TIOL - COB( WEB) - 506
JUNE 23, 2016

By Shailendra Kumar, Editor

IRRESPECTIVE of the fate of the Constitution Amendment Bill on Goods & Services Tax (GST) in the Rajya Sabha which is more of an arithmetical event, the debate on introduction of GST is thankfully back on rail. And it is to be attributed to the decision of the Centre and the Empowered Committee of State Finance Ministers to put the much-awaited GST Model Law in the public domain for feedback from the stakeholders. Going by the public posturing of the Union Government and also the Model Law it may appear that India is ready-go for implementation of GST from April 1, 2017. But, as per my understanding, it is not!! All the stakeholders such as the CBEC, the States, the industry & trade and also the IT Platform are not yet fully geared up for such a gargantuan change. It must be remembered by all the stakeholders that the GST is not an incremental reform of the present indirect tax regimes. It is undebatably the most powerful transformational reform post-Independence in India. And, given the magnitude of its impact on the shape and configuration of the present business organisations, tax administration and also the Exchequers, it should not be accepted as an 'under-cooked' legislation which appears to be the case in present.

Let me take TIOL Netizens to the Prime Minister's sage advice at the recently-concluded Rajaswa Gyan Sangam where he underlined the need for evolving a taxpayer-friendly fiscal environment. Just opposite to what the PM said, is litigation-friendly GST. And, this is what seems to be flowing out of the present GST Model Law. Let me start with the definition of "SUPPLY", the most critical expression in the proposed law:

"1) Supply includes ...."

If I ask an industry veteran or even a retired revenue official what does this remind him of? - His quick answer would perhaps come from the definition of "manufacture" as per Section 2(f) of the Central Excise Act, 1944. Exactly the way the expression 'manufacture' was defined, the architects of the GST Model Law have carried the same mindset to define what constitutes 'supply'? Such a thought process clearly establishes the fact that nothing has been learnt from the judicial wisdom accumulated over the decades. Since the architects of the Central Excise Act had failed to visualise the kind of price the posterity would be paying to know the exact meaning of 'manufacture', they may be pardoned for not defining 'manufacture' clearly. But, similar amnesty is perhaps not available to the present generation of architects who should remember that NO definition should begin with "It includes ...!" Ideally it should begin with "It means ... and then also includes ..." Such a measure of caution is so important to avoid future litigation as even today the Apex Court has to deal with the live issue of 'what is manufacture'? It was actually left to the Supreme Court of India to lend words to the expression 'manufacture' through several landmark decisions such as Delhi Cloth Mills, Ujagar Prints, Pawan Biscuits, Parle Products, Moti Laminates and many more. But, with the Revenue keeping on adding new dimension to the word "manufacture", the Apex Court continues to lay down new judicial wisdom to provide intended meaning of the expression 'manufacture'. The same fate would await the expression 'SUPPLY' unless it is re-defined.

If India looks over the global GST-map, the nearest example we may find is that of the Canadian GST. And the Canadian Revenue has defined SUPPLY as "A supply means the provision ...." Such a definitive expression is highly desirable to avoid any possibility of litigation when India is approaching this mega reform with an unforgettable baggage of sticky litigation records.

A similar error is glaringly pronounced if one looks at the definition of "place of business" which has also been defined with the expression "It includes ..." Why can't we say "It means ..." when we have so much of judicial wisdom flowing out of landmark cases in the content of international taxation. The expression "Permanent Establishment," which has universally been used even in the context of GST / VAT laws in many countries, has largely been settled by the courts not only in India but also outside India. The concept of PE is so often used to invoke the incidence of taxation in the context of international taxation that the GST law makers should be extra careful in choosing the legal expressions which are least dispute-triggering. My off-the-cuff feedback would be that the existing team of architects of the GST Model Law should undertake another exercise to identify all those expressions which may produce litigation once it is implemented. In fact, at certain places, the same team has done a good job by clearly stating what the word "job work" means?

Let me now take you to other minefields of promised litigation. Valuation Rules are one of them. The fact that the disputes relating to assessable value either in the case of Central Excise or Customs or taxable value in the case of Service Tax continue to be piling up before various judicial forums notwithstanding catena of court decisions, it would be highly desirable to avoid exclusions or inclusions. If certain costs to the business are to be included or excluded they should be clearly specified. Even after seven decades of the Central Excise Act, it is not uncommon to find an Apex Court decision on issues like physician sample and notional interest on advance or sum paid for technical knowhow. In this backdrop, the proposed valuation rules would be triggering litigation particularly in the context of related party transactions; business deal between the branch office and the head office; captive consumption and cost allocation from common services availed by a Group of Companies - a common practice among MNCs. To avoid litigation, an extra ounce of efforts need to be put to infuse more clarity and to chase away obscurity from the most common expression like Valuation.

