FEBRUARY 05, 2017

By Sumit Dutt Majumder

INDIA has adopted the Dual GST (Goods and Service Tax) model where both Centre and the States would levy and collect GST on a common tax base in such a predetermined manner that a taxpayer would have interface, broadly, with only one of the aforesaid two tax administrations. The Council in its ninth meeting on 16^th January, 2017 took a few decisions on Dual Control mechanism which appear to have certain inherent infirmities, including a few relating to interpretations of Constitutional provisions. Broadly, the decisions were as follows

(a) In respect of intra- state supplies by the taxpayers below the threshold of Rs1.5 Crores, the States would administer both States GST ( SGST) as well as Central GST (CGST) for 90% of the taxpayers, leaving aside the balance 10 % for Centre.

(b) For taxpayers above that threshold, the taxpayers base will be divided 50-50

(c) Even for administering Integrated GST (IGST) for inter-state supplies, the tax payer base will be divided in the same aforesaid two ratios. However, there is a rider that if there is a dispute between the States over determination of the ‘Destination State’ as per the laws relating to ‘Place of Supply’, the IGST would be administered by the Centre.

(d) Audit will be capped at 5 % of the total number of taxpayers, based on risk factors. The list will be decided jointly by Center and the States. The auditees will be shared between Centre and the States through a computer based programme so that an auditee faces only one tax authority.

(e) Intelligence based enforcement work, generally known as Anti- Evasion work, will be in the concurrent jurisdiction of both Centre and the States over the entire tax base presumably on the time honored principle of ‘First- Strike’ - whoever strikes first, carries on with the follow up work in that particular case.

The thrust of these decisions has been towards cross- empowerment of the States and Centre in both the situations of intra- state and inter- state supplies. Lets now look at the Constitutional provisions relating to the empowerment of Centre and States for collection of three components of GST i.e. Central GST (CGST) , States GST (SGST) and Integrated GST (IGST).

Clause (2) of Article 246 A is reproduced below :

"246 A (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce". (Emphasis supplied)

This clause states clearly that Parliament has ‘ exclusive power to make laws’ with respect to inter-state supplies. As against this Clause (1) of Article 246 A reads as follows :

"246 A (1) Notwithstanding anything contained in articles 246 and 254,Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State".(Emphasis supplied).

Thus, effectively the Clause (1) read with Clause (2) empowers both Parliament and State to make laws with respect to only intra- state supplies. The position is further clarified by Article 269A (1) which reads as follows :

"269A (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council". (Emphasis supplied)

A reading of the provisions of the Articles 246A and 269A will thus make it clear that with respect to inter-state supplies, Parliament has the exclusive power to make laws relating to GST, and the Government of India has the exclusive power to levy and collect IGST. Article 269A further clarifies that IGST so collected will be apportioned between the Union and the States. It’s not that the levy and collection would be apportioned.

In this context, it would be significant to refer to the pre-amendment provision of Article 269, the title of which reads "Taxes levied and collected by the Union but assigned to the States" (Emphasis supplied). Cambridge Advanced Learner’s Dictionary defines the word ‘assign’ as "to give a particular job or piece of work to someone". That’s the reason why Central Sales Tax (CST) on sale of goods in interstate movement is being collected by the origin states by virtue of the aforesaid assigning of the job. Significantly, the amended provision Article 269A has omitted the words ‘assigned to the States’.

In light of the foregoing , it’s clear that the aforesaid amended Constitutional provisions do not allow Centre to cross-empower the States by assigning the job of collection of IGST .

