting State will transfer to the Centre the credit of SGST used in payment of IGST. The

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Importing dealer will claim credit of IGST while discharging his output tax liability in his ownState. The Centre will transfer to the importing State the credit of IGST used in payment ofSGST. The relevant information will also be submitted to the Central Agency which will act asa clearing house mechanism, verify the claims and inform the respective governments totransfer the funds.

Constitutional Amendment: Proposed changes

Article 246A to be introduced through Constitutional amendment that would give Parliament& state power to levy GST, mean that Union and State would have concurrent powers oftaxation.

Introducing Article 279A that will provide for creation of a GST council. The GST council isto be headed by Finance Minister and will have state Finance Ministers as member.

Article 279B to be introduced through Constitutional amendment making a provision for

dispute settlement authority which shall consist of a chairperson and 2 members to beappointed by chief justice.

GST to be defined under Article 366(12) A.Merits of GST

It will reduce the cascading burden of a large number of indirect taxes at the centre and state

levels.

It is expected to moderate prices and boost demand and consumption.

It will bring uniformity by way of one country one tax.

It will rationalise and simplify indirect tax structure.

It is expected to increase GDP, TAX GDP ratio and bring a revenue surplus and thus reduce

fiscal deficit.

It will integrate Indian economy with the rest of the world as most countries have GST inplace.

It will build India as a common market

It will raise productivity, reduce distortions and increase the rate of GOP growth.Problem associated with GST:

Its proposed structure is flawed by international standards because it excludes petroleum and

alcohol products which account for 40-50 % of revenue from indirect taxes. Excluding themmeans no information on them, while in rest of world they are included in GST & they use

additional selective excises on them to gather more revenue. Goods and services should not be listed separately as it defeats whole purpose of creating a

seamless treatment between them. The legal complexity of defining them should go away.

A well developed system of clearing house is required for interstate trade for which India's IT

system is not ready. This can create insurmountable problems of high GST evasion as ithappened in 1986 with introduction of MODVA T. took years for European Union to implementGST which could be foolproof. Likewise, New Zealand and Canada have managed transition toGST through strong political leadership as well as meticulous planning & implementation.

The proposed rate of 16 percent may be high as compared to the present VAT rates of 12.5

per cent, CENVAT 10 per cent and service tax 10 per cent. This rate of 16 percent may beunsustainable and could defeat the purpose of GST. The 13th Finance Commission hasproposed a 12 per cent GST rate which appears more rational.

States have expressed discontent as would get 8 % out of 16 % while at present they get

12.5 % by way of state VAT.

Implementation of GST is pre-conditioned by two major constitutional amendments - one to

permit the centre to tax sales and the other to permit states to tax services. These may notcome easily.

Its successful implementation requires a strong technological back bone to track transactions

at each stage; otherwise there are fears of loss of revenue to states. Centre has entrustedthis task to panel by Nandan Nilekani.

Issue of compensation to be given to states in event of loss of revenue for which centre has

committed to compensate states.

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Basic import duties have been kept out of GST, which is in contrast to what Kelkar Task Force

recommended. Empowered committee has been having a constant dialogue with states toiron out difference and strike consensus. Many states, particularly these not under the rulingparty regime have expressed serious reservations on GST.

States' apprehend loss of autonomy under GST both in respect of rate determination as well

as dispute settlement.

Direct Taxes Code (DTC)

While GST is viewed as the ultimate reform of indirect tax structure in India the Direct TaxesCode is seen as the ultimate reform of direct tax structure. The government prepared adraft direct taxes code in the year 2009-10.

Code sought to consolidate and amend law relating to all direct taxes, so as to establish an

economically efficient, effective and equitable direct tax system which will facilitate voluntarycompliance and help increase tax-GDP ratio. All direct taxes are sought to be brought undersingle code and compliance procedures unified, which will eventually pave way for singleunified tax payer reporting system.

Need for Code arose from concerns about complex structure of Income Tax Act, numerous

amendments making it incomprehensible to average tax payer and frequent policy changesdue to changing economic environment. DTC states that marginal tax rates have beensteadily lowered and rate structure rationalized to reflect best international practices and any

further rationalization of tax rates may not be feasible without corresponding increase in thetax base to enhance revenue productivity of the tax system and improve its horizontal.

A threefold strategy for broadening the base has been articulated in the Code.

