News Update

Pensions Department launches special drive to clear pending matters; Ease of Rule to ensure Ease of LivingUS Federal Trade Commission to file Anti-Trust lawsuit by Sept 26 against Amazon IncGovt, IMF, SARTTAC hosts global seminar on harnessing Digital Public InfrastructureIndia at UNGA - Representative calls on Pakistan to take credible action to prosecute 26/11 plannersLighthouse Festival - Goa Govt aims to highlight historic tourist spotsAzerbaijan annexes Armenian-majority populated Artsakh Republic after 2-day offensive culminating after 10-month blockadeGovt promotes Artificial Reef to rejuvenate coastal fisheries in 10 StatesGST - Cancellation of registration - Taxpayers cannot be continued to be allowed to be vexed by SCNs and orders that provide no reason, whatsoever - Costs imposed: HCCanadian PM escalates row; says Intelligence shared with India weeks ago; US calls for accountabilityGST - Cash did not form part of 'stock in trade' of appellant's business; therefore, could not have been seized - 2000 rupee notes would cease circulation by September end - Cash seized to be released and credited to petitioner's account within five days: HCSunak keen to toss cigarettes out of UKCus - Since the provisions regarding particulars required for assessment has not been declared correctly, they have not complied with Customs law in proper perspective and thus, Section 111 ibid is attracted for confiscation of goods and for imposition of redemption fine: CESTATUS to provide long-range missiles to UkraineCX - Finished goods 'Chewing Tobacco' were not wholly exempted, thus benefit of Notfn 52/2002-CE cannot be denied to demand duty on intermediate product 'Compound' manufactured and captively consumed in manufacture of Chewing Tobacco : CESTATMega fire in Taiwan golf factory; 1 dead & 10 missingST - Activity of transportation of coal from pit-heads to railway sidings within mining areas is more appropriately classifiable under head 'transport of goods by road service' and does not involve any service in relation to 'mining of mineral, oil or gas': CESTATBiden to join striking auto workers to extend supportI-T- The action of the assessee in treating expenditure as deferred revenue expenditure in the books of account will bar the assessee from claiming it as revenue expenditure for the income tax purposes: ITATJD (Secular) joins NDA for forthcoming general electionsI-T- AO was justified in intiating proceedings u/s 147 when there was relevant material to prove that income chargeable to tax has escaped assessment: ITATXi goes for China-Syria ‘strategic partnership’I-T- AO erred in issuing notice for reassessment when AO lacked reasons for reopening assessment : ITATAadhaar not mandatory for electoral rolls, says ECI to SCI-T- PCIT can exercise it's revisional powers u/s 263 in cases where there is no order passed by AO or there is no proceedings under the Ac on which any order is passed : ITATTesla keen on setting up battery storage system in IndiaI-T- AO erred in disallowing assessee's claim disregarding the CBDT Circular which was in favour of the assessee : ITAT
GST Council - A Baby likely to be born with major Legal & Constitutional handicaps

TIOL - COB( WEB) - 514
AUGUST 18, 2016

By Shailendra Kumar, Editor

WHEN the Indian Parliament passed the GST Bill (122nd Constitutional Amendment) on August 3, history was indeed made. But when the Indian Prime Minister, Mr Narendra Modi, was addressing the Nation on another historical occasion - 70th Independence Day, the history made early this month was 'almost' forgotten. I am a little intrigued by the fact that when the PM cannot forget about making a 'thick' reference to almost 'routine' activity of the Income Tax Department i.e. income tax refund, how did he forget about one of the most historic reform measures of the Government, realised barely two weeks back!! Is it a case of missed opportunity? Did PM or his speech writer do it deliberately? Does this fact of low-key, passing reference of GST in his speech amount to conflicting signals about the Government's confidence to implement GST during the remaining period of the NDA's tenure? Even if the internal and stealthy homework done by the PM and the BJP leadership may have indicated that implementing GST in the coming years may do some mortal political harm to their electoral chances to stage a comeback to power, it was undebatably a historic chance to extend full credit to the Opposition for setting an example of healthy democratic tradition which comes from an enviable maturity of the Indian democracy. No matter, opposition parties may appear to be obstructionist at one point of time but such political behaviour often serves public good. For instance, had the Opposition not insisted on deletion of 1% additional tax on inter-state trade, it would have been a serious distortion in the proposed aberrations-ridden GST model. Even their insistence on ring-fencing of the GST rate should always be seen as a positive demand in public interest.

