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Tax Congress - Tinder-dry issues do exist but GST may do a Houdini!

TIOL - COB( WEB) - 808
MARCH 24, 2022

By Shailendra Kumar, Founder Editor

GOING by the monthly GST revenue statistics it is indeed tin-kettling and pirouetting time for the revenue strategists in the North Block! They fussily wish that it is not a 'dead cat bounce' syndrome! I also sincerely hope that it is not a cack-handed recovery tempo for the Indian economy! Although 'El Niño' effect of the Ukraine war cannot be wished away as our energy bill would definitely cross the Rubicon but the same may be shapeshifted into 'La Niña' syndrome through adroit diplomacy! And this is in addition to the rudely hanging sword of the pandemic if one goes by the WHO's latest word of caution - "tip of the iceberg"! In other words, India needs to watch the mercurial geopolitical swirls like a hawk as any upheaval in one global macro-indicator may upend the GST revenue stabilisation momentum!

If we keep the external forces beyond our optic cup for the time being or may presume that the GST may do a Houdini to escape the butterfly effect of rapid-fire global developments, there is no dearth of domestic and genetic challenges for the GST. Compensation is one tinder-dry issue which is leaping to flare up any time! Rate rationalisation issue has been havering for quite some time! It would be hooey to believe that 'Moses' would further defer the spike or tweaks of the tax rates and tax slabs! A fresh bucketing of goods is on the platter and the GoM headed by Mr B Bommai is likely to lose its marbles over the intricacies of the issues hanging fire for too long! Making sensible and action-worthy recommendations indeed involve lots of elbow grease on part of the GoM. The GST buggy would soon be speeding past the fifth anniversary milestone but the GST Council is yet to stabilise the tax rates! Secondly, the GST Council, at its next meeting, hopefully in April, is also expected to debate and agree on bringing ATF under its arm! Though there is no Faustian pact for this but the Central Government and the aviation industry strongly believe that the ATF has remained unplugged from GST for too long!

Besides the GST rates rationalisation exercise, the industry and trade expect unplugging of certain rules which appear to be gnawing away the efficiency and the taxpayer-friendliness of the GST - that is 'handcuffing' of ITC! Although the GSTN has largely stabilised the tools and the functioning of the return-filing portal but the industry finds many rules giving them the hairy eyeball even on legitimate claims. No time for spine-bash for the Council! It is required to take decisions at gobsmacking pace amid growing fissures within the Council.

In this backdrop, one of the Technical Sessions at the Second TIOL Tax Congress held at Pullman Hotel in New Delhi on February 26 was - "International VAT Experiences - Relevance for Indian GST". It was chaired by the former AP High Court Judge and former CESTAT President, Justice Goda Raghuram. And the three domain experts were - The CBIC Member(GST), Mr D P Nagendra Kumar; Prof S E Ahmad from London School of Economics and Mr Mahesh Jaising, Partner, Deloitte.

The first speaker, Mr Jaising preferred to laser-focus on five areas which the GST Council may target as part of the road-ahead approach. His first recommendation was relating to unlocking of ITC for non-exporters. He said that the GST law is well designed to enable exporters to claim refund. However, a time has come to examine and adopt the international practice of clubbing of national and sub-national credit - that is CGST and SGST. Such clubbing of credit across the country is technically feasible at the GSTN-level and adequate guardrails can be put in place. The second international practice which may be provided room in the law is the 'Grouping of Credit' which is a fairly settled practice in the EU VAT. EU implements VAT Group of taxable persons based on the principle of economic link and financial control - direct as well as indirect! Fifty one per cent stake threshold is applied for grouping different entities including non-taxable or exempt person. Just one person is notified to be accountable VAT person for the entire group and intra-group transactions remain beyond VAT or are deemed exempt. It becomes easier for managing transactions within the group. There are many economic benefits for the Group companies including VAT deductibility.

Mr Jaising's third recommendation was to go for LTO (Large Taxpayer Office). He said that the LTO concept is nicely tried and tested in India and it would go long way as mood elevator for the large taxpayers. His fourth prescription was to permit payment of reverse charge by using the credit ledger. This is a low-hanging fruit which the Revenue can offer with no revenue spin-off in sight! And his fifth suggestion was to help MSMEs in a big way which is already being done by the Government with tangible results. In relation to e-commerce platform, small businesses have no threshold exemption benefit and, therefore, cannot sell their goods unless they take full-fledged registration. If one is a composition dealer, inter-state supply option is not available. But, given the robust nature of platforms, data can be provided to the revenue if some sort of GST parity is allowed to small businesses. Before concluding, he observed that there are many litigious advance rulings on which the policy-makers can issue detailed circulars to clarify the real intent of the law like the one done recently on exports and intermediaries.

