‘One nation, One tax’. This slogan has gained currency to justify introduction of the proposed national Goods and Services Tax (GST). This catchy slogan is rather misleading but deserves to be taken seriously, as an objective to be achieved in due course.
GST as envisaged at present is far from the ideal of a single tax working seamlessly through the supply chain of all goods and services. Many items will be out of its net. Some types of taxes will not be covered. Exemptions will be there. States will have the right to levy new taxes. Taxes levied by local bodies continue. Even so, it is a beginning. In its present form as envisaged, GST promises to widen the base, simplify processes, bring greater compliance and make it easy to carry on business. More important, it gives an opportunity to raise questions regarding continuation of some other exemption schemes.
India is fragmented by way of different tax dispensations for special economic zones (SEZ), export oriented units (EOU) and the domestic tariff area (DTA). SEZs are deemed to be foreign territories for the purpose of application of certain tax laws. EOUs till recently were bonded warehouses but now operate under special tax exemptions. Different businesses in the DTA get different types of exemptions, under the excise, customs, service tax and sales tax laws.
The SEZ scheme was introduced in 2000, as an improved version of the earlier Free Trade Zone (FTZ) and Export Processing Zone ( EPZ) schemes. Special legal dispensations by way of the SEZ Act, 2005, and SEZ Rules, 2006, were put in place with great hopes of facilitating creation of world- class infrastructure where investment would flow, generating a lot of employment and exports. Liberal tax exemptions were given to SEZ developers and units set up in SEZs for manufacturing, trading and for providing services. However, the scheme has not succeeded as expected. It is time to examine whether this scheme should continue.
The EOU scheme was introduced in 1980, when domestic economic policies were very restrictive. The scheme succeeded in that environment and even for years after liberalisation of the economic policies. However, for the past few years, the scheme’s advantages have eroded, as they’ve been brought nearly at par with DTA units in fiscal benefits. The income tax exemption for EOUs have been taken away. DTA units are also able to import capital goods dutyfree against the export obligation. The only benefit not available for DTA units but available for EOU is refund of central sales tax ( CST) on purchases for export production.
On the flip side, DTA units get benefits under the Services Exports from India scheme; EOU ones do not. The CST refund benefit will go with the adoption of GST. So, there might not be good enough reasons to continue with the EOU scheme.
Just as multiplicity of taxes results in complications and higher compliance costs, a multiplicity of schemes to boost exports also result in unnecessary difficulties and pointless paperwork. It would be better to scrap superfluous schemes and end many of the exemptions that now serve very little purpose.
So, on this Independence Day, let us hail the initiative to bring in something new by way of GST and hope it will help generate fresh ideas.