Budget 2010: Rohan Shah's Expectations

CNBC-TV18's Menaka Doshi caught up with Rohan Shah, Managing Partner, ELP to find out his expectations from Budget 2010.

 

Given the fact that Goods and Services Tax (GST) has been part of the theme for the last three budgets and this minister is so serious about GST or says he is, he will have to do various things if he wants to make GST a reality, in this budget.

We are looking at a GST which the finance commission task force says will come or should come by October 1, 2010 which means the budget is the last instrumentality that the minister has to step forward to do what he needs to do to ensure the GST is enroute. If they are serious about that there are at least five things that the budget must do and I am hopeful that he will get them done.

The first thing that he needs to do is attenuate the rates that he ultimately has for both excise duty and service tax, to bring in for the purposes of GST. 

 

Does that mean that he has to roll back or it will seem like he is rolling back the stimulus measures on the front of excise etc what he is actually doing is readjusting rates to be prepared for a GST?

 

The finance commission task force says they are looking at a levy of 5% of central GST and 7% of state GST so in accumulation that is 12%. If you look at the current excise duty that he has got, he has got an excise duty at 8% and he has got a service tax at 10%. So it is not a question of his being able to scale this up but it actually might be a question of his scaling it down in the anticipation that he is now leading into the rate structure that we wants to bring in for the purposes of GST. Now admittedly the tax base he has today is smaller than the tax base that he will have when there is GST but unless he begins to make the preparation from a rate perspective he just cannot bring a knee-jerk rate one day before or on the day that the GST is coming in especially if it is coming in the middle of financial year because that is sort of going to set back the process and the process for adjustment for industry is going to be almost impossible.

 

What would be the immediate impact on the fiscal if he has to do a downward adjustment to rates and will it then be possible for the government to be able to move ahead on that?

 

He probably needs to mimic what he hopes to achieve in the GST which is lower rates but with a higher tax base so he has a higher number of tax payers, a higher number of tax paying transactions but lower rates. I think if he starts making a move in that direction. For example he may increase the net of those who are liable to pay service tax that is what he needs to do for GST in any case. But if he starts that process now then hopefully we have this balance of a higher set of tax payers but a more benign and a more livable set of rates.

 

The other thing that he needs to work on is dismantling the whole central sales tax (CST) because that has been threaten over a period of time, we have not got ride of it and as we move into the GST we have to get ride of that CST.

The third thing he needs to do is if we need a wider tax base in the context of GST that a whole series of exemption notifications which are around we will need to start getting pared down. That may not be very popular with industry but if we want a larger tax base and like I said more livable tax rates then he has to start addressing the scope of the exemptions he has there out right now.

 

Also, the GST system is premised on the fact that every transaction pays tax but every transaction also generates a credit which can be used to pay in terms of your next tax liability. At this point in time that credit system is in a manner a little mangled and corrupted by the factor of certain things being available, unavailable and I think he has to work on setting the credit system right and opening up all of those issues which today in pinch on the credit system.

 

Finally, the one thing that he needs to do is even as we talk of a GST about 6 months away or a seven months away from where it is likely to get introduced the one critical factor is who has jurisdiction to tax particularly in issues between state and centre so when you talk of services like telecom, transportation etc it is critical that you get place of service of supply rules, you get rules in terms of fixing tax jurisdiction and we are still oscillating in terms of where we want to go, which direction we want to take and I think it is high time that he took a definite step in relation to that.

 

If you do not see any of these five measures or if you see only one or two of these five measures what conclusion then would you draw on the faith of GST and if your conclusion is that GST will be postponed is that not almost a good thing because many people say that the prefer the GST be applied from the next financial year as oppose to in the middle of a financial year?

 

Whether it is the October 1, 2010 or April 1, 2011, these issues have to be taken care of. Given the way in which the states are interacting with the centre, given the constitutional issues he is possible going to take a year. So it isn't that because it is going to go over to the April 1, 2011 he can afford to be sanguine in the context to this budget. He has to deliver some of these items if not all of these items surely into this budget and then you have a reaffirmation and you have a belief which is credible that yes the GST is coming. If the GST comes in the middle of the year my fear is that you will take a tax which is much anticipated and which has the potential to do much good and bring about negative sentiment because you introduced it wrong. So I wish he has the courage upfront to say yes it is a year away, even though it is a year away here are my definitive steps and here is my contribution to why the GST will definitely come.