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Finance Commission Task Force Report on GST - The Enemy within!

TIOL - COB(WEB) - 166
DECEMBER 17, 2009

By Shailendra Kumar, Editor

IMMEDIATELY after the release of the 'First of the Discussion Paper on GST' by the Empowered Committee of State Finance Ministers(EC) on November 10, 2009, TIOL had commented in great details (see our piece 'GST roll-out: State fiscal jingoists succeed in proving April 1 st as 'All Fool's Day') about the unrealistic facets being attached to the new tax regime. While speaking to media persons the EC's Chairman, Mr Asim Dasgupta, had strenuously talked about three prominent deadlines,not only for the EC but also for the Centre - November 15th for finalising the text of the Constitutional Amendment; November 30th for polishing the phrasing of the Model Legislations; and January 15th for putting the IT Infrastructure in place.

Although Mr Dasgupta had exhibited a brave face in fixing these deadlines, but for TIOL, which could see the elements of surrealism in his claims, it was all unreal. In other words, the deadline of April 1 st, 2010 truly appeared to be a 'All Fool's Day'. Now after a month of this event, when TIOL looks back and takes another look at the entire gamut of developments, the chances of realising all the deadlines fixed by the EC have moved into the realm of misleading fantasy! Nothing has been heard about either the text of the Constitutional Amendment or the Model Legislations for the CGST, SGST and IGST.

More shocking is the recent news that even before the EC and the Centre could agree on the basic structure of the new fiscal edifice, the EC would be coming out with its own set of multiple GST rates. Defying all logic and the spirit of cooperation, the EC appears to be in a tearing hurry to roll out everything that provides a leg to its 'unilateral fantasy', and probably blame the Union Government for the failure to make it happen as per the deadlines.

Here comes yet another bout of shock for all GST-optimists. Even before a formal announcement is made for postponement of the April 1 st deadline, the Finance Commission Task Force has gone beyond its mandate and pushed the deadline to October 1, 2010. Has it become a proxy face for the Centre? Will the Finance Minister clarify this point? Or,is it that the the Empowered Committee which has been mandated to work in close tandem with the Centre to thrash out the nitty gritty of the new regime, has in turn delegated its powers to the Finance Commission Task Force. Let's find out what mandate was given to the Task Force. Going by the report of the Task Force which has not followed the protocol of giving the Terms of Reference in the beginning of the Report (a typical characteristic of its Chairman, Mr Arbind Modi, who has given 'Definitions' of words and phrases used in the Direct Taxes Code Bill, 2009, in Part H, towards the end). It has been printed on page no 136. The sentence begins with ''The Task Force shall examine the impact of the proposed implementation of the Goods and Services Tax (GST) ...''

If one goes by the terms of reference, this Task Force was mandated only to study the IMPACT of the proposed change in the realm of indirect taxation, and not to go deeper into various facets like the GST model best suited for the country; the potential tax base; the modalities of the implementation of GST including threshold limits, composition limits and treatment of inter-state transactions. As our understanding goes, this Task Force was not asked to indulge itself into a parallel homework unless there was a secret understanding in which case the public has a right to know. For its detailed homework, the Empowered Committee along with its officials have been spending public money on travelling of its key negotiators and holding talks with the Centre's representatives. Then, what was the need for another set of study? It is common sense - deciding the threshold limit is the prerogative of the negotiating parties and not of the Finance Commission.

The basic assumption behind the impact-analysis-mandate given to the Task Force was that the model legislations would soon be in public domain for nationwide debate, and the Finance Commission may study and give its feedback along with the inputs coming to the negotiating parties from various stakeholders in the economy. But here is a case where an inch of space offered to the Task Force has been converted into miles of it for its extra-jurisdictional commentary.

Worse, even before the major components of the GST regime are agreed upon between the negotiating parties, the Task Force has jumped the guns to make its comments public on virtually all the key features of the proposed changes. The Finance Commission's mandate, if one goes by the history of protocols, cannot be to suggest procedural issues like monitoring of compliance and the framework to administer GST. These are typical administrative works which fall within the exclusive domain of the Executive, and not a temporary body like the Finance Commission.

What happens when a temporary body exceeds its mandate? So far as IGST is concerned, the Empowered Committee has already rejected the 'Bank Model' in response to serious objections raised by many States. Netizens may like to go back to the Discussion Paper and find out for themselves which IGST model has already been approved by the EC. But this Task Force has on its own suggested a Modified Bank Model which harps on the wisdom of collecting tax revenue with minimal costs. And for the same, it wants the exchequer to totally rely on the robustness of IT Infrastructure of the banks which would also reconcile the Input Tax Credit accounts. In a nutshell, this modified system is to replace the Central Govt in the IGST model. And all this is to be implemented at the cost of the Centre.

TIOL would be carrying a series of articles on the technical-flesh of this report in the coming days but today, we would like to focus on some of the idiosyncrasies of the Finance Commission. First, is it not an awkward reality that the Finance Commission handpicked a gentleman, supposedly an expert in Direct Taxes to head the Task Force on the most important Indirect Tax Reforms. Is it not a case of asking an Engineer to study and comment on a complicated bypass surgery? Secondly,how is it that Dr Vijay Kelkar could not find anybody either from the CBEC (the implementing agency for the CGST) or the State VAT to join this Task Force? Thirdly, the authors of this Task Force Report have tried hard to borrow an aura of credibility by profusely thanking four key officers from the CBEC who had, TIOL is in know of this reality, debunked the basic assumption made by Mr Arbind Modi, for arriving at the Revenue Neutral Rate. When the fundamentals scripted by Mr Modi were themselves punctured by the CBEC officials, what purpose does it really serve by thanking them and then, ignoring their reservations and recommending the same flawed and misleading Revenue Neutral Rate for working out the tax base.

Although the ignoramus may welcome this report but the fact remains that this would further add to the prevailing confusion and may not lead to churning of any new set of wisdom. It would be a desirable behaviour on part of the EC and the Centre to discount all those details which are not related to the mandate given to the Commission, and focus on ironing out their own differences to arrive at solid foundations for the proposed regime. Let's hope that the unsolicited information does not delay the roll-out any further.

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