The next speaker was the CBIC Member(GST), Mr D P Nagendra Kumar, who emphasised that at the time of drafting of the GST laws, extensive inputs were culled out from international practices such as in UK, Singapore and Australia. Moving from an origin-based taxation to destination-based was a steep climbing and the Government did look at several valuable international experiences. In the last four and half years, it has now become a completely electronically-administered tax system. After studying e-invoicing system, particularly B2B in South Korea, India introduced e-invoicing from October 2020 and, astonishingly, within one and half years, it has become a soar-away success. With such invoices available on real time basis, it can now be integrated for tax payment. Interestingly, it has also helped the businesses in their vendor settlement and better tax compliance. As rightly pointed out by Mr Jaising, B2B transactions would be revenue-neutral and going forward, this needs to be addressed, he added. Talking about some of the international experiences of discovering risky sectors, he said that restaurant is one of them. He observed that GST has indeed jogged on very well thus far and hoped that more reforms are in store for giving more relief to the taxpayers.

The third speaker Prof Ahmad, while preferring to share his personal experiences being involved in the VAT reforms in China and Mexico, recalled that reform started off at tax administration-level in 1993. With their tax to GDP ratio plummeting from 30% in 80s to 10%, China was in serious trouble. However, it decided to scrap the past and begin with a clean slate. Provisions were enacted to ensure that no province loses revenue! Revenues were guaranteed in perpetuity. Revenue-sharing and tax transfer design were built in. It made a beginning with investment-type VAT and finally transformed into consumption type VAT. In a record three years' time, the tax to GDP ratio leapfrogged from 10% to 20%. In the second bout of reforms in 2015, China integrated business tax managed by the provinces. A giant step towards creating a level-playing field for the entire economy! It was followed by demolition of boundaries encircling SEZs. This basically meant that it did not matter where production took place as long as full refund for export was sanctioned. This was a sort of incentive to shift production away from SEZs and also to curb environmental damage done to Shanghai and to minimise income inequality. Humph! Changing boundaries was an arduously monstrous job which is almost impossible in India and Europe! Once a country creates harmonised base and harmonised tax rates to ease the cost of doing business and create a common framework for investment, it is not easy to ask sub-national tax jurisdiction to raise rates or change base. It also does not make sense to have multiple tax administrations. These are the key lessons one may gather from the case of China.

Talking about the Mexican case, Prof Ahmad observed that after NAFTA, Mexico extended tax exemptions and special tax rates for border regions and created huge maquiladoras in the north to facilitate trade with the US. Such a tax regime basically meant that there was no VAT revenue flowing into the coffers. Higher thresholds helped in tax planning by maquiladoras. Mexico then created a National VAT and allowed State VAT to undertake audit of any firms regardless of size and made e-invoicing mandatory. The refined tax structure eliminated the room for tax planning and tax evasion which large firms were earlier indulging in! The tax to GDP ratio spiralled from 10% to 15% in three years. This also created a level-playing field which attracted FDI through the country wherever infrastructure was robust. Investments poured in automobiles and aerospace sectors in the surrounding areas of cities. This also helped the small businesses in a big way.

While concluding the Session, the Chair, Justice Raghuram, observed that with the 101st Constitutional Amendment being almost five-year-old, it perhaps requires another genetic mutation both for the practitioners as well as the tax administrators. The tax buggy has trudged a long distance from being imperial imposition to a consultative process for harvesting more revenue. He said that rich plaudits go to the speakers for elaborating the relevance of international experiences for the Indian GST. For GST, five years is too little time for 'mankind' to fathom a mutant of our Constitutional Scheme. He praised the conflict management being done by the Central and State tax administrators and the law-makers and noted that it may take a long training and modulation for them to understand that they are a part of the process which has brought in great change in the understanding of cooperative federalism!

I do concur with the observations of the Chair and also of Mr Sushil Modi who observed that five years is too little time for a new history of taxation to stabilise and the Indian GST has thus far not engendered all such macro-economic ills which many tax jurisdictions have internationally confronted with no chance of salvation! Time to cosy up to positive facets of the Indian GST and wait for the Cadillac version! Toxic masculinity laced with a tincture of bitterness of the GST laws would be drained off in the coming years! Fat-fingered errors are being eased out! Gorgonian provisions would soon be dead in the water! But, the policy makers also need to ensure that they do not succumb to temptation for 'revenue shopping' in the form of ITC-fettering! I sincerely hope that my optimism is tinged with the prevailing politico-fiscal realism! Gilded time lies ahead both for the taxman and the taxpayers! Till then, do not drive the drivel!

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