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GST Council needs to address growing feeling of being wronged!

TIOL - COB( WEB) - 543
MARCH 02, 2017

By Shailendra Kumar, Founder Editor

THE OECD Secretary-General Angel Gurría was in New Delhi early this week. And he along with the Economic Affairs Secretary Shaktikanta Das released the OECD Economic Survey of India. While praising the Government for having taken several steps to bring certainty in the tax regulations regime Mr Gurria also called for adoption of the time-tested mantra of lower tax rates and a broader tax base for enhanced tax efficiency. He also said that multiple exemptions, deductions, rebates, deferrals and credits often create a bias against labour-intensive activities in the economy. Is it not ironical for India, a labour surplus economy. Ideally, India should have a fiscal policy that favours labour-intensive industries. In this context, the OECD also finds that the lower threshold of more than 20 employees for paying social security contribution (PF liability) is a proven disincentive for firms to create quality jobs. Conspicuous absence of inheritance tax despite acute concentration of wealth in a few hands is another irony which was pointed out by the OCED Survey. The revenue collection from real estate sector that stands at 0.2% of GDP is well below the level in OECD and BRICS countries.

While calling for more tax reforms at the national level, the OECD Survey did not lose sight of a local tax mess called property tax. Coming to GST it has observed that the proposed GST would promote competitiveness and productivity of Indian companies. This brings us to the much-debated GST Model Laws which are going to be finally approved by the GST Council at its two-day scheduled meet on Friday and Saturday. Thanks to the officers from the CBEC who burnt midnight oil with the Law Ministry bureaucracy and got the first round of legal vetting for the IGST Law which has already been circulated among the States. The CGST Model Law was the next to be vetted and its copies are being circulated among the States. It is expected that the GST Council would be approving the first-round-legally-vetted model laws on Friday and Saturday. Since the Centre has demonstrated its large-heartedness and the determination to guard against any more issues that may further delay its implementation, the States are going to be more than happy to give their approval on Friday. The issues of cross-empowerment under the IGST and the CGST having already been accepted by the Union Finance Minister, Mr Arun Jaitley, at the Council's last meeting at Udaipur, it appears that the CBEC has lost even the last ray of hope to see any change in the Council's decision on the issue of either cross-empowerment or division of the tax base below Rs 1.5 Crore threshold.

Some experts may feel that even if Mr Jaitley has conceded the cross-empowerment under the IGST, it does not erase the constitutionality issues emerging from cross-empowerment under the IGST. However, since Mr Jaitley has committed himself to all such concessions extracted by the States, even the Union Cabinet is likely to approve the decisions of the GST Council. More interestingly, to avoid further delay in the implementation, Mr Jaitley has gone to the extent of committing that even if the Parliament raises objections to some of these decisions, rather than altering or modifying them on the floor of the House, the Centre would bring back the issues to the domain of the GST Council and only after the GST Council approves the changes demanded in the House, the Centre would push for the passage of the Bill. Since the Bills are going to be Money Bills, it is unlikely that any scissors would be applied to the content approved by the Council in the Rajya Sabha. And so far as the Lok Sabha is concerned, since the BJP has the majority, the bills would comfortably sail through.

Once the IGST and CGST Bills are approved by the Parliament during the remaining period of the Budget Session, the SGST and UT Model Laws which are going to be largely mirror-image of the CGST, would be finalised by the GST Council and the same would be passed by the State Legislature. Meanwhile, the remaining and contentious issues would be discussed and finalised by the GST Council in the month of April.

Parallel to the preparations by the Ministry of Finance, the IRS Association has written to the Prime Minister and has made several demands. Let me examine the merits and feasibility of acceptance of their demands by the Centre.

D1 - Revision of the division of assessees below Rs 1.5 Cr in the ratio of 50:50. This would mean a vertical split of the entire assessee-base in the ratio of 50:50.

TIOL Adds: This issue was raked up again at the Udaipur meet at the time of finalising the minutes of the previous meeting but on request from the States that different arrangements with different States for division of the tax base would weaken the unity of the States and may give arm-twisting opportunities to the Centre, the Council had sealed the fate of the decision. So, it is unlikely to be discussed again and the CBEC should treat it as fait accompli.

