AUGUST 16, 2013

By Sumit Dutt Majumder

GOODS & SERVICE TAX (GST) that is being scripted for introduction in India would be a Dual GST with both Centre and the States levying and collecting it concurrently. But under the Indian Constitution, taxing powers of Centre and the States are clearly delineated through Union List (List I) and States List (List II). The Concurrent List (List III) where both the Centre and the States have concurrent jurisdiction, does not have any tax item. Hence emerged the need for an amendment of the Constitution so as to empower both the Centre and the States to levy and collect GST. But there were so many issues where consensus between the Centre and the States was just not being achieved during 2010-11 in spite of the frequent interactions. The option was either to keep waiting and continuing with seemingly endless negotiations or to set the ball rolling by introducing a Constitution Amendment Bill, which was in any case mandated to be referred to the Parliamentary Standing Committee on Finance, which would then examine the views of all the stakeholders including the States, and recommend modifications in the Draft Bill. The Centre in its wisdom went for the second option, and rightly so. Thus we saw the 115th Constitution Amendment Bill (the Bill) being introduced in Parliament in March 2011, and the same being referred to the Parliamentary Standing Committee of Finance (the Committee) the same week.

The Committee under the chairmanship of Mr. Yashwant Sinha has since submitted its report after extensive interactions with all the stakeholders for over two years. Besides the issues relating to the Bill, the Committee has also made observations and recommendations on certain issues related to GST in general like Administration and IT Mechanism, Compensation Mechanism, GST Monitoring Cell etc.

First, the Bill. There was no controversy on the new Article 246A for empowerment of Parliament (Centre) and the State Legislatures to levy and collect GST that would provide a dual concurrent GST.

In terms of the new Article 269A, the GST on inter-state transactions was to be levied and collected by Centre and such tax was to be apportioned between Centre and the States. The Committee took note of the Integrated GST (IGST) model envisaged by the Centre and broadly accepted by the EC. While noting that settlement of IGST accounts among different States will be done by the Centre, the Committee felt that there was a possibility of a positive balance in the proceeds of IGST at the end of a fiscal year. The Committee therefore recommended a suitable provision in Art 269A for distribution of remaining proceeds of IGST after the accounts of the fiscal year is settled. The Committee further observed that the proposed model should not act as a disincentive for States with a strong manufacturing base, considering that the destination-based IGST model favours predominately Consumer States. Even as tacit approval of the IGST model was accorded with some suggestions regarding distribution of remaining proceeds of IGST, suggestion was also made for considering an alternate model i.e. Modified Bank Model recommended by the 13th Finance Commission. The IGST model is at the last stage of finalisation by the EC. One apprehends that the Committee's aforesaid observations on the subject might reopen the issue of choosing the model for inter-state transactions. In the process, finalisation of GST Net, the IT infrastructure, of which inter-state transaction is a crucial element, might also get delayed.

With respect to Article 279A of the Bill authorising setting up a GST Council that would make recommendations to the Union and the States on GST design and structure, the Committee, while noting that the States have broadly agreed to it, made certain observations and recommendations.

On the requirement of the GST Council to be guided by the need for a'harmonised structure'of GST, as provided in Clause 5 of the Article 279A of the Bill, the Committee recommended that the expression'harmonised structure'needed to be clearly defined for avoiding ambiguity. As for the stipulation at Clause 8 of Art 279A of the Bill regarding consensus before every decision of the GST Council, the Committee recommended for voting instead of consensus since otherwise no decision could be taken even if one State differed. The Committee also suggested different weightage s for voting for representatives of Centre (one-third) and the States (two-third). The quorum was also recommended to be raised to 'half' from the proposed'one-third'. These recommendations regarding'consensus'and'harmonised structure'are indeed practical and would bring more transparency.

On GST rates, the Committee felt that the States should have some elbow-room for varying the tax rate depending on exigencies, and therefore recommended a band with a floor rate and ceiling rate within which the States could vary the tax rate. This recommendation, if accepted, should be made valid for Centre as well. With respect to threshold, while noting that it was ideally desirable that the GST regime was made comprehensive and all encompassing, the Committee suggested that for the present, the existing exemption for small business many continue. The committee has left the issue to the wisdom of the GST Council.

As for the GST Dispute Settlement Authority (DSA) proposed under Article 279B of the Bill for adjudicating disputes arising out of deviation from the norms laid down by the GST Council, the Committee agreed with the States that the DSA would have undermined the supremacy of Parliament and State Legislatures, and therefore recommended that Art 279B be omitted. Instead, the Committee suggested for empowering the GST Council to deal with this matter, since there was indeed a need for a mechanism for resolving such disputes.

With respect to the proposed amendment of clauses 3 in Article 286 of the Bill relating to the power of the Parliament regarding taxation of'declared goods', the Committee felt that the spirit of cooperative federalism which is crucial for the structure of dual GST has to be upheld and that it has to be ensured that there is no unilateral decision by the Centre on this issue. The Committee therefore recommended amendment of the said Clause 3 in such a way that the Parliament could act only'on the recommendation of the GST Council'. The Committee felt that this change would allay the fear of the States to some extent on loss of fiscal autonomy.

