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Delay in GST Roll-out - Will GST Council answer its critics today?

TIOL - COB( WEB) - 533
DECEMBER 22, 2016

By Shailendra Kumar, Editor

THE GST Council is slated to meet today and tomorrow. It is true that the last bunch of issues are necessarily disputatious, and there is a gestation period for finding their solutions. But, it has unfortunately come to be seen as a victim of demonetisation drive of the Union Government. I personally do not think that had there been no demonetisation decision, the Council would have arrived at amicable solutions at its very first deliberation. Given the complex nature of the issues and an equally complicated chemistry of polity at the Council, the issues of cross-empowerment and finalisation of model laws always required sensible and pluralistic debate over them. And when such debates were gathering momentum, what came to cast a pall of gloom over the optimism to find their solutions was the decision to demonetise two high value bank notes. For the Modi Government, it was a case of overestimation of the tolerance index of the economy to deal with two disruptive reform initiatives - Demonetisation & the GST. Even as the GST dual system has been on the 'frying pan' for too long, the Modi Government showed uncalled for haste in unfolding the demonetisation decision. And this has evidently given a push to the 'disruptive decibels' from certain quarters. When some of the Finance Ministers talked about more revenue loss due to contraction in economic activities resulting in lesser revenue mobilisation to their kitties, it is not without a reason. The economy is going to contract by more than one per cent and it would certainly hurt revenue collections for both the Centre as well as the States. This is certainly going to be one of the issues to be raised at today's meeting. Some States would be looking for more compensation. But when the Centre has already committed to compensate them for whatever revenue loss the States might suffer and when 14% revenue growth has been locked, it should not worry them too much for the next fiscal. But yes, demonetisation would hurt their revenue receipts in the current fiscal and there would be no compensation for the same.

However, some revenue loss in the current financial year should not be seen as a reason powerful enough to derail the much-awaited GST reform. GST is going to do a world of good not only to the economy but largely to the revenue kitties of all the parties. In such a background, no State Finance Minister should be allowed to derail the process of evolution of GST laws. Demonetisation should be perceived only as a temporary setback which has delayed the process of roll-out from April 1, 2017. Though the Union Finance Minister and other State FMs were talking about April 1, 2017 as the deadline but they knew for sure that their most vital vehicle GST Network was not prepared for such a roll-out besides the pending finalisation of some of the major components of the GST laws.

One of the issues which has neither been finalised nor has been brought to the floor of the GST Council is the application of GST laws to Union Territories without Legislature. Out of seven UTs only two, Delhi & Puduchery, have legislatures. What about the rest five? If one reads the 101st Constitution Amendment Act, it only refers to UT with Legislature which has been included in the list of 'State'. Although the Constitution vests powers in the Parliament to make laws for UTs but so far as the GST laws are concerned, a separate legislation is required particularly for the levy of IGST and availing credit for the same. Good businesses exist in many of these UTs and for the levy of IGST and availing input tax credit it is important that a separate legislation is prepared for vetting by the GST Council.

Moving away from other issues such as cross-empowerment which I had discussed at length in my previous column, there are many more issues relating to the GST laws which require the attention of the law makers. One major rule which is missing and that needs to be put in public domain are the valuation rules. The major worry for the industry is how it is going to be treated in the case of stock transfer and also captive consumption. These are serious and tricky areas of differences between the Revenue and the industry. Another important issue is the valuation in cases of related party services passed through Book Entries only. It is common practice that a large company head office sources certain services at entity-level but makes the same available to its other offices at different locations and sometimes even to its Joint Ventures and tend to pass book entries only. But it can become a contentious issue of valuation. In my previous column I had touched the issue of valuation in the case of employer-employee services. Reacting to it, one netizen has drawn my attention to a common practice in the industry when one employer buys notice period of an incoming employee and pays directly to the previous employer of the same employee. How such a transaction is going to be treated and valued may become an issue of serious dispute. When it comes to discount, although the second version of the Draft Law has clarified that it is not going to be a part of the value of the product but many large industries find that the issue of credit notes issued for discounts post-sale are impractical. Valuation of common administrative services which is a common head in cases of large entities, is going to be another area of discontent.

Previous 'The COB(Web)s' Column on GST
Employer-Employee Services: GST Model Law really intends to tax Diwali & Christmas Gifts? GST - Let's not water down the Territorial Waters issue
Is GST Council heading for Stalemate? GST Tryst with Three Fault lines!

Another provision in the model law which has not been welcomed by the industry is the differential treatment being meted out for computing the value of the turnover of GST goods and non-GST goods. In case of GST goods, the value of turnover excludes GST taxes whereas it includes taxes paid under other taxes in case of non-GST goods. In such a scenario, the turnover of GST goods would always be lower than non-GST goods. It has been pointed out that such a provision would cause serious distortions for the purpose of distribution of input tax credit to other entities having the same PAN. Some industries have pointed out to the Government that all attempts should be made to avoid taxing other taxes such as APMC Cess etc.

If we leave behind these technical issues which do require serious examination before the law makers reject the concern of the industry, the legal opinion of the Ministry of Law with respect to cross-empowerment under IGST may also become a serious bone of contention between the Centre and the States. It is learnt that the Ministry of Law has opined that the States cannot be cross-empowered under IGST for carrying some of the functions of the Union of India. If one goes by the States, they are of the opinion that if the cross-empowerment is feasible under the CGST and the IGST, why it cannot be done under IGST when it ultimately boils down to an administrative arrangement.

Yet another issue which is no less constitutional and tricky is the extension of GST law to the State of Jammu & Kashmir which has a special status in our Constitution and is largely governed by its own Constitution. A Committee of Central and State Governments was set up to develop the architecture which would allow the application of GST laws to the State but nothing has lately been heard of it. This is one of the last items on the GST Council's unfinished agenda. In this background, if the Union Finance Minister, Mr Arun Jaitley's statement that the GST would be implemented between April and September, 2017, sounds more realistic and practical rather than harping on April 1 deadline. Giving more credence to the volatile nature of Indian polity which resists all such reforms and may push back GST roll-out beyond September is an unwarranted speculation. Let's hope the GST Council Members put all such speculations to rest by taking a long stride forward at today's meeting!

Also See : TIOL TUBE Videos on GST

simply inTAXicating - GST RO(W)AD AHEAD - Episode 7

simply inTAXicating - GST RO(W)AD AHEAD - Episode 6

simply inTAXicating - GST RO(W)AD AHEAD - Episode 5

(Watch more GST Episodes on TIOL TUBE)