JANUARY 16, 2017

By K Srinivasan, IRS

AN attempt to demystify the myth that is going on around it and the cobwebs it has created in the minds of people need to be cleared before we make a good, clean start of this nice simple but old tax regime in its new tunic in this epochal year 2017.

In the Indirect tax landscape of India, many fail to appreciate that the much hyped tax reform of GST is but a new swath of green covering the old turf which is rich in its subsoil of growth. The work of many great men of the Central Excise Department in the past six decades is flowing hidden underneath like veins of water, keeping the ground constantly green.

Let us now take a close look at the new tax reform both in its content and form to appreciate how it is not one bit new from the age old indirect tax regime the CBEC has been assiduously administering with its sixty thousand strong work force, which has the rich cultural heritage, acumen and uncanny knack to interpret the indirect tax laws for almost close to a century if you count the tax collection experience they had in the imperial Customs and Salt Department, in.

What is GST? It is nothing but an indirect tax proposed on goods produced and sold and services provided. Are these activities not subject to taxation already, yes they are. From 1944, a time of pre-independence and even a little before, excise was levied on goods produced. With time, the approach of excise tax laws have been elegantly nuanced by the collective wisdom of an ingenious specie of taxmen who have evolved much like any other natural species of plants to stand tall and prolific like a colonnade of endemic trees which are so native and friendly to the taxing environment.

The new species of taxation that the Government tried out in 1994 was a tax on services which was also the result of a natural evolution and success of the CBEC achieved in a consummate manner in the collection of taxes. As the consumption pattern of the people of our country changed with time and improvement in their standards of living, levy on services consumed apart from goods turned out to be a gold mine of revenue for the Government which has since equaled the Excise duty figures of about Two Lakh Crore rupees per annum.

The levy commenced with three services with a moderate rate and sprang forth in two decades to a hundred odd services covering the entire gamut of the service industry justifying the magical and game changing shift from the positive regime of taxation to a negative list regime in 2012. In fact that was the original game changer of indirect taxation, the true forerunner of the proposed GST under Article 377 (12A) or the Constitution of India.

Coming back to taxation of goods, the concept of taxing sale of goods aside the activity of manufacture was there in vogue again for nearly close to a hundred years as the very name of the Madras General Sales Tax Act,1939/1959 would suggest. It has once been name changed as the Tamil Nadu Sales Tax Act, 1958, and now as the Tamil Nadu Value Added Tax Act, 2006. Therefore,collecting tax on sale of goods is not anything new which is even now the integral part of GST.

How is GST a new tax reform them. It is a new tax reform in the sense that it is going to be a destination based consumption tax instead of being an origin based tax now. Well, what does that matter to the taxing statute or authorities of the centre or the states? Little or nothing at all one must say.

Let us now turn to the mechanics of the new tax regime and juxtapose it with the old regime to know exactly how it is similar or to what extent it is different, if it is different at all. Every officer of the Central Excise Department and the State Sales tax Department at the cutting edge level is going to do the same function of tax collection starting from the place of origin of goods, whether produced or sold, except that all central levies are rolled into a single tax called CGST and all state levies are made again into a tax roll called SGST, for handling tax consumption, resembling much a vegetable roll.

The intricate delicacies of taxation that are rolled quietly into an exotic of all the three, is the hybrid roll. You may like to even call it the Indian Vegetable Frankie Roll named IGST, which rolls the CGST and SGST into one. It is like a double bubblegum that bubbles double but not quite really so for all make beliefs are but empty bubbles and so might be the IGST many states apprehend. Let us now get to a little serious business, keeping aside the levity and fun of equating the new tax reform and the skills of the lawmakers to the art of culinary.

Taxation of goods manufactured was covered under List-I which is the Union List-under schedule-VII / Entry 84 of the Indian Constitution. Taxation of goods sold was similarly covered under List-II Entry 54 of the Indian Constitution again. They are the Union and the State lists as everyone knows. What about services and their taxes which the Union has been collecting from 1994? Well that is a long story and to cut it short it was to be Article 268A, Entry 92C of List-II of the VII schedule (perhaps) but then it was not to be as well. Does it sound a bit quaint and odd at the same time to you? Yes it is like that.

The Supreme Court in - 2010-TIOL-87-SC-ST-LBobserved,  "this Court has on three different occasions upheld the levy of service with reference to Entry 97 of List I in the face of challenges to the competence of the Parliament based on the entries in List II and on all the three occasions,  this Court has held that the levy of service tax falls within Entry 97 of List I."

So, Service Tax is levied under the residual entry 97 of the Seventh Schedule to the Constitution, and not under entry 92C as strongly believed by many.

What is the present position of constitution with reference to GST? Let us take a look. Constitution has been amended by the 122 Constitutional Amendment Bill,2014, wherein Article 246A(1) creates concurrent taxing jurisdiction between centre and states to enable taxing of goods produced, sold and services provided commonly known as 'supply' by both centre and state under the nomenclature CGST&SGST respectively at rates already evolved through mutual consensus through the GST council created under Article 279A. GST is one way different from the conventional origin based taxation of the present in that it seeks to tax a common value base instead of a variable tax base between centre and states.

