MARCH 18, 2013

By Sumit Dutt Majumder

MUCH has been written and spoken about Goods & Service Tax (GST) since Mr Palaniappan Chidambaram, the Hon'ble Finance Minister, then and now, made an announcement while presenting the Union Budget 2006-2007, about the Government's intention to introduce GST nationwide. Even after seven years of that announcement, GST is yet to be launched. For starters, GST will subsume a host of Central and State indirect taxes, and it will avoid the cascading effect of taxing the taxes by providing input tax credit at each taxation point. There will be basically two streams of GST - the Central GST (CGST) and the State GST (SGST) to be administered and collected by Centre and the States respectively. The inter-state movement of goods and services which is now covered by Central Sales Tax (CST), will be taxed by the sub-stream Integrated GST (IGST).

An Empowered Committee of the State Finance Ministers (EC), which also included the representatives of the Central Government, was given the task of working out the roadmap for introduction of GST. Certain essential steps for ushering in GST are amendment of the Constitution, enactment of Central law on GST by Parliament and State laws by the respective State Assemblies, finalisation of GST structure and model, including rates of GST, putting in place a robust supporting IT infrastructure, and most importantly prior training and reorientation of the taxmen.

For empowering both Centre and the States to levy and collect GST, the Union Government has introduced the 115th Constitution Amendment Bill (The Bill) before the Parliament in 2011. It has three clauses. While there is no dispute on the first clause regarding empowerment of Centre and the States, some States have protested against the second and third clauses relating to power of GST Council and Dispute Settlement Authority (DSA) on the ground of tinkering with the fiscal autonomy of the States. They argue that they would lose the power of varying the GST rates and of taking a particular item out of GST in the event of substantial revenue loss.

The Bill is under examination of the Parliamentary Standing Committee on Finance (PSCF), headed by Mr Yashwant Sinha, a senior MP and the former Union Finance Minister. The PSCF has reportedly raised certain issues. There is an apprehension that the Bill binds the sovereign legislature with the recommendations of the GST Council which is an executive body. Besides, the idea of creation of DSA makes the action of the legislatures on sovereign issues liable to be adjudicated by the DSA. Reportedly, the PSCF has also advised to have a relook on the issues relating to dilution of power of the Union Government and the impact on revenue of the States with relatively high origin-based taxation . The concern of PSCF appears to be that the Bill may not be in conformity with the basic structure of the Constitution. It has also been suggested to consider including Petroleum and Electricity in the GSTnet for facilitating full advantage of input tax credit.

While these valid concerns of the PSCF are being examined at the appropriate level, in the meantime the Empowered Committee (EC) has apparently made a breakthrough in its recent meeting at Bhubaneswar. First of all, the Centre has reportedly agreed to compensate for loss of revenue if any, on implementation of GST. Before that, the Centre and the States have also reached an important agreement on Central Sales Tax (CST) compensation. Settlement of this single issue does really raise the hope of an early arrival of GST.

Other areas of agreement have been reported in great details. The idea of a Dispute Settlement Authority (DSA) would be shelved now, and the GST Council would decide about the form and scope of the DSA. On having uniform GST rate across the country, the Centre has, at the instance of some States, reportedly agreed to set a floor rate for the tax with a narrow band within which the States will retain the right to vary the State GST (SGST). For the sake of fiscal autonomy of the States, there may not be too much objection to such a proposition. It is a fact that at least 50% of the countries administering VAT/GST, including countries in European Union and Canada do have different VAT rates and still practice the levy of GST. If it is finally decided to go in for the narrow band of rates as a compromise, then the scheme of Integrated GST (IGST) for inter-state movement of goods will have to be reworked carefully. Besides, in that case the Centre should also have similar autonomy in this area.