First element is to minimize exemptions that have eroded tax base. Removal of these

exemptions would result in a higher tax-GDP ratio; enhance GDP growth; improve equity(both horizontal and vertical); reduce compliance costs; lower administrative burdens; anddiscourage corruption.

Second element seeks to address problem of ambiguity in law which facilitates tax avoidance.

Third element of the strategy relates to checking of erosion of the tax base through tax

evasion.OTC bill was tabled in Parliament in August, 2010. Revised Code placed was a highly watereddown document.Silent Features and Highlights of the revised OTC are follows:1. OTC removes most of categories of exempted income. Unit Linked Plans (ULlPs), Equity

Linked Mutual Funds (ELSS), Term deposits , NSCs (National Savings certificates), Long terminfrastructures bonds, house loan principal repayment, stamp duty and registration fees onpurchase of house property will lose tax benefits.

2. Tax saving based investment limit remains 1 lakh but another 50,000 has been added forpure life insurance (Sum insured is at least 20 times premium paid), health insurancemediclaim policies and tuition fees of children. But the one lakh investment can only be donein provident fund, superannuation fund, gratuity fund and new pension fund.

3. The tax rates and slabs have been modified. The proposed rates and slabs for annual incomeare as follows:

Men and Women are treated same nowUpto Rs 200,000 (for senior citizens Rs. 250,000) NilBetween Rs. 200,000 to 500,000 10 %Between Rs. 500,000 to 1,000,000 20%Above Rs. 1,000,000 30%4. Exemption will remain the same at 1.5 lakh per year for interest on housing loan for self-

occupied property.5. Only half of Short - term capital gains will be taxed, if one gains 50,000, only 25,000 will be

taxed. Long term capital gains (From equities and equity mutual funds, on which STT hasbeen paid) are still exempted from income tax.

6. Tax exemption at all three stages (EEE) - savings, accretions and withdrawals-to be allowedfor provident funds(GPF , EPF , and PPF), NPS (new pension scheme administered by PFRDA),

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Retirement benefits (gratuity, leave encashment .etc.), pure life insurance products & annuityschemes. Earlier DTC wanted to tax withdrawals.

7. Surcharge and education cess are to be abolished.8. Tax exemption on LTA (Leave travel allowance) is abolished.9. Tax exemption on Education loan to continue.10.Corporate tax reduced from 34% to 30% including education cess and surcharge.11.For taxation of Capital gains from property sale within one year, gain is to be added to

taxable salary. For long term gain (after one year of purchase), instead of flat rate of 20% ofgain after indexation benefit, new concept has been introduced. Now gain after indexationwill be added to taxable income and taxed as per the tax slab. Base date for cost ofacquisition has been changed to 1 st April, 2000 instead of earlier 1 ST April, 1981.

12.Maximum limit for medical reimbursements increased to Rs.50,OOO per year from currentRs.15,000 limit.

13.Dividends will attract 5% tax.14.As per the current laws, a NRI is liable to pay tax on global income if he is in India for a period

of more than 182 days in a financial year. But in the new bill, this duration has been changedto just 60 days.

15.It consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961and the Wealth Tax Act 1957 with a single legislation.

16.Simplifies language of legislation. Use of direct, active speech, expressing only a single pointthrough one sub - section and rearranging provisions into a rational structure will assist a layperson to understand provisions of DTC.

17.It indicates stability in direct tax rates. Currently, the rates of tax for a particular year arestipulated in the Finance Act for that relevant year. Therefore, even if there is no changeproposed in' the rates of tax, the Finance Bill has still to be passed indicating the same ratesof tax. Under the Code, all rates of taxes are proposed to be prescribed in Schedules to theCode; thereby obviating the need for an annual finance bill, if no change in the tax rate isproposed.

18.It strengthens taxation provisions for international transaction. In the context of a globalizedeconomy, it has become necessary to provide a stable framework for taxation of internationatransactions and global capital.

19.GAAR to curb Aggressive Tax Planning - Direct tax rates have been moderated over the lastdecade and are in line with international norms. A general anti-avoidance rule assists the taxadministration in deterriny aggressive tax avoidance in a globalized economy. Such generalanti- avoidance rules already form a part of the tax legislation in a number of G- 20 countries.

These will also apply to investments under DT AAs.