In this context, the Committee also recommended empowerment of both Centre and the States to raise additional resources during natural calamities, and also to provide for special schemes for North Eastern States, the State of Jammu & Kashmir and other special category States. Similarly, the Committee recommended that the Centre should also have the flexibility to levy surcharge or cess during extraordinary circumstances. These recommendations are pragmatic and indeed necessary keeping in view the need for raising revenue in various types of exigencies.

In the light of the Centre agreeing to the proposal of the States to keep a few goods like petroleum & its products, natural gas, alcohol etc. outside the ambit of GST, the term'Goods & Service tax'was proposed to be so defined in Art 366 that these items were excluded from the ambit of GST. The Committee however believed that such specific exclusions need not be provided in a Constitution (Amendment) Bill, as this will needlessly make the GST regime very rigid. Since the ultimate goal is to have an integrated, comprehensive and seamless GST regime subsuming various Central and State indirect taxes and levies, the Committee recommended that the above - mentioned exclusion provision may be omitted from the Constitution (Amendment) Bill. The Committee further felt that in any case, the proposed provision inserting Article 279A in the Constitution empowers the GST Council to make recommendations on subsuming or exempting or excluding certain goods/services from the purview of GST. The Committee thus believed that the constitutional mandate being provided to the GST Council is resilient enough to address such emerging situations. This is a very wise recommendation. In future, when it is decided to bring Petroleum products, Alcohol etc within the ambit of GST, it will be so much easier without having to go through the Constitution Amendment route.

As for the Entry 52 of the Seventh Schedule, as worded in the Bill, the Committee observed that it would not be desirable to go back to the earlier system of levy and collection of Octroi by local bodies, and suggested that the entry tax in general should be subsumed in GST. This is a welcome suggestion and would bring relief to the Trade & Industry in Maharashtra where the levy of Octroi is still in vogue.

The Committee has also made certain recommendations on issues not directly related to the Amendment Bill. One such issue is the demand of certain States for a Constitutional provision in Art 279A for a mechanism for compensating the States in case of loss of revenue after implementation of GST. The Committee has recommended for suitable amendments in the Bill providing for a built-in permanent compensation mechanism with a view to addressing the legitimate revenue concerns of the States. It has also suggested creation of a Compensation Fund under the administrative control of the GST Council. It may be recalled that during the Committee's interactions, the Centre had opposed the specific inclusion of Compensation mechanism in the Constitution. It was argued that the already existing provision of Finance Commission could take care of this issue. It is doubtful whether the Centre would now relent on this issue.

Based on a suggestion from Dr. Parthasarathi Shome, then Chief Executive of ICRIER, the Committee has recommended setting up of a GST Monitoring/Evaluation Cell for closely following the implementation of GST and its impact. It has been suggested that the Cell may function under the aegis of the GST Council, and a suitable provision may be made in Art 279A of the Bill so as to put monitoring of GST on a firmer footing. This, no doubt, would be a good idea for proper and effective implementation of GST.

While stressing on the need for flawless implementation of GST through seamless IT infrastructure, the Committee urged the Centre to provide technical assistance to States for developing robust IT practices. The Committee also observed that the issue of dual control would need clarity so that dual GST regime becomes acceptable to trade and commerce at large and fosters tax compliance.

In conclusion, the Committee allayed the fear about the GST Council overriding the supremacy of Parliament or State Legislatures, pointing out that the mandate entrusted to the GST Council under the proposed Art. 279A did not in any way alter the existing Constitutional scheme. The Committee expected the GST Council to follow the principles of cooperative federalism and democratic governance. The Committee is also of the view that on the whole the Bill'should not ideally include specific aspects relating to rates, exemptions, exclusions, thresholds, administrative arrangements etc. What should be included in the laws and rules should not form part of the Constitution of India'. The Committee concluded by stating that the Bill would require further amendment in the light of the aforesaid suggestions.

Summing up, the Committee has made a number of useful observations and recommendations on many critical issues. It is now upto the Centre and the Empowered Committee to take the call on those issues. Resolving some of the issues in terms of the Committee's recommendation would however take quite a bit of time since these would entail fresh negotiations between the Centre and the States. Some such issues are consideration of alternate model for Inter-State transactions, Compensation Mechanism, Special Schemes for a few States, Subsuming of Octroi (Entry Tax) in Maharashtra etc. The newly elected Chairman of the Empowered Committee, Mr. Abdul Rahim Rather had stated after his election that it is possible to introduce GST by next year i.e. 2014. In the light of the issues raised above, it would definitely be a Herculean task. While all efforts may be made in 'track-one' to make it feasible in due course, there is no harm if the Centre plans its own GST in 'Track-two', as suggested by Sijbren Cnossen, the VAT/GST expert. The Centre's GST could be a broad-based one encompassing all central Indirect Taxes except Customs duty (but including CounterVailing duty) and covering all goods in Union List including Petroleum Products and Tobacco. The Parliamentary Committee's Report has succinctly brought out the pitfalls that need to be carefully avoided before launching Dual GST, and implementation of the recommendations made therein would definitely take considerable time. Hence is the reiteration for following Cnossen's suggestion in planning Centre's own GST in'Track-two'. This is perhaps one situation fit for responding to the call 'Ekla Cholo re' - at least for now!

[The author is Indirect Tax Ombudsman, Delhi and former Chairman, Central Board of Excise & Customs; Views are personal]