Uttarakhand to gain from GST, govt should plan to promote service sector : The Tribune India

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Uttarakhand to gain from GST, govt should plan to promote service sector

The Indian economy is on the verge of making an exemplar shift to the new indirect tax regime of Goods and Services Tax (GST).

Uttarakhand to gain from GST, govt should plan to promote service sector

Rajeev Dimri Taxation expert, partner, BMR & Associates LLP



The Indian economy is on the verge of making an exemplar shift to the new indirect tax regime of Goods and Services Tax (GST). The GST being a uniform tax on supply of goods and services leviable on value addition at each stage is likely to be a turnaround event for Uttarakhand in revenue generation and development. It is expected to significantly revamp the tax collection system and generate huge resources for the state. 

Strong service sector base

With the Centre all set to introduce the GST, the Uttarakhand government must also be intensely evaluating its impact on its revenue collections. The GST may indeed prove to be a boon for Uttarakhand. It empowers the state to tax services and is expected to bring level playing between the states having a strong manufacturing base vis-à-vis Uttarakhand that is majorly into service offering. Uttarakhand's sectoral portfolio already points towards a strong service sector base. Some of the major service offerings of the state are education, tourism, agriculture, health care etc, which are consumed within the state. While the education, tourism, agriculture and health care sectors should be largely exempt (or under the merit rate at best) under the GST, tourism provides a huge opportunity to the Uttarakhand government to augment its tax revenue. The government should also visualise the GST as an opportunity to make a fresh start to revive and rebuild the state for important service sectors such as information technology, research and development, online travel and e-commerce. A concerted effort by the state to foster growth of these sectors can significantly improve its tax revenue profile. Further, lesser tax exemptions on both goods and services proposed under the GST regime will also contribute to greater revenue collection by the state under the proposed regime.  

Timely development

The GST has a consumption-based framework. Uttarakhand primarily being a consumer state stands to gain much more than the manufacturing states. Thus, the advent of the GST may prove to be a timely development for Uttarakhand, as most of the excise exemptions in the state have already reached their cut-off expiry date and are not expected to stimulate further investment. While there is a potential risk regarding premature withdrawal of excise sops, the Union Finance Ministry is exploring ways to carry forward the existing notified exemptions till their expiry date even after the introduction of the GST. All these factors, seen cumulatively, may prove to be a harbinger of good news for Uttarakhand.

Tax compliance to improve, revenue to increase

Another important factor that will impact the tax revenue projections for the state is that the new tax regime in the initial years, at least, will not cover some sectors of strategic and economic importance such as petroleum and alcohol, which are few of the largest revenue generating sectors for the states. Further, it is expected that the revenues earned by Uttarakhand should enhance because of broad basing of the taxpaying population owing to lower thresholds. It is pertinent to note that even at the time of introduction of VAT, the tax revenues of the states had actually gone up. Tax evasion is at present prevalent in the form of a fallacious claim of exemptions/lower duty rates or to escape the levy of non-creditable taxes. Since the GST will have the same rate for almost all products/services, with no or least exemptions and free flow of credits, it is likely to encourage compliance so to form part of the GST chain with a corresponding increase in tax revenue to the Uttarakhand government. Last, but not the least, according to the Constitution Amendment Bill, the state government is entitled to compensation for revenue loss suffered during the first five years of the commencement of the GST. These fundamental features of the proposed GST structure should alleviate major concerns that the Uttarakhand Government may have with respect to the GST.

The present origin-based indirect tax regime unequivocally supports states in building a better manufacturing base to earn the maximum tax revenues. This induces states to attract concentrated investments in the manufacturing sector by offering various tax and fiscal incentives. The need to offer such tax and fiscal incentives is more prominent in the states that are not naturally equipped with resources to allow growth of industries due to their geography and location.

New tax regime to offset geographical disadvantage

Uttarakhand’s geographical location, which mainly comprises mountainous ranges and forests, makes it a less preferred location for industries. Given Uttarakhand’s geography, the only catalyst for attracting investments in the manufacturing sector has been various fiscal incentives offered by Uttarakhand such as excise, VAT, income tax exemptions. With the special concessional industrial package granted by the Central Government, Uttarakhand has been trying to balance the shortcomings in attracting investments. It has indeed been successful in gaining around 30 per cent revenue contribution from this sector. The state has been able to bring in some major industrial houses such as TATA, Bajaj, Hero Honda, Hindustan Unilever Ltd, Nestle, ITC etc. Uttarakhand has emerged as the top state in the country in terms of growth in the industry and the service sector in the last 10 years, according to an Assocham study.

Strengthen tax administration

While a major change in the revenue stream is expected, Uttarakhand must also be mindful of a major revolution in the entire tax administration on the initiation of the GST. The GST, being a destination-based tax, envisages movement of GST revenues from the origin state (s) to the destination state (s). Thus, with added revenue stream, the Uttarakhand Government will also have added responsibilities. State government officials will have to learn taxation of services. It will be particularly relevant for the state authorities to educate themselves about the place of supply rules for services and the principles governing intra-state and inter-state supply of services. 

Overall, while challenges are expected, there are many opportunities for Uttarakhand to restructure its economy, thereby, ensuring a free flow of trade and ease of doing business. The GST aims to bridge the gap that exists today between states naturally equipped with industries vis-à-vis buyer states. This is the best time for Uttarakhand to plan and assess its potential for building a strong tertiary base in the state. However, this shift is expected to take some time. As Uttarakhand will be compensated for the losses suffered during the initial years, the state government should get a long gestation period to suitably plan their economic goals for a better tomorrow.

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