THIRTEENTH FINANCE COMMISSION REPORT

Headed by Vijay Kelkar submitted its report in December 2009. Covers five-year period

(2010-15) during which its recommendations are to be implemented. Raised share of taxesthat states would be entitled to receive over next five years by 1.5 % and hassuggested a roadmap for introduction of a single-rate GST.

New road map for fiscal responsibility suggests that overall debt of centre and states becapped at 68 % of GDP from current 82 % level and 75 % recommended by the Twelfth

Finance Commission. It has recommended the centre to reduce the level of debt to 45 percent of GOP by March, 2015 from the current level of 54.2 per' cent. For states the reductionin debt is recommended at 2 percentage points to 25 per cent.

centre should transfer 32 per cent of taxes it collects to states against 30.5 per cent at

present. The overall ceiling including transfers from the centre's gross revenue has beenraised from 38 to 39.5 per cent.

Among proposals that provide a thrust to fiscal federalism, the commission hasrecommended that local bodies get upto 2.5 per cent of the divisible tax pool. Of thisupto 1 per cent can be incentive-linked.

It recommends that the states contribution in centrally sponsored schemes should be 50 per

cent of cost, against 40 per cent for schemes such as Sarva Shiksha Abhiyan.

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Projected that tax receipts would register a compounded annual growth rate between March

2010 and March 2015 of over 17 per cent while the nominal growth in GDP is estimated at13.2 per cent.

Prescribing a zero revenue deficit as the golden rule, the commission has recommended that

endeavour for all states should be to attain that level by 2014-15.Thus, its salient recommendations are as follows:1. States to get 32 per cent of central taxes, compared to 30.5 per cent now.2. Up to 2.5 per cent of divisible pool may be transferred as grants to local bodies.

3. Total transfers to states on the revenue account be capped at 39.5 per cent of the Centre'sgross tax revenue, compared to 37.5 per cent earlier.4. Centre should target to have revenue surplus by 2014-15.5. Combined debt of Centre and states should be capped at 68 % of GDP by March 2015,

currently at 82 per cent.6. In case of macroeconomic shocks, Centre to borrow and devolve to states instead of relaxing

state borrowing limits.7. The medium term fiscal plan should be made a statement of commitment.8. Single rate for goods and services proposed for GST.9. To make GST purely consumption based, taxes and cesses should be subsumed.10.Petrol, diesel, alcohol, tobacco may be charged to GST with additional levies by the Centre

and states.

11.Only public services, unprocessed food items, health, education and transactions betweenemployer and employee be exempted from GST.

The criteria adopted by the Commission for inter-state allocation gives 47.5 per cent weight

to fiscal capacity distance, 25 per cent to population, 10 per cent to area and 7.5 per cent toFiscal Discipline.

The Government has, by and large, accepted the recommendations of the Commission. The

National Calamity Contingency Fund is to be merged into National Disaster Response Fundand Calamity.

Fiscal consolidation road map has been accepted in principle according to which combined

debt of centre and states is to be pegged at 68 % of GdP by 2014-15 - 45 % for centre andless than 25 % for states. An independent review mechanism, to be set up by the Centre toevaluate fiscal reforms process, has also been accepted in principle.

Wants government to target a single 12% GST (5% by the Centre and 7% by States) againstthe current cascading levels of over 20% for Centre and states combined. The commissionalso calls for taxing realty deals.

Holds that if all exemptions are removed, indirect taxes and cess are integrated into GST and

tax is levied with systematic and logical integrity, GST can become a very purposeful andproductive levy. Commission has proposed a constitutional tax agreement between theCentre and States to prevent deviations from the GST rate.

Commission has also sweetened deal for states that adopt GST. They will get a share in the

Rs.50,000 crore central grant earmarked to meet compensation claims between 2010-11 and2014-15. However, states that violate the tax agreement would have to forego even specificgrants.

The recommendations of the 13th finance Commission on GST can be summed up asfollows: Single 12% rate on all goods and services: 5% for central GST and 7% for state. All indirect taxes and cess to be subsumed in GST. Railways fares and freight, electricity to attract GST. High speed diesel, petrol, jet fuel to be brought under GST; state and centre can charge

additional levy. Only public services by government, service transactions between employer and

employee and health and education to be exempted from GST. Export to be zero rated. Imports to attract GST.