The major concern however is about the proposal to give flexibility to the States to join or exit GST at their will, on the ground that the States had similar option while implementing VAT. GST is a different cup of tea. It intends to create a common economic market for the entire country. There will always be inter-state movement of goods and services. If one State refuses to adopt GST, how will the taxman compute the tax for the goods & services destined for or moving out of that State? Remember, GST is a destination-based tax. Further, would Central GST be leviable in non-GST States? What would be the fate of CST and Service Tax in non-GST States? These issues did not arise while implementing VAT because VAT is an internal tax on sale of goods in a particular state. The inter-sate movement of goods was covered by Central Sales Tax (CST). Therefore, there was no difficulty in implementing VAT by the States, one after another. But GST surely has to be ushered in together by all the Sates and the Centre. There is another way of looking at this issue. Even if the States are given the option of exit or entry, it may not work in favour of the State opting out. That State will then not be collecting two major components of GST i.e. Service Tax and Central Excise duty on manufacture of the goods. The amount lost on these two counts will probably outweigh the amount gained out of the origin-based VAT. Besides, such a situation, which would result in a break in the chain of input tax credit, may also give rise to ‘tax-shopping' to the detriment of the interest of that State. In my view, therefore, it's a non-issue.

One welcome decision of the Bhubaneswar Meet that will have far-reaching spin-off is that of the prospect of bringing Petroleum and Petroleum products within the ambit of GST by not excluding them from GST in the constitutional amendment. These goods being basic input for most of the industries, there would be a break in the chain of input tax credit if these are kept outside GST. This matter needs to be further pursued with the States to ensure that Petroleum and Petroleum products are kept within GST. Sound economic sense suggests that even Alcohol, one of the two demerit/sin goods, should be brought within the ambit of GST. The Centre has already agreed to keep Tobacco & it's products within GST, while simultaneously imposing separate Central Excise duty on the item. Similar approach can be adopted for Alcohol as well, whereby the States can levy additional State Excise duty on Alcohol, while keeping it in the GST-net.

In the Bhubaneswar meeting, the EC has also approved a Report of the Sub-committee set up by the Union Finance Minister on ‘GST Design'. The Report recommends lots of follow-up action. This has prompted setting up of three panels for addressing the pending issues like method of determination of Revenue Neutral Rates (RNR), and in turn GST rates, finalisation of IGST model and GST on imports, Place of Supply Rules, Threshold for the tax and Dual control for small tax-payers etc.

On Revenue Neutral Rate (RNR), R Kavita Rao of National Institute of Public Finance and Policy has prepared a report, which brings out State-wise analysis of revenue implications of GST and estimation of RNR. The Report is based on a few assumptions for want of certain information, and the author has fairly stated that the set of estimates projected in the Report could be a fair benchmark for further discussion. Thus the Report would help the new panel. Rules relating to Place of Supply of goods & services are critical since these will impact the revenue that will accrue to a State. Therefore, there has to be common Place of Supply Rules. International experience on this issue, as learnt by the taxmen from both the States and Centre on their visit to important GST compliant countries should help in crystallising our requirements.

On administering the IGST, the Central Board of Excise & Customs (CBEC) had suggested a model in 2009, which was thought to be acceptable. Later, certain reservations were expressed, and the Directorate of Systems of the CBEC came out with a new model, which would deal exclusively with State GST in the context of inter-state movement of goods & services. IGST will be administered by Centre. The panel on IGST will have to finalise the model after taking care of concerns of the States regarding Revised Returns, Short Filing, Supply Rules, Missing Dealer Syndrome etc. As for GST on imports, it will have two components - one equivalent to Central GST and the other equivalent to State GST. While CGST will be retained by the Centre, the SGST will be distributed to the States based on the principles of destination based taxation. GST on import being basically Customs duty has to be collected by the Centre. The panel will perhaps come out with a model somewhat in line with the IGST model.