It appears from the decisions of the GST Council that the Council feels that the Central Government is within its power to delegate its sovereign function of tax collection to the State Governments under Article 258 which empowers the Centre to confer its power to the States in certain cases. Article 258 (1) reads as follows :

"Article 258.Power of the Union to confer power, etc., on States in certain cases.-(1) Not withstanding anything in this Constitution, the President may, with the consent of the Government of a State, entrust either conditionally or unconditionally to that Government or to its officers functions in relation to any matter to which the executive power of the Union extends"

The provisions of the Clauses (2) and (3) of Article 258 further elaborate upon this ‘cross - empowerment’. Clause (3) in particular provides that ‘there shall be paid by the Government of India to the State such sum as may be agreed, or, in default of agreement, as may be determined by an arbitrator appointed by the Chief Justice of India, in respect of any extra costs of administration incurred by the State in connection with the exercise of those powers and duties".

Further, the Council seems to feel that such authority of cross -empowerment is also there in Article 258A, the title of which read. "Power of the States to entrust functions to the Union".

It must be understood that the delegation of power by Central Government to the State Government under Article 258 is an extra-ordinary power in extra ordinary circumstances like the one where the Central bureaucracy is not available or not competent enough to undertake a particular job. In the present instance , there exists a bureaucracy appointed through UPSC process and is appointed at the pleasure of the President. Delegation of Central indirect tax related assessment function to the States would amount to appointment of State officers to do the job of Central offices indirectly, without undergoing through the UPSC selection process. The officers of the Central Board of Excise & Customs (CBEC) are capable of discharging the duty cast upon them. Further,Adjudication proceedings under a fiscal law has never been delegated by the Centre to the State or vice-versa under the aforesaid Articles 258 or 258A, as the case may be. The Government to which a particular tax accrues administers that tax. This has been the cardinal principle of administrations of all taxes in the past.

It also appears that the issue of parliamentary oversight has not been addressed by the GST Council while taking decision on dual control in IGST. Assessment errors by State Government officers would go outside the oversight of Comptroller and Auditor General (CAG) and Public Accounts Committee (PAC) under the arrangement for cross-empowerment. CAG and PAC submit reports to the Parliament, to which the CBEC tax administration is answerable. However, such oversight collapses once the powers under IGST is delegated to the States as their officers are not answerable directly or indirectly to the Parliament. This effectively leads to grant of power without any accountability which does not appear to be constitutionally permissible. Power and accountability always go hand in hand.

The section of the constitution dealing with ‘Distribution of Revenue Between the Union and States’ covers, inter alia, Articles 268 to 270. A close scrutiny of Article 268 to 270 would show a fundamental design feature of the Constitution which is that the taxes are administered by Government to which the tax accrues. Taxes such as Stamp duty, Central Sales Tax, though Central levies, they accrue to the State Governments. It is for this reason, that these Central taxes are administered by the State Governments. In contrast , IGST is a Union levy as per Art 269A read with Art 246 A. It does not accrue automatically to the State Government. It gets utilized through the cross-flow of credits, and the remnants would be settled on monthly basis by the Central Government. It is quite obvious that the administration of IGST can not be delegated to the State Governments without breaching the basic Constitutional design.

There is another angle with regard to future prospects of disputes between the Origin State and the Destination State. GST is a destination based consumption tax. Delegation of IGST powers to the Origin States means empowering a third party to adjudicate on revenue which belongs to the Destination State and the Centre. What interest would the Origin State have to protect the revenue of the Destination State and the Central Government. Such adjudication would take place after the monthly fund settlement has taken place for cross-utilization of IGST against SGST and vice-versa. Therefore, from the perspective of design philosophy also, the IGST delegation to States will invite more controversies and hence not only unwarranted but also inadvisable.

It is significant to mention here that when the issue was referred to the Ministry of Law, the Ministry in its opinion categorically stated that the power to levy and collect IGST vests only with the Central Government.

Coming back to the technical issues relating to the administering of IGST, it has to be remembered that in India GST is based on a design which the world of VAT knows as Versano Little Boat Model. It is based on a federal levy. In Indian context, IGST acts as an intermediate tax for transfer of credit across sub-national authorities. This model was proposed in the year 2000 by Versano and has been called by Richard Bird as the greatest innovation in Value Added Tax in the last 100 years. This model obviates the need for zero-rating the cross-border/inter-State supplies and reduces the cash flow requirements for the business and the need for sanction of refunds. These two design features were the primary reason for India to adopt IGST model. The model has been further refined by intelligent design of credit flow in a hierarchy by officers of CBEC for which they should be justly proud. The important point to note there is that the very design requires the intermediate tax or the ‘little boat’ to be owned by the Central Government.