Anyway, let's move away from the unfathomable political calculus of the NDA Government, and go straight to the proposed GST Council, which is perhaps going to be the most powerful federal forum in the years to come. Virtually all key components of the proposed GST matrix have been left to be decided by the GST Council, which is slated to be notified within 60 days after the Constitutional Amendment is ratified by at least 50% of the States. As soon as the GST Council would be constituted with the Union Finance Minister as the Chairperson and one of the State Finance Ministers as Vice-Chairperson (to be elected), the GST Council is going to first lay down detailed procedures for conduct of its own business. But, who would do the homework on its detailed procedures? There is perhaps going to be a GST Secretariat, to be headed by a Secretary General who would most probably be a Secretary-rank 'Generalist'. In this regard, since the Union of India is going to bear the entire cost of running the GST Council, the Union Cabinet would have to sanction certain new posts of various ranks. Though it may be a small Secretariat in the beginning but given the humungous quantum of initial homeworks required to be done, its workforce should be at least 35+. Naturally, a major chunk of deputationists joining the Council's Secretariat would be from the CBEC but a few posts should also be reserved for State VAT officials opting for the deputation. A good amount of initial homework would be with respect to carving out the detailed procedures in relation to various recommendatory functions of the Council. A good amount of technical inputs would be required by the Council to take certain decisions such as GST rate or even the levy of surcharge (perhaps, in future), exemptions, zero-rated items, exemption threshold, computation of compensation for revenue loss feared by the States, possible nature of disputes and many more. No doubt, the Centre may think that the technical wings in the Ministry of Finance can provide initial inputs but for healthy federal culture and to obviate chances of allegations of a bias in such studies, the GST Secretariat of both Central and State officials should jointly carry out such tasks. So far as the sanction of new posts goes, it would be a great opportunity for the laggard CBEC to offer about two dozens of its own posts voluntarily so that the Union Cabinet need not put more burden on the Consolidated Fund of India. And the obvious benefit to the CBEC would be that its officers would be occupying them on deputation basis.

One sensitive and dispute-prone area which would require transparent computation is going to be the working of compensation in lieu of revenue loss to the States. Intelligible criteria would be required to be put in place with certain degree of transparency. Since the losses are going to be notional in nature, its computation based on parameters agreed upon by the GST Council Members, is going to be key to healthy implementation of particularly SGST. Let me envisage a situation where a cantankerous State (phew, there are many!) decides to exempt certain goods or services either on merit or on political grounds. Even as it may reap the political benefits of such exemptions, it may ask for compensation of the revenue losses suffered. What should the GST Council do in such a situation? It should perhaps compute the revenue loss vis-a-vis the Standard Tax Rate to be decided by the Council. In such a situation, even if a particular State goes for exemption of goods or services beyond the common list of exempted goods and services decided by the Council, the exempting State would do so at its own peril! And what may come handy for the GST Council to develop the formula for computation of Compensation for notional loss of revenue, is the formula which India had developed within the framework of SAFTA for compensating Least Developed Countries (LDCs) like Bangladesh. Netizens may recall that before lowering the Customs Tariff for SAFTA Members, Bangladesh had asked for an assurance from India that if it loses revenue India would compensate it for the same. Since Bangladesh never suffered revenue loss India also never compensated it but the technical knowhow about the negotiations and computation is available with the Union of India and the same may be made use of by the GST Council.

Let me now talk about the actual character of the GST Council which may create many challenges for its smooth working. As per Article 279A, the GST Council is going to be a recommendatory body. It is first going to take a call on the existing lists of exempted items so that a common list of exempted goods and services could be developed. Obviously, there are going to be several dissenting voices with respect to certain specific items as well. Therefore, there would be two lists of exempted items - a common list to be followed by all and a specific list of items to be exempted by individual States based on local consumption patterns. Given the diversity in our eating habits, each State has certain items of local nature which are generally consumed by the poor more. In such cases, the States would have to bear the cost of such exemptions as they cannot claim compensation for the same. So far as food items are concerned, and certain basic services such as education, health and state transport go, they need to be exempted as they constitute above 68% of a poor Indian's consumption basket. A few items are going to be declared zero-rated to further ease the burden of prices on the poor. Yet another call which the GST Council would have to take is going to be the issues relating to area-based exemption and other surviving exemptions.

