TIOL - COB( WEB) - 232
MARCH 24, 2011

By Shailendra Kumar, Editor

ANY talk of tax reforms at a time when the entire Government is beleaguered with a volley of corruption charges, indeed require bravehearts. And the Finance Minister, Mr Pranab Mukherjee, is one of such bravehearts. Unperturbed by all the charges of wrong-doing, Mr Mukherjee, last Tuesday, moved several vital amendments to the Finance Bill, 2011. Along with them, he also tabled the much-speculated GST Constitution Amendment Bill. Among the amendments, one noticeable change on the direct tax side was the relaxation in the equity holding in the foreign subsidiaries of Indian companies which would be subjected to concessional rate of 15% dividend tax if funds parked abroad are brought into the country. Having seen the FDI inflows on slide in the past one year and also a flood of representations the FM has reduced the equity share from more than 50% to 26% or more to be eligible for the tax benefits.

Since the tax rate applicable to such funds was 30%, there was indeed no incentive for the Indian corporates to bring back the dollar money into the country. Most corporates have been keeping their such funds parked overseas for future takeovers or JVs. But, with the FM announcing the relaxation in share-holding, one may now expect that a good number of Indian companies which may even be holding only 26% stake in a Joint Venture will also be eligible for this benefit.

Let's now go to other amendments which were proposed, keeping in mind the proposed GST roll-out. On Service tax front, the FM had proposed the 'Point of Taxation' rule to infuse certainty in determining tax liability which has for long been a bone of contention for the lack of an independent Service Tax Act. Although the intention of the Govt was good but the proposal turned out to be too hurried and least debated. A good number of service providers expressed their concern about the difficulties the proposed change was likely to pose in their routine working. Thankfully, their concern was well attended to by the mandarins in the North Block who finally agreed to defer it by three months. Ideally, it should have been six months so that the policy-maker could have held some close interactions with various segments of the economy.

Let's now go to another GST-related proposal announced in the Budget. The FM had withdrawn Central Excise exemption granted to 130 items, and brough them under 1% levy. He had also given the option of 5% levy with Cenvat Credit availment facility. The industry took some time to fathom the actual impact of this levy which resulted in widespread protest and representations. Marooned by letters from even the Parliamentarians and industry associations, particularly, small-scale units, the FM came out with a solution in the form of an abatement. Since withdrawing the levy would have harmed the cause of GST, he has announced 35% abatement for 1% levy. Notifications in this regard would be issued next week.

A similar benefit has been granted to the branded readymade garments industry which was the first to hit the streets with placards and dharnas. The abatement has been hiked to 55% to soften the impact of 10 % central excise levy.

But the most historic step was to table the 115th Constitutional Amendment Bill which would vest powers in the Centre as well as the States to levy GST on the common taxbase. To do so, the Bill proposes to insert Article 246A. To tax inter-state trade in goods and services, the Bill proposes to insert Article 269A. It has defined GST in Article 366. The much-speculated GST Council is proposed by Article 279A. In tune with the First Draft, the Bill proposes to make the Union Finance Minister as the Chairperson of the Council. Besides FM, the MoS(R) will be the second nominee from the Centre on the Council. For the States, all State Finance Ministers would be the Members of this Council, and they would elect one amongst themselves as the Vice-Chairperson. This Council is going to give veto power to each Member and thus, no State could complain of loss of fiscal autonomy. However, once agreed upon, no State will have the freedom to tinker with the GST rates. The Council is largely going to act as a bulwark against frequent tinkering with the tax rates unlike the present day VAT system.

In case of a dispute, the Bill proposes to set up a GST Dispute Resolution Authority vide Article 279B. This body headed by a retired SC Judge or HC judge would act on complaints relating to deviation, if any, reported to it either by the Centre or the State. This three-member body would settle all top-level GST disputes.

Having tabled this Bill the FM, deservingly, must have heaved a long sigh of relief. Now that the ball is in the court of the Parliament and the State Assemblies, they need to rise above their partisan politics and approve the Bill. For smooth sailing of this Amendment, at least 50 % of State Assemblies are required to pass it. Once that is done, the first hurdle to roll out GST will be overcome. The second hurdle will be the GST rates, followed by the GST Acts and then the GST IT-platform for smooth implementation. It is learnt that most of homework is done on other fronts, and once this Amendment Bill is through, industry and trade may hope to see GST by October 2012 or April 2013. Let's hope good sense prevails over States and they approve this Bill without much delay.