Further, in the decision regarding IGST, there is a rider that in the event of dispute between two States regarding place of supply, the administering of IGST would vest on Centre. This will only make things complicated for taxpayers instead of ease of doing business.

The issue of cross- empowerment between Centre and States on collection of CGST and SGST in respect of intra- state supplies is fairly arguable. In the absence of any bar like the one in respect of IGST vide Article 269A read with Article 246 A (2), it may be argued that in respect of intra- state supplies, cross-empowerment with regard to CGST and SGST would be in order by virtue of the authority of Article 246A (1) read with Article 269A.

On the strength of this cross-empowerment, the GST Council has decided that for intra- state supplies by the taxpayers below the threshold of RS 1.5 Crore, the States would administer 90 % of the taxpayers leaving aside the balance 10% for Centre. In this context it must be kept in mind that 93 % of the existing Service Tax assessees of Centre are in this band of less than Rs 1.5 crores, and that most of the cases of evasion of Service Tax have been detected in this band. The most important point is that the officers of the Centre i.e. Central Board of Excise & Customs (CBEC) have 23 years of collective experience in administering tax on services since 1994. On the other hand, States have no experience whatsoever in taxing services. Being intangible, taxing the services with reference to the place of supply is more complicated than taxing the tangible goods. Therefore, it does not make sense to give a go -bye to the vast experience of the Center’s officers and entrust most of the work (90% of tax base) in this band to officers of the States who are inexperienced in taxing services. This will be fraught with revenue risk. Besides, given the fact that the Central and State taxes subsumed in GST as well as the number of assessing officers available with Centre and States are almost equal, it’s only logical that the division of work should be equal. This ratio of 90-10 in favour of the States would reduce CBEC’s legitimate work due to substantial reduction in the assessee base. On Audit, all GST experts led by Prof Richard Bird have maintained that audit is the essence of administering GST. Audit has been decided to be capped at 5% of the tax base. Therefore, effectively Centre will have only 5% of 10 % of the tax base below the threshold of Rs 1.5 Crores, Centre’s share of tax base in this band being only 10%. This is grossly unfair. An unfair distribution of work runs the risk of acrimonious relation between Centre and State officials where complaining to oversight authorities against each other may become the norm.

GST is a cooperative tax, a concurrent and coordinated tax which needs both Centre and the States to work in harmony. It’s like a joint venture between Centre and the States. Success of a joint venture depends heavily on happiness of both the partners. Keeping this in mind, Centre has been making a number of compromises with the States. On demand from the States, the essential inputs like Petroleum and its products have been kept outside the ambit of GST; so has been the case of Alcohol which is a State subject although the other demerit goods like Tobacco and Cigarettes (Central subjects) are in. The States have also been allowed to vary their GST rates within a band. Most importantly, the Centre also agreed to compensate the States fully for first five years in case of their loss of revenue.

Although these compromises impaired the shine of a good GST, these were considered necessary to bring the States on board and make them happy. The Union Finance Minister was therefore applauded for being flexible. But, the latest decisions of the Council arising out of unjust appeasement of the States have made the field officers of the CBEC very unhappy, thus casting a shadow on the success of this great venture. Equity is mother of all virtues. An unfair and iniquitous division of work is a surefire way of killing coordination. The economist Richard Swift, referring to ideas from David Graeber, suggests that "without some kind of reciprocity society would no longer be able to exist". The answer therefore seems to be in sharing of the entire tax - base 50-50 between Centre and States for intra-state supplies, as well as for audit purpose.

(The author is former chairman CBEC and currently Consulting Editor, TIOL)