Similarly, where was the need to differently define "capital goods" when we can simply visit the Income Tax Act which allows depreciation on all capitalised expenditure incurred for creation of capital goods yielding enduring benefits. The fact that when a sister tax law has also gone through decades of litigation rounds before many types of expenditure have been settled as capital or revenue, why can't the GST law makers take benefit of such settled judicial wisdom rather than keeping it open for a can of litigation worms. Yet another example is the term 'manufacturer' which should be avoided particularly when we are going to switch over to terms like supplier of goods and/or Services. The fact that this expression has been used at a couple of places, it goes to prove that our GST makers have not attended to this task by leaving behind the baggage of Central Excise terminologies.

Yet another piece of evidence is the expression 'permission'. A supplier of goods or services would be required to take permission under certain circumstances. The word PERMISSION smacks of the features of the colonial tax system. When the GST is going to be a tech-driven compliance system, why not INTIMATION in place of PERMISSION? Then, whether the permission would be required to be taken from one Authority or two authorities - this is not very clear in the model law. This also brings us to the concept of DUAL CONTROL where assessees up to a threshold would be under only the State Authorities. Although it is not yet public but it is learnt from the sources in the Empowered Committee that the Union Government has accepted their demand for having control over assessees up to Rs 1.5 Crore turnover. Administratively speaking, such assessees may be under control of the States but legally speaking, there would be two sets of officers (CGST & SGST) administering them. Such a threshold if gifted away to the States, would also have serious administrative implications for the Central administrators which I would discuss in latter para.

Moving away from the legal phraseology let me go straight to the Registration Chapter. Since the focus is on technology-driven compliance regime, the goal of law makers should be to make REGISTRATION as simple as possible. But, a quick glance at the Registration Chapter reveals that it could not have been more complicated than what it promises to be. Apart from taking registration for SGST in each State, one would also be required to take separate registration for each business vertical if one has multiple ones in a State. In its present form which is uniform for all sorts of assessees, it would be unfair to subject small traders to the same procedural regime. Worldwide, the compliance structure is weaved in such a way that the compliance is simple and cost-effective for smaller businessmen and a little more elaborate one for biggies in the industry. But, that is not the case here and it needs to be reconsidered.

The most potential source of litigation is going to be the differential GST rates for goods and services. Exactly like the present Central Excise Tariff Act, where too many disputes are initiated for lower tax rates, a similar situation may crop up even in the proposed GST regime. What may further muddy the tax waters would be the future classification scheme. There are many more contentious issues which I would like to discuss but the most important question before me is - what is the preparation for transfer of credit? The fact that invoice mismatching would result in denial of credit, how robust is the GST Network platform to deal with billions of invoices in almost real-time milieu? It is not very clear and does call for a separate piece on the IT preparedness of the Union Government and the States. Similarly, there is a need for a debate within the CBEC - how good are going to be the present administrative structures of an Executive Commissionerate; Audit Commissionerate and the Directorate. If assessees up to Rs 1.5 Crore turnover are transferred to the States, more than 90% of its service tax assessees would be gone. In this case the CBEC would have to go for a brand new organisational structure (Cadre Review).

Before I conclude I feel tempted to pen down my feeling that the present GST Model Law has all the bad ingredients of Central Excise, Customs, Service Tax and the VAT laws apart from a few good ones. Therefore, the need of the hour is to set up a fresh Panel of Experts (at least one or two known jurists; one or two from the industry & trade; two from the taxmen community and at least one international GST consultant) to undertake the exercise of a comprehensive review of the model law. There is a clear-cut need for a fresh approach to remove the vestiges of the present colonial regime notwithstanding the decade-old incremental reform. Secondly, if the GST is finally implemented, all the stakeholders should be mentally reconciled to the fact that there is bound to be complete mess for a couple of years before the new system sinks in. Thirdly, the Modi Government should also be politically ready for an electoral setback as this is what the global history of GST implementation speaks volumes about. Let's hope good senses rule the roost for this truly transformational reform India is itching for!!