D2 - Role in Audit: If the base split in the ratio of 90:10 of the small taxpayers is non-negotiable, it may be seen that the 10 % base does not provide the adequate sample space for selection for 5% audit. Therefore, it is absolutely necessary that risk base selection for audit, of a number not exceeding 5%, be allowed to the Centre below 1.5 Crore. To accommodate the concerns of the State the selection of units to be audited may be placed in the following hierarchy – Service providers, Manufacturers, Deemed Goods suppliers and pure traders. This would almost completely eliminate audit of traders by the Centre. There is no mechanism of Audit available with States, while the Centre has evolved a complete audit procedure manual EA-2000 for risk based audit. This will help ease of doing business as well as quality audit to curb black money and revenue leakage.

TIOL Adds: This is a valid and acceptable demand and may be given a favourable hearing. Since the States have no experience in dealing with Services, the method of audit can be structured in such a manner that the Centre gets largely service providers for audit, followed by manufacturers and deemed goods suppliers. And the States alone can audit traders where they have the expertise.

D3 - Decision of IGST cross-empowerment may be rescinded and be placed with Centre, as it is not constitutionally valid.

TIOL Adds: The fate of this issue stands sealed since the Centre's representative, the GST Council's Chairman has conceded the demand for cross-empowerment under the IGST. It was largely a political decision and the Centre has conceded a part of its turf to the States.

D4 - In the spirit of the Constitution, exclusive role of Centre in Territorial waters.

TIOL Adds: It is true that the supplies made to and from the territorial waters are going to be constitutionally inter-State transactions but are going to be treated as deemed intra-State for the Coastal States, and the legality of such deemed intra-State transactions can always be challenged. It may be settled later if one moves the Apex Court. Till the time it happens, the Govt is going to make it legally valid.

D5 - First stage appeal- in cases where revenue involved is above say Rs 25 lakhs, must lie with Commissioner level officer. Appeals vertical in States are not well developed and CBEC officials at the level of Commissioner and above can be productively used for dispute resolution of these cases.

TIOL Adds: This is a fair demand and the States should accept it.

D6 - Member (Technical) in Tribunal should be common for CGST and SGST, taking into account the cross empowerment, and he should be Commissioner level officer. This would obviate need for a three Member bench. The bench can be two Member and consequently CBEC officials at the level of Commissioner and above can be productively used for dispute resolution of these cases. The administrative set-up of tribunal may be so constituted that the dignity of Group A officers and nature of IRS Service is preserved. Commissioner of CBEC proposed to be posted in Tribunal cannot be done unless the States also post officer of equivalent rank in the tribunal.

TIOL Adds: This is also a valid demand as once Commissioner-level officers are inducted as Member (Technical), the division bench would be competent enough to resolve all disputes.

D7 - Advance Ruling should be given at the level of Commissioner as such Rulings will have wide ramification in GST for Ease of Business and will often have all India implications.

TIOL Adds: This is also a valid demand as a good number of GST assessees would prefer seeking advance rulings rather than opting for the tribunal route which is quite expensive today to settle a legal issue. Rather no legal issue stands resolved at the Tribunal-level. Whether it is the Revenue or the assessee, all legal issues are settled at the Supreme Court level. In this regard the institution of Advance Rulings should be robust enough in the GST regime.

D8 - Revival of Settlement Commission.

TIOL Adds: The principle of settlement in tax laws is old and time-tested. Going by the popularity of this institution and the fact that hundreds of cases have even today been pending with it, the Council should favour continuation of this body even under the GST regime.

D9 - Further for Ease of doing Business, the assessees from Sectors like Banking, Insurance, Telecom, Aviation, Information Technology, Railways, e-commerce are required to be retained under Centralised Registration.

TIOL Adds: Centralised registration is not a luxury but the need of the hour in today's cut-throat business environment. For certain sectors it is cost-effective and convenient. Going by the character of sectors like the banking, telecom and online e-services, it would be wiser not to go against the nature of the technology and retain such a facility in the proposed GST regime. No law should make a business do something which is unnatural and defies the logic of managing the compliance business.

D10 - IRS officers may kindly be considered for GST Commissioners in States, instead of IAS.

TIOL Adds: This is also a valid demand as being a specialist, IRS officers would make better GST Commissioners in States. It would also reduce the radius of conflict zones with the Centre. Being a part of the same service, the States and the Centre can coordinate better and achieve greater efficiency in tax administration.

D11 - The Chairman and CEO, GSTN should be from IRS, serving or retired or GSTN kindly be placed under CBEC.

TIOL Adds: Even if the GST Network is allowed to retain its private sector character, the key posts should be filled by the IRS officers for better coordination and control of the Centre.

Let's hope that the GST Council pays adequate attention to all these issues as they have the potential to derail its intended smooth implementation. An ideal situation would be where the Central and the State officials work together for the betterment of the system and the convenience of the assessees.

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