Once the exemption business is over, the second major task before the Council is going to be decision with respect to common exemption threshold for goods as well as services. As soon as this benchmark is determined, a clear picture about the tax base would emerge. And it is likely to be close to 80 lakhs. Based on this number the Council would have to decide the details of the composition scheme and also the dual administration for small businesses. But the most vital calculus is going to be determination of the Revenue Neutral Rate (RNR). And, after taking into account the whole range of surcharges, cesses and other duties levied by the Centre and the States, the GST rate is going to be decided based on the size of the tax base. If the exemption threshold is going to be high coupled with a large number of exempted goods and services, the RNR would be higher as the tax base would shrink accordingly. If they are going to be reasonably low and small respectively, the RNR could be lower.

Once the RNR is decided, it would be easier for the GST Council to determine the GST rate structure. Going by the various studies done so far, we are heading for at least three-rate structure - lower rate, standard rate and higher rate on sin goods. Deciding these rates would be a Himalayan task for the Council as 'low' lower rate on items like precious metals is further going to push up the GST Standard rate. If it is going to be a little higher 'lower rate' in the range of 3% to 5%, it would necessarily bring down the Standard rate. Once the tax rate business is over, the Council would have to debate and decide the key provisions of the Model GST Law. Some of the components discussed above would be accommodated in the GST law and its schedules which would finally go to the Parliament for its approval. Once the same is passed, all the States would have to go through the same drill with some extra inputs if needed. If the Model GST law is tabled in the Parliament before the GST rates are finalised, a separate bill would have to be presented before the Parliament for approval of the tax rates.

In other words, if there is required to be any amendment in the tax rates, it has to be done through the Parliamentary and state legislative routes. And the best occasion to do so would be the annual budgets. So, the much-speculated fear about the Union Budget losing its lustre in the coming years may not prove to be right. Since finalising GST rate is going to be a sensitive exercise for the Centre as well as the States, they would prefer the Money Bill route and the annual budgets do provide an easy cushion for the same.

Let's now examine the constitutional character of the new legal creature the GST Council is going to be. Undoubtedly it will be a recommendatory body but going by the key functions it would perform, it would empirically be a quasi-legislative-cum-executive body as the Parliament has delegated some of its powers to the Council. The biggest challenge before the Council is likely to be its recommendations to prescribe a machinery to resolve disputes of various shades. One type of dispute could be with respect to some of its procedures which may be protested by a particular state. Another type could be with respect to the GST administration or dual administration. Yet another type could be purely legal in nature with respect to jurisdiction, fiscal autonomy or legal rights of a State. Now the question is - whether the GST Council is going to provide different types of machineries to settle different types of disputes or just one machinery to resolve all disputes!! How much administratively desirable it would be to refer a dispute of executive nature to a body which may also be dealing with pure constitutional issues. If a Tribunal headed by a retired Supreme Court Judge or a High Court Chief Justice is going to be set up, whether the constitution of such a Tribunal would not come in direct conflict with the Original Jurisdiction of the Supreme Court. As per Article 131 of the Constitution, the Supreme Court shall have original jurisdiction in any dispute : (a) between the Government of India and one or more States; or (b) between Government of India and any State or States on one side and one or more other States on the other; or (c) between two or more States if and in so far as the dispute involves any question (whether of law or fact) on which the existence or extent of a legal right depends.

Going by the interpretation of Article 131 by the Constitution Bench decision in the case of State of Karnataka vs Union of India (2002-TIOL-2564-SC-MISC-CB), it is unlikely that any decision of the GST Council to set up a Tribunal to settle disputes between the Centre and the States or between two States is not going to be challenged before the Apex Court. Secondly, the GST Council would be required to perhaps consult the Chief Justice of India before setting up such a judicial forum. Given the on-going tug-of-war between the Judiciary and the Executive over the appointment of Judges today, it is likely that the Apex Court may not promptly relent on such a request. Perhaps, this also appears to be the reason for Mr Arun Jaitley not to accede demand of the Congress Party for a clear-cut outline on the proposed dispute resolution authority nor did he elaborate on this issue in the Constitutional Amendment Bill. But, it is indisputably going to be a major issue of constitutional debate. However, the history of evolution of human society reveals that there is inevitably a solution for every problem and such solutions are often found resting in the womb of problems themselves. In this backdrop, I hope that the solutions would emerge once these problems crop up and the GST Council would also grow stronger by finding solutions to all these teething issues in its initial years.

TIOL Tube Latest

GST Council Recommendations - Time for ’Peek & Poke’!

Mr. Nikhil Gupta, Global Indirect Tax Lead, Wipro Enterprises Pvt Ltd sharing his thoughts at the TIOL Awards 2022 event.

Mr. Vishweshwar Mudigonda, Partner, Deloitte Touche Tohmatsu India LLP sharing his thoughts at the TIOL Awards 2022 event.