Nationalisation of Banks

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Increasing role of government in July, 1969 with nationalisation of 14 banks (depositsexceeding Rs.50 crores each).

Rational given for nationalisation was that banks, primarily controlled by a few industrialistsand business magnates, had failed to play significant role in the planned development of thenation.

Main objectives to be achieved through nationalisation, according to Prime were as follows:a) Removal of control by a fewb) Provision of adequate credit for agriculture, small industries and exportc) Giving a professional best to managementd) Encouragement of a new class of entrepreneurs ande) The provision of adequate training as well as terms of service for bank staffNationalisation of banks for 6 additional banks was carried on in 1980, thus increasing the totalnumber of nationalized banks to 20. These are in addition to the SBI and its associate bankswhich were nationalized in 1955.

Adoption of "Lead Bank Scheme" after nationalisation was the main reason behind thebranch expansion. This scheme was proposed by the Gadgil Study Group and the NarimanCommittee.

Under this scheme, all nationalized banks were allotted certain districts and they were

assigned development responsibility of these districts. Lead Bank of every district wasrequired to undertake a socio-economic survey of district in order to assess development

potential and how such potential could be tapped through credit expansion. Another post-nationalisation initiative in the banking sector was in the form of "Priority Sector

Lending". This was introduced mainly to channelize more credit to agriculture, smalindustries, and small transport operators.

Narasimhan Committee-II: on banking sector reforms submitted its report in April 1998Major recommendations of the Committee were as follows:1. Cautioned against merger of strong banks with weak banks as this will adversely affect asset

quality of strong banks.2. Concept ofnarrow banking should be tried out to rehabilitate weak banks. If this was not

successful, issue of closure should be examined. Narrow banking, according to Committee,implied that weak banks should not be permitted to invest their funds anywhere except ingovernment securities as these were absolutely safe and risk free.

3. Two or three large Indian banks should be given international character.4. Small, local banks to be confined to States or cluster of districts to serve local trade, smal

industry and agriculture.5. Government ownership has become an instrument of management. Such micro-management

of banks is not conducive to enhancement of autonomy and flexibility.6. Functions of boards and management need to be reviewed so that the boards remain

responsible for enhancing shareholder value through formulation of corporate strategy.7. Need to review minimum prescriptions for capital adequacy. Recommended that CAR be

raised to 10 % by 2002.8. RBI Act, Bank Nationalisation Act, Banking Regulation Act and State Bank of India Act were in

urgent need of review.9. Need to lay down prudential and disclosure norms and sound procedures for purpose of

supervision and regulation.10.Integration of NBFC's lending activities into the financial system.11.Need for public sector banks to speed up computerisation and focus on relationship banking.12.The RBI should act only as a regulator and not both regulator and owner.Recommendations of Committee are being implemented year after year in phased manner. Forexample, CAR of banks has been stepped up and prudential norms have been made more andmore stringent. All major banking legislations viz., RBI Act (1934), Banking Regulation Act (1949),and Bank Nationalisation Act (1970) have been reviewed and gradually diluted in accordancewith changing requirements. More flexibility is being provided to banks by greater autonomy tobank boards. On-line banking has become key word and consolidation of banking industry (ratherthan branch expansion) is being encouraged by permitting mergers and acquisitions within

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existing legal framework. Asset Reconstruction Funds/Companies have been set up for bad debtsand FDI limit in private banks has been raised to 74 %. Most importantly, securitisationlegislation has been put in place for recovery of bad debts. This is known as SARFAESI viz.,Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests.BASEL-I

Set of agreements set up by Basel Committee on Bank Supervision (BCBS), which provides

recommendations on banking, regulations in regards to capital risk, market risk andoperational risk. purpose of accord is to ensure that financial institutions have enough capitaon account to meet obligations and absorb unexpected losses.

Named after Swiss town of Basel. The Basel Committee on Banking Supervision operatesunder the auspices of the Bank of International Settlements (BIS) located in BaselSwitzerland.

Basel-I is -the round of deliberations by central bankers from around world, and in 1988, the

BCBS published a set of minimal capital requirements for banks. This is also known as the1988 Basel Accord, and was enforced by law in the G-10 countries in 1992, with Japanesebanks permitted an extended transition period.