It is pertinent to note that this new fangled common/comprehensive tax base is not fine by International GST/VAT experts like Prof. Sijbren Cnossen, a renowned professor Emeritus, at the University of Pretoria who is consulted world over by many nations on value added tax/GST reforms. The reason he ascribes to it is very peculiar but logical and not all that difficult to understand. It is that the centre and states in a Federal set up must have fiscal autonomy and must not tie themselves into a knot like the one in which we have sought to tie ourselves, where no future changes in taxing regime would be possible. But that is yet another kettle of fish which we would not like to open now.

Turning to apportionment and compensation between centre and states, well there is nothing dramatic about it under the new GST scheme. Apportionment was to be handled under Article 270 which has been slightly tinkered to add to Article 270 clauses (1A),(1B) and (1C) to take care of primary, secondary and residuary apportionment. But all apportionments of revenue between centre and states conventionally recommended by the Finance commissions were dealt under this Article 270 of our constitution alone which continues to be the same.

Article 270 (1A) enjoins on the Centre/Union that even the taxes collected under the Article 246A(1) shall be distributed between the Centre and the States in the manner prescribed under Article 270 in general and as also read with Article 246A(2).Why then there is so much of doubt in the minds of the states about compensation is mainly because the promises of the centre regarding compensation due to implementation of VAT from 2005/2006/2007 to the states, are still outstanding. This has led to a major trust deficit which could have very well been avoided. Be that as it may.

The Central Government had already talked the GST council into accepting the levy of a super Cess on luxury and demerit goods which proceeds will be made use of, for providing compensation to the states to prove further that the GST rates agreed upon are highly revenue neutral. It is pertinent to draw the attention of readers to the conflicting stands expressed by the National Institute of Public Finance and Policy and the Chief Economic Advisor in the matter of Revenue Neutral rate recommended by each other, the former suggesting 27% and the later 15.6%.

The NIPF & P's rate of RNR is almost twice as much as the CEA's. The reason given for the difference is reportedly the former not factoring in the revenue of about 7 lakh crores. But we leave it to the wisdom of the experts and the law makers to make sure that the GST rates of 5%, 12%,18% and 28% will play out to be truly revenue neutral eventually and let us also sincerely hope so.

The concept of creating concurrent taxing jurisdiction between centre and states is not anything new. As far back as 2/2/1983 by the 46th Amendment Act,1982, Article 366 was amended to include a clause (29A) that had put out a list of 6 situations of terming them as deemed sales even though they can't be strictly regarded as sales. But, for the purpose of taxation states would be well within their entire powers to levy VAT on the same.

The centre took this opportunity in some of those cases and could identify the service portion of those transactions and levy their share of tax such as SIM cards, photographic prints, works contract, Renting of tangible goods, Promotion of services involved in the course of sale of food or any other such food stuff for consumption and so on.

To my mind, Article 366(29A) is the real forerunner to the new Article 246A(1) under the new GST regime. It is interesting to note that this definition of deemed sales has been still retained in the new regime and not dropped unlike Article 268A which has been promptly decided to be dropped after having been in limbo from 2003/88th Amendment Act, 2003.

However, Article 286(1) and (2) are rightly amended to replace the words 'Sale or purchase of Goods' with 'Supply of Goods or Services or both' and the declared goods definition under Article 269(3) which provided for levy of VAT not exceeding 5% on Goods of Special importance has been pat dropped as it is no longer needed.

Well, coming back to the GST reform, what is new about it is a question that will persist throughout our discussion till the end of the article perhaps only to discover that it is not new at all.

GST is supposed to guarantee no retention of taxes by the business and strict integrity of a seamless Input Tax Credit (ITC) will ensure this. The concept of ITC to neither the centre nor the states is anything new. Central Excise Department had experimented with a set-off procedure as far back as the early seventies, followed by the MODVAT scheme in 1984 and cross utilization of input and service credits across board in 2000, 2001, and 2002 and state VATs from 2005, 2006, and 2007 followed ITC as well, were all progressive developments of ITC to cut back the cascading of taxes and tax competition, introduced with resounding success.

What is new about GST anyway is that multiple taxes of the centre and states are rolled into common CGST and SGST rate baskets of goods and services so that when ITC is applied the cascading is next to nil theoretically and there is uniformity of rates across States unifying the Nation into a common market. This is quite likely to be true as arithmetic suggests but remains to be experienced by the business and consumers alike without input taxed situations leading to cost- push inflation.

Let us start at the very beginning for that is a very good way to start as the sound of music song would like us to go.

The Central Excise Department and State Sales Tax/VAT Departments could repeat their usual acts of tax collection just as before under GST. The subject of taxation, the point of taxation, the place of supply and taxation are all just the same, except that the states must get to experience a feel of taxation of services and the centre similarly get to experience taxation of sale of goods. The supply chain is the same, the value addition is the same, and availability of tax credit of taxes paid at the previous stage of taxation for set off of the next stage tax liability down the supply chain to the last consumer is all the same.

The exemptions are few and the exclusions are far too less and few in between what is new. You can always say nothing is new except the Hybrid Tax called Integrated Goods and Services Tax (IGST). GST is not a game changer, since in an intra state taxing environment, CGST and SGST much the same way as the Excise duty/service tax on the one hand and value added tax (VAT) on the other on goods and services are going to be collected and set off successively with the aid of ITC.

Only in an Inter-State or cross border taxation, some novelty in concept though not in the levy and collection practice, is going to be experienced, which we will see in the next part, IGST the real game changer, if it can be called a game changer at all. Until then, goodbye and a happy new year 2017.

To be continued...

(The author is Assistant Commissioner of Service Tax, Chennai and the views expressed are strictly personal.)