APRIL 29, 2014

By Sumit Dutt Majumder

WHO blocked the GST? That's the question Palaniappan Chidambaram, the Union Finance Minister, asked during his Interim Budget Speech for 2014-2015. While expressing disappointment at the delay in introducing GST, Mr Chidambaram stated as follows: "I am disappointed that we have not yet been able to introduce GST. I leave it to you to answer the question, who blocked the GST when an agreement on the game-changing tax reform was around the corner?” While the Finance Minister left it to the House to answer the question, the purpose of this piece is not to look for that answer, but to find the factors that contributed to the delay in introducing the GST.

Recently, a senior officer in the Ministry of Finance had asked me, on hearing that my book titled "GST in India - It's travails, tribulations and challenges ahead” is under print, - 'Tell me in one sentence, why is the GST delayed?' Without batting an eye-lid my one-liner was - 'the trust-deficit between Centre and the States'. I was right, and wrong too. Right, because the trust-deficit, particularly that flowed out of the allegation of the States that the Centre did not keep the promise of compensation to the States for revenue loss due to tapering of the rate of CST was indeed one good reason. But wrong because that was one reason, but not the only one. The reasons are in fact many.

This leads one to look for the factors, or should one say the reasons that led to the delay in introducing GST. The first and foremost among the reasons is that the Centre and the States could not come into an agreement on a Constitution Amendment Bill which is required to be approved by the Parliament for empowering both the Centre and the States to levy and collect GST. The disputes are on many counts.

When there was not much of progress in having a common agreed Constitution Amendment Bill, Mr Pranab Mukherjee, the then Union Finance Minister, had sought to break the stalemate by introducing the 115 th Constitution Amendment Bill in the Parliament for empowering both Centre and the States in this regard. It was expected that the Bill of such import would be referred to the Standing Committee of Finance which would in turn consult all the stakeholders, including the States who again would have the opportunity to place their views before the said Parliamentary Committee. While proposing the introduction of the said Amendment Bill in his Budget Speech of 2011-2012, the then Finance Minister had stated on the floor of Parliament as follows: "Unlike DTC, decisions on the GST have to be taken in concert with the States with whom our dialogue has made considerable progress in the last four years. Areas of divergence have been narrowed. As a step towards the roll-out of GST, I propose to introduce the Constitution Amendment Bill in this session of Parliament.”

The Parliamentary Standing Committee on Finance had examined the said Amendment Bill, and came out with its Report in 2013. The Report made an unequivocal endorsement of the Dual GST structure. It also allayed the fear of the States about the loss of fiscal autonomy. The Report also made certain recommendations and observations. The Centre prepared a Revised Bill after considering those recommendations. However the States did not agree on many issues in the Revised Bill. In deference to one of the recommendations, the Centre had proposed in the Revised Bill not to exclude certain critical items like Petroleum, Petroleum products, Alcohol etc. from the ambit of GST in the Constitutional provision itself. The idea was that whenever the Centre and the States agreed to bring these items within the ambit of GST, this could be done without going through the arduous route of Constitutional amendment as per Article 368. But some of the States did not agree to this, and insisted that these items should remain excluded from the ambit of the GST in the Constitutional provision itself.

The second dispute on the Amendment Bill has been that the Centre's proposal to subsume 'Entry Tax' including 'Octroi' within the ambit of GST has been turned down by some of the States. This is a retrograde step. No country in the world - whether VAT compliant or not, has such a taxation.

The third issue is that the States have been demanding a Constitutional provision in Article 279A of the Constitution for a mechanism for compensating the States in case of loss of revenue after implementation of GST. The Centre has been opposing it saying that the existing provision of Finance Commission could take care of this issue. The States are still insisting on their demand, perhaps because they are not satisfied with the present mechanism of compensating the States for loss of revenue on account of gradual reduction in rate of Central Sales Tax (CST) which is expected to be phased out once GST is introduced. There is thus a trust-deficit between Centre and the States, and the Centre would have to come out proactively with a viable and agreeable scheme for compensating the States in case of revenue loss with introduction of GST.

On the issue of 'Declared Goods', where the Centre has the constitutional authority to declare any goods as being of special importance and deny the States the power to impose duty on such goods over a stipulated rate, the Centre, in deference to the recommendations of the Standing Committee, suitably modified the disputed clause in the Amendment Bill i.e. Clause (3) of Article 286, by factoring in the role of the GST Council with regard to fixation of rates of duty for 'Declared Goods'. But some States have now proposed that the very authority of Centre in respect of Declared Goods should be abrogated. This demand is against the present provision in the Constitution.

These have been the major disputes concerning the Constitution Amendment Bill which have resulted in delay in introduction of GST.

As for the other factors, the controversy over dual control on 'Small Business' has become an irritant in the relationship between Centre (read the Central Board of Excise & Customs) and the States. Concern regarding inconvenience of the 'Small Business' led the States to believe that the Centre should not have control over the small taxpayers - and that 'dual control' should be there only for large tax-payers over a particular cut-off which could be an amount between Rs.1.5 Crore and Rs.5 Crore. Consequently, as per the States' proposal, the States will collect both SGST as well CGST from tax-payers below a fixed cut-off, say Rs.1.5 Crore, and return the CGST amount to the Centre. This would save the 'Small Business' from the rigours of dual control by both the States as well as Centre - the States argued. But the Centre (read CBEC) has opposed this.

It is everybody's case that the small taxpayers should be subjected to minimum control. There are ways to meet that end. Interface with small taxpayers can be based only on the risk parameters. In administering the system, Centre and the States would have to identify risk areas jointly. The mitigating administrative measures may include (a) Registration by a single agency for both SGST and CGST without manual interface, (b) no physical verification of previous entries, (c) no pre-deposit of security, (d) simplified Return format, (e) longer frequency of Return Filing etc. Further, compliance requirements like audit, inspection etc. may be minimised for small tax-payers through administrative directions. But, keeping a section of the taxpayers, albeit small ones, out of the radar of the Central GST authorities will be fraught with revenue risk. One particular risk area of concern would be the issue of fake invoices by a taxpayer under control of single tax authority, say the State, to a taxpayer under the control of other tax authority, say the Centre. A study of the tax frauds detected in VAT countries will give a clear picture of the revenue risks. The proposed IT architecture for GST i.e. GST Net would be quite capable of facilitating the implementation of the proposed simplified administrative measures. With the GST Net in place, the basic functions like registration, self-assessment, payment and returns would be done electronically, and there will hardly be any physical interface (control) with the 'Small Business'.

As for the logistic difficulties of approaching two tax authorities - Central and State - when physical contact is needed, an idea can be to draw inspiration from the principle of Large Tax Payers Units (LTUs). One of the objectives of LTUs is taxpayers' facilitation by housing Central Excise, Service Tax and Income Tax authorities under one roof so that a taxpayer gets to sort out all his problems in these taxes at one place. One can cull out the concepts of LTU and implant it for tax administrations for both Centre and the States with respect to 'Small Business'. We may perhaps call them 'STU' - 'Small Taxpayers Unit'. