TIOL - COB( WEB)-526
NOVEMBER 03, 2016

By Shailendra Kumar, Editor

AS announced by the Union Finance Minister, Mr Arun Jaitley, at his last briefing after the GST Council meeting, the State VAT Commissioners and Finance Ministers landed in Delhi yesterday for the two-day meeting starting today. And they had, I believe, meaningful meeting till late last night. The two key agenda items are the finalisation of the GST rate structure, including the option of imposing CESS(ES) over and above the proposed peak rate of 26% and the most contentious cross-empowerment of GST authorities under the CGST and SGST. Like the Union of India, the States are also battle-ready to hotly debate the proposed multi-rate structure. If the situation demands, it may turn out to be a protracted battle. Although Mr Jaitley, driven by the spirit of pooled sovereignty and the principles of consensus, would once again try his best to funnel the energies on the floor towards a consensus but the States are not ready for the CESS option. Their argument is that they have agreed to trade off their fiscal autonomy only for a larger kitty of revenue. And if the Centre insists on the CESS route, they would not get any additional revenue albeit they would share the blame for such distortions in the proposed reform.

The recent talk over multiple rates of CESS for different peak rate products which fall in the category of luxury or sin goods, has indeed come as a shocker for the industry and trade. The fact that a large part of the economy is going to reap the benefits of the GST, the luxury and sin goods sectors had also been entertaining genuine expectations of some fiscal relief. But, what has washed off such a hope is the spectre of a possible CESS which could be as high as the peak GST rate itself. Secondly, what worries them more is the fact that CESSES are by their very nature, not going to be 'CENVATable'. This means non-availability of credit - an additional burden. I recently met some industry honchos and came across the fact that a good number of such companies engaged in the manufacture of demerit or luxury goods have virtually kept their investments in a state of suspension and also put a halt to their revamp plans in India. In other words, the growing uncertainties over the tax rates for them have put a large question mark over their business plans in India.

Such uncertainties apart, one needs to remember that the GST or VAT is globally seen as the most revenue kitty friendly tax ever invented. Some economies which are witnesses to large-scale income tax evasion, in fact tend to see VAT as the most reliable and certain instrument to buoy up revenue kitty. When I had met a legendary global GST expert Sijbern Cnossen in Delhi a year back, he had gone to the extent of saying that the VAT or GST is so far the best fiscal instrument ever devised from the Revenue's view point. Since it is levied and collected at multiple points, it is far superior to the Retail Sales Tax. Another big strength of such a system is that it is 'self-enforcing'. But, how? Since availing credit for input VAT is a big incentive, the business entities on their own ensure that the tax paid by them to their suppliers are deposited without fail so that they could set off such input VAT against their output VAT. Those who advocate in favour of VAT for certainty in tax collections vis-a-vis income tax, also argue that it requires much less judicial interpretation than what it takes to define income under income tax.

Moving away from the conceptual benefits of a VAT system, all taxpayers need to remember that the federating States have agreed to lose their fiscal autonomy, not because they are keen to grant tax relief to the industry and trade but only to shore up their revenue kitty. That is the sole reason that they have decided to orphan the five petroleum products which constitute a major component of the cost of doing business in any sector. Secondly, they also put huge burden on the back of the common man. Since the States like the Centre collect more than 45% of their VAT revenue from them, they were not keen to give any sort of tax relief to them notwithstanding the fact that they are largely state-owned public sector undertakings. Unfortunately, the oil and gas sector is not only left out but is also destined to bear an additional bout of heart-burn. How? First, they are not going to be allowed to join the GST bandwagon for at least five year time span - the period of 100% compensation to States for any revenue loss. Secondly, they are going to pay GST levy on several inputs and capital goods they are going to consume but are unlikely tobe allowed to avail credit for the same. In other words, they need to factor in additional costs for doing business at the present level. Worse would be a day when the crude prices once again bounce back to move only upwards in the global energy market and India's dwindling forex kitty on account of poor exports, may not sustain the level of domestic demand. In such a scenario, the domestic Oil Marketing Companies would have no choice but to hike the prices of petroleum products sharply and that would prove to be an unavoidable inflationary pressure on the economy.

Anyway, it calls for more detailed and exhaustive examination which I intend to undertake in future when the Model GST law is finalised. While talking about the Model GST Law, Mr Jaitley had said that the GST Council would discuss and approve the same at its next meeting on November 9 & 10 but it seems such a tight deadline is not working out well. Given the fact that the industry and trade had thousands of reservations about the various provisions of the Model Law and also the fact that the technical committee members themselves admitting that there are lots of changes required to be made, it is likely to be ready only by November-end. Secondly, it would be advisable for the GST Council to once again put the finalised Model Law in the public domain before the same is presented to the Parliament. Such a decision appears to be quite desirable from many a perspective. One, if there are major flaws or blunders in the Law, let them be pointed out. Secondly, let the taxpayers get familiar with the provisions they are finally going to comply with. Thirdly, if the Centre and the States are really serious about the taxpayers' rights, it would be a good step to demonstrate respect for such rights. Otherwise, every State has legal right to bulldoze through its own way and not to care for the rights of the taxpayers. But, the global trend is that the taxpayers must be given advance notice or be treated as an inevitable partner in every fiscal change being planned in the interest of the society at large.

This brings me to the issue of cross-empowerment which the GST Council is going to discuss at its fourth two-day conclave. Logically speaking, it is a non-issue. It should not be allowed to derail the decision-making efforts. The fact that when the tax base is common for both the Centre and the States and both have been vested with constitutional rights to tax, it is just a matter of clear understanding that both need to trust each other and collect revenue with minimum inconvenience to the taxpayers. In the background of such a golden rule, the technical committee members just need to agree to some basic arithmetic. For instance, audit is ONE function where the Centre and the States need to empower each other. It is only a matter of half a per cent here and there in selection of top assessees. So far as the assessment and preventive functions are concerned, they are going to be undertaken by both and do not require cross-empowerment. But, yes, a good understanding to share intelligence or findings of a search would help each other in making good cases. So, let's hope that the fourth meeting of the GST Council produces some anticipated results. All the three meetings have produced some results and it has been a good going for this federal body so far. It would be also desirable for the Council to put the issue of deferring the implementation of the GST by at least three months as one of its agenda items sometime in January or February. By looking at the level of preparedness of all the stake-holders, the GST Council should postpone the implementation to July, 2017 or later rather than rushing into a new system with crippled efficiency.