Primarily focus on credit risk. Assets of banks are classified and grouped in five categories

according to credit risk, carrying risk - weights of zero (for example home country sovereigndebt), ten, twenty, fifty, and up to one hundred per cent (this category has, as an examplemost'corporate debt). Banks with international presence are required to hold capital, equal to

8 per cent-of the risk-weighted assets.Major criticisms against Basel I are: (a) the norms treated all borrowers alike; (b) no weightagewas given to availability of security for a credit facility; and (c) it treated loans of varyingmaturity in the same manner.Basel-II

Are in process of implementation in several countries, attempts to integrate Basel-I capital

standards with national regulations by setting minimum capital requirements of financiainstitutions with goal of ensuring liquidity.

Aims at securing international convergence on regulations governing capital adequacy ratio(CAR). Capital adequacy is a measure of bank's capital and is expressed as a percentage ofbank's risk weighted assets. Objective of Basel-II is to develop a framework that wouldstrengthen the soundness and stability of the international banking system.

Consists of three pillars, viz., minimum capital requirement, supervisory review and marketdiscipline.

The first pillar is on capital requirement, wherein, it identified three different types of risk

credit risk, operational risk and market risk.

The other two pillars have been added in Basel II as reinforcement to first pillar. Supervisory

review is to ensure that bank's implementing Basel I accords have proper processes in placefor assessing their capital adequacy. Purpose of pillar 3 (market discipline) is to encouragemarket discipline by developing a set of disclosure requirements which will allow marketparticipants to assess key pieces of information on scope of application, capital, riskexposures, risk assessment processes, and hence the capital adequacy of the institution.

CAR is defined as proportion of a bank's total assets that is held in form of shareholders'

equity and certain other defined classes of capital. It is a measure of bank's ability to meetneeds of its depositors and other creditors. In short, CAR is a measure of bank's capital and itis expressed as a percentage, of a bank's weighted credit exposures. It is also known ascapital-to-risk weighted assets ratio (CRAR).

The equation for calculating CAR is given as follows:CAR= Tier-I Capital + Tier-II Capital / Risk Weighted AssetsCapital Adequacy Ratio ensures that a bank is strong enough to absorb a reasonable degree oflosses.BASEL-III

In backdrop of global financial meltdown, Basel Committee on Banking Supervision has

decided to introduce Basel-III norms to strengthen existing capital requirements and

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introduce a global liquidity standard to enable banks to weather financial storms. Basel-IIImandates banks to increase loss-absorbing capital from 2 % to 4.5 %of risk-weighted assetsby January, 2015. In addition, banks will be required to hold a capital conservation buffer of2.5 % to withstand future periods of stress, bringing the total loss-absorbing capital to 7 %.

Future counter cycling buffer in range of 0-2.5 % of capital is to be imposed (depending upon

national circumstances) to protect banking sector from periods of excess aggregate creditgrowth. These capital requirements are to be supplemented with a non risk based leverageratio that will serve to back stop risk based majors and higher capital norms. Thus triplesquantum of capital which banks will be required to maintain.

ROLE OF CENTRAL BANKSGlobal financial meltdown was caused due to greed of banks and their callous policies whichtotally overlooked KYC norms. It was compounded by investment Bankers, hedge funds andcredit rating agencies. All this went on under nose of central banks which were helplessspectators. This has raised a very important issue whether role of a central bank is only toconduct its monetary policy and focus on price stability and inter-rate determination or go muchbeyond to impose stringent regulations on the banking sector and constantly monitor theirfunctioning in larger interest of economy.Some specific measures in this regard could be as follows:1. Setting up of financial stability council to act as a watch dog and monitor systemic risks.2. Adoption of BASEL-III norms.

3. Restricting banks from making proprietary investments i.e., those assets held in privateownership like hedge funds, private equity funds.4. Consumer protection by way of regular checking of mortgage accounts and other assets in

which banks invest and which are further sold to Investment Bankers.5. Rationalising Bank supervision system by way of Central Banks keeping an oversight of bank

holding companies with assets above a certain limit.6. Making securitisation market more transparent and accountable.7. Introduction of Credit Default swaps for bonds, mortgages and other complex financial

products under which all these instruments are insured by a third party so as to cover defaultby the issuer of these instruments and at the same time protect those who invest in thoseinstruments.

8. Recommending to the government to seize financial firms, on the verge of collapse for

orderly liquidation and thus prevent massive bailouts and disastrous bankruptcies.