The issue of Threshold and Dual Control for small traders raised by some States stems from the fact that currently there are varying threshold based on the annual turn-over, and that the incidence of tax depends on it. For Central Excise duty it is Rs. 1.5 Crore, for Service Tax it is Rs. 10 Lakhs, for VAT it is mostly Rs. 5 Lakhs etc. It is good economics to suggest that in the GST regime, the taxes of both the Centre and States should have a common incidence, and hence common threshold. Varying thresholds would disturb the tax-base and hence the RNR, which would ultimately affect the rate of GST. Smaller the tax-base, the higher would be the RNR. On the question of dual control over the small traders on whom currently, only the States have control, one view is that the States may be authorised to administer and collect even the Central GST for the tax-payers below the present Central Excise threshold of Rs. 1.5 Crore and then pass it on to Centre. According to that view, one of the major criteria should be that those who were not earlier under dual control and with a lower operational margin should not be under dual authority in the GST regime. This argument, though attractive, is specious, and if accepted, a big chunk of Service Taxpayers would have to be kept outside the control of the States since at present the States have no control over Service Taxpayers who are exclusively under control of Service Tax Commissionerates of the CBEC. One must accept that in the scheme of things in the universe of GST, dual control is a given, whether the tax-payer is small or big. Keeping the small taxpayers in respect of retailers of goods out of the radar of the Central GST authorities and those in respect of service providers out of the radar of the State GST authorities would be fraught with revenue risk. The danger is the risk to revenue from any such assessees who may be under the control of one tax authority, say the State, and who may start issuing fake invoices to other assessees under the authority of another tax authority, say the Centre. One may recall, in a GST regime the tax paid by an assessee is heavily dependent on the appropriateness of the input tax credit received. Thus, keeping a section of assessees below a threshold, free from control of one of the two tax authorities, may dent the system drastically, which may resultantly raise the RNRs and rates of GST in turn. On a different plane, in dealing with Centre-State relations, the Indian Constitution projects the supremacy of Centre on matters relating to Finance, Defence and Foreign Affairs. Keeping that in mind, it may be inappropriate for the Centre to abdicate it's sovereign responsibility of collecting tax and outsource it to the States in respect of small traders.

The solution therefore lies in administering GST with robust IT support. That's why GST Network (GSTN), a special purpose vehicle, has been envisaged to provide IT support for business processes like e-registration, e-filing of Return, e-payment and computer aided checks. This will significantly reduce physical interface with tax-payers. Further, compliance requirements like audit, inspection etc may be minimised for such small tax-payers through administrative directions. Thus, the answer lies in minimising the dual role for small tax-payers and not in doing away with it.

As for IT infrastructure, while GSTN is an important component, the other essential component is development of optimum capability of IT infrastructure of the States so as to facilitate a two-way communication with the GSTN portal. All States need to develop minimum common interface with GSTN portal. GST being a joint venture between Centre and the States, there has to be a common approach to solutions of the problems. The Government has reportedly selected a former Chief Secretary of the State of Bihar as Chairman, GSTN. Next key post will be that of the CEO for the GSTN. In the true spirit of joint venture, it is expected that the CEO would be selected from amongst the officers of the CBEC. In fact, a practice may be evolved that the posts of Chairman and CEO are shared between the States and the CBEC on rotation basis.

Talking of GSTN, one issue that often arises is it's ownership. Reportedly, a decision is under way that 51% of the shares of GSTN would be held by the private sector. Revenue data is most sensitive from a nation's financial security point of view, and therefore one view is that the Government – Centre and the States together, should hold 51% of the shares. After all, the IT Departments of the CBEC and most of States - Maharashtra, Gujarat, Karnataka and Delhi, just to name a few have been doing exceedingly well on IT front, and they can surely be trusted with ownership. The process of introduction of GST has been a dynamic one, and we have seen the review of quite a few previous decisions for continuous improvement of the scheme. It may therefore be worthwhile to re-examine the idea of ownership of the GSTN by the Government, unless that decision is final and closed.

Time for GST has come, and all stake-holders must prepare themselves to usher it in soon. Taxmen across the country, from big bosses to foot soldiers, must internalise the concept of GST and brace for ushering in the unputdownable Goods & Service Tax!

(The author is Indirect Tax Ombudsman, Delhi and former Chairman, Central Board of Excise & Customs. The views are personal.)