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Credit Flow in GST Regime - And the Discredit goes to ...

TIOL - COB( WEB) - 449
MAY 21, 2015

By Shailendra Kumar, Editor

HURDLES are an integral part of evolution of any new system. If the political system happens to be democracy like ours, it is likely to be multi-staged hurdle. Though many in the ruling party may perceive it as avoidable delays and additional costs to the economy but it must not be overlooked that the diversity of opinion, an inseparable characteristic of a democratic system, commands its own price like any other virtues in the society. Secondly, wisdom takes time to dawn and it naturally goes hand in hand with the slow and steady! In this backdrop, what the Opposition did with the GST Bill in the Rajya Sabha was quite sensible and legitimate. But this does not mean that what the Finance Minister, Mr Arun Jaitley, has been seeking from the most powerful institution in our system is illegitimate. Having seen the time-input of nine years which have gone into the 'concoction' of the present GST model, Mr Jaitley is predictably a 'man in a tearing hurry'.

Although his haste is noble but he seems to have developed amnesia about the distortions creeping into the proposed model. Once again Mr Jaitley is not to be blamed for accepting some of the illogical demands of the States which have come to be seen as fresh bout of distortions in our Dual GST framework. One such distortion is the one per cent additional tax with no credit facility. Another major amiss which the posterity is going to attribute to the NDA Government as a mega failure is its reluctance to push the States a little more for agreeing to the idea of subsuming notorious Stamp Duty in the proposed GST. The NDA Government has taken many measures not only to curb generation of black money in the domestic economy but also to enable resident Indians to come out clean if they have sources of income and assets located overseas a la the Black Money Act. Mr Jaitley knows for sure that unless the villainous regime of high stamp duty is brought to an end, the central role of cash in property transactions cannot be curbed. In this background, it would be of utmost importance for the Select Committee Members to examine the feasibility of such an inclusion even at the cost of additional tranche of compensation to the States. It must be remembered by the NDA that it is generally too hard to rectify the mistakes committed at the stage of introduction of a new system.

Let's now move to another debatable development which may command the attention of the Hon'ble Members of Rajya Sabha who are about to begin their examination of various bones of contention. The most critical goal of the proposed GST is to transform India into a Single Market. And this is to be achieved by ensuring unhindered credit flow between the States. It so far sounds fine. But, as per the inputs collected from certain State VAT authorities, this is to be achieved by matching every sale and purchase invoice and only bona fide credit transfer is to be allowed. This also sounds healthy. But the trouble is - credit flow on the basis of invoice matching in a large economy like India is unprecedented and also untested proposition.

Let me recall my engrossing chat with the globally noted GST expert from the Netherlands, Mr Sijbren Cnossen, who was in India recently. When I triggered this issue, his spontaneous reaction was - no way, not at all! Invoice matching for allowing credit flow is a retrograde idea. Such an exercise was undertaken by two BRICS countries - China & Brazil, and it had miserably failed. It had a countervailing effect on the benefits of the GST system. He cited the example of EU which has been grappling with the problem of invoice mismatching to the tune of USD 100 bn annually - this is when there is no mandatory 100% invoice capturing. And the reasons for such mismatch are many - wrong feeding of data is the most prominent one. To help GST taxpayers the EU provides the facility of a call centre where "Miss Match" (he jokingly explained) helps a taxpayer in rectifying the data errors so that the credit could be availed.

Let's now go back to the Indian scenario. The IAS and the IRS officers who have been authorised to take such a decision, I am sure, will have not even a remote idea about what could be the possible number of such invoices generated in a year. A few billions, perhaps! Does our GSTN bureaucracy have even the faintest idea about what sort of ICT infrastructure is required to handle this sort of volume? Have they visited the failed economies to find out what went wrong with them and why they abandoned such an idea? Nobody in the Governments or GSTN has any clue as to what is the number of invoices they are looking at, except that they are sure that they can do it. The one who knows not that he knows nothing, is ignorant enough, but if he starts believing that he knows, then he becomes the most pernicious.

To add to that is the reality of semi-literate nature of local stockists, who would be expected to upload each of his invoices in cases of interstate sales. Let me explain it by giving a simple example - A wholesaler of edible oils in Gurgaon, from whom such commodities are purchased by local retailers of Delhi would need to upload all their invoices for the local retailers of Delhi to avail credit. Such high level of compliance cannot be achieved where the profit margins are wafer thin and a trader is semi-literate. Hiring personnel for compliance or outsourcing compliance would mean high transaction costs which is nothing but an additional 'tax' for a small taxpayers. The immediate consequence would be that a large number of dealers would simply decide to stay out of the compliance net. There would be an economy of unregistered dealers who would prefer paying hafta to the local SGST officials and it would give a boost to the cash economy. All taxes down the line, income tax, shop registration fee etc would be evaded to keep the activity hidden from the GST radar.

Secondly, it is learnt that the credit matching rules as have been negotiated between the Centre and the States provide that where there is a mismatch in credit between the buyer and the seller, the same would not be allowed. To put it simply, if you are a consulting engineer who travels extensively to provide services by using Air Services, you would not be entitled to the input services credit if the Airline did not pay the taxes to the Government. It does not matter that you had paid the entire consideration of the tickets to the Airline which included the tax element. Worse, if you travelled 12 times in a month, and the tax element on 11 journeys was deposited by the Airline but not on the 12th journey, you would not be entitled to the credit of all the journeys. This indeed flies against the very fundamental of the indirect taxes which are pass-through tax. Once you have paid the consideration, which includes the tax element, the well-established wisdom across the world is that you have discharged of your tax responsibility. But not so in the proposed GST regime in India. The weakness of State VAT authorities in dealing with missing dealers who have passed on the credit and vanished has led to this 'absurdly humourous' solution being suggested where the States have decided to go after the person who has purchased from the missing dealer and not after the missing dealer. The States seem to be hell bent on punishing the wrongdoing, it does not matter whether the wrongdoer is being punished or an innocent person.

If this is what is going to happen in the proposed GST regime, and this has perhaps been one of the reasons for keeping all critical decisions away from the eyes of the taxpayers, then the NDA Government top honchos should wake up fast and remind themselves that there cannot be better disservice to the single market philosophy than what is being decided. Rather than focussing on providing the basic error-free ICT services when the GST is rolled out, if the GSTN is actually toying with such ideas in the realm of impossibilities, it is bound to be a non-starter.

In this backdrop, I would urge the Select Committee Members to expand the scope of their interactions with the Empowered Committee and also look into some of the critical decisions already taken. This is also the right time for the Finance Minister to involve some of the global experts who could perhaps help India avoid the glitches experienced by some of the economies who had also entertained similar fancy ideas. There is nothing wrong with the idea but an idea which falls in the realm of impossibility should not be tried with right in the beginning itself without culling out even the basic data and feasibility studies. Let's hope India does not tumble down even before it starts to learn walking! After all, no one wants a new regime that is stillborn.

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