TIOL - COB( WEB) - 542
FEBRUARY 23, 2017

By Shailendra Kumar, Founder Editor

FOR the latest meeting of the high-profile GST Council, the venue chosen was the City of Lakes - the city of Udaipur, the historic capital of the Mewar Kingdom. A great history of artillery warfare shadows this city. And since the 10th meeting of the Council was perhaps expected to be a witness to a different shade of modern 'warfare' within the four walls of participatory democracy, such a venue was chosen. But, because the legally vetted Model GST Laws were not available for final stamp of approval by the Council, not much 'warfare' was seen at the meeting. The only draft which was available after legal vetting by the Ministry of Law, was that of the Compensation Bill. Since most of the issues in this case were settled long back, it sailed through smoothly. It is to be now approved by the Union Cabinet before the same is tabled before the Parliament.

As the Ministry of Law could not make the Model Laws of CGST, SGST and IGST available for final approval, the Council took up other remaining issues such as anti-profiteering provisions, the formation of the Appellate Tribunal at the Centre and the State levels; exemption to certain items and many others. Since the Committee which has been assigned the job of working out specific rates for goods and services has still not finished the job, this was not discussed at this meeting. However, the Chairman of the Council expressed his hope that the legally-vetted Model Laws would be available at the next meeting in New Delhi on March 4 & 5. Once that is vetted by the Council, different Committees would initiate the rules-drafting work.

Interestingly, since Union Territories (UTs) stand apart as a different class of entities, it was decided that a separate bill is to be drafted for the same. A committee is going to do so along the line of the SGST so that the seamless flow of credit is not disrupted. But, what continues to be a million-dollar mystery is - the status of the Jammu & Kashmir law which is not yet clear. Even the GST Council has not talked about it. When I had met the J&K Finance Minister, Mr Haseeb Drabu, he had said that an expert panel was working on the same, and the Draft would be made available for discussion with the Centre. Since none in the know of things appears to be discussing about it, one needs to wait and see how the businesses originating or terminating in the jurisdiction of Jammu and Kashmir are going to be conducted in the proposed GST regime. It is more important from the flow of credit perspective. Any delay on part of the J&K to join the GST bandwagon would kill the business in its territory as the credit would not be available for inputs and supplies originating there would be treated as import in the consuming destinations.

Let's now move towards the most controversial and torrid issue of 90:10 ratio decided for division of the assessee-base below Rs 1.5 Crore threshold. Although the IRS Association may feel grumpy but the Centre did make a serious attempt to draft the minutes of the ninth meeting of the Council in such a manner that different States may have different arrangement with the Centre for sharing the assessee-base below Rs 1.5 Crore threshold. It is another issue that a good number of States did not agree to such a modus operandi as they perhaps feared that it may eat away the unity of the States which is so vital for future negotiations with the Centre. Some of them perhaps felt that different arrangements may lend arm-twisting opportunities to the Centre at future negotiations. In the larger interest of cohesion and unanimity the Centre also discarded the doctrine of arrangement with States and that permanently seals the much-debated issue. The final verdict is out - the Centre would retain 10% of the assessee-base and the rest are to be divided among the States.

But, does it mean that everything is lost for the CBEC officers? Perhaps NO! And the answer lies in not-yet-decided method of working out the threshold. The expression 'Threshold' is yet to be defined. How is it going to be calculated is something of great significance. If a business has Permanent Establishment (PE) in four different States, the threshold may be decided by clubbing their supplies in totality. Even related-parties transactions may be clubbed together, depending on the legal structure of a corporate. For instance, the threshold may be decided by clubbing the supplies of subsidiaries with the parents etc. If something like this is done, the tax base of CBEC would soar up for above Rs 1.5 Crore limit, and the total number could be much higher than one may project it today. So, one needs to wait for the final shape of the GST laws before one rushes into a cocoon of disappointment!

It is time now to discuss the most controversial issue of IGST. Although the Council at its last meeting had decided that the States would get powers to tax transactions in the territorial waters as by deeming fiction, all such transactions would be treated as intra-State transactions but many States objected to the Draft finalised by the Centre. And the Draft proposes to treat the territorial waters as the territory of the Union of India and the powers are to be delegated to the States to tax transactions as intra-State. The demand of many Coastal States is to treat the territorial waters as the territory of the States and allocate powers to them not to just collect but also to levy, collect and appropriate the taxes.

Although the Chairman of the Council referred the issue to the Law Committee to examine but even if one goes by the international conventions, such a decision would not be valid. Let me draw attention to the UN Convention on Law of the Sea or Treaty. Such a Convention replaces the earlier concept of 'freedom of the seas'. As per the UN convention, the jurisdiction of only a sovereign entity and not sub-nationals like States has been recognised to exploit marine natural resources in the territorial waters, Continental Shelf and Exclusive Economic Zones. Territorial waters even along the coastal zones are international waters and are regulated by the UN Conventions. So, any demand to extend the boundaries of States up to 12 nautical miles would be violative of not only international treaties but also our Constitution if we read Articles 297 and 366(30). However, it is also true that some of the States have enacted certain local laws which regulate certain economic activities in the territorial waters. But, it is only for the limited purpose of FISHERIES which happens to be ENTRY 21 in the State List of the Seventh Schedule of the Constitution.

Yet another issue which was raised by the States at the latest meeting was the cross-empowerment to State officials under the IGST Act. The decision to exclude State authorities from adjudicating cases if any issue relates to import or export of goods or services are involved, was vociferously contested. And their argument is that the States have been administering CST Act, 1956 and assessing the authenticity of exports as it involves refund of taxes paid at input stage.

Here, if we visit the Constitution of India, Articles 268 to 270 reveal a fundamental design feature of the Constitution i.e. the taxes are administered by the Government to which the taxes accrue. Taxes like Stamp Duty and CST albeit they are Central Levies, they accrue to the States. It is for this reason that the Central levies are administered by the States. But that is certainly not the case for the IGST. It is a Union Levy as per Article 269A. There is no automatic credit of it to the States. It gets utilised through the cross-flow of credits and the rest is to be settled on monthly basis by the Union Govt. In this background, delegation of powers under the IGST Act may breach the basic design of the Constitution.

From the entire range of controversies, it may appear that the IGST is going to be the most challenging for both the Union and the States. While doing my research I also decided to interact with the globally known GST Economist, Dr Sijbren Cnossen who was kind enough to respond to my mail:

" ... as you know, I've never favored the IGST since it will amount to taxation of inter-state export, while inter-state importers will have to file for refunds. It would have been much better if every inter-state exporter and importer would have had to deal only with his own instate GST administration, as is the case in the EU. The IGST may well turn out to be the Achilles heel of the dual GST. And now VAT officials of exporting states will be allowed to impose the VÄT on exports (and, of course, they won't pay this to the VAT of importing States although they should). The extension of the GST to territorial waters is an extra interesting complication, which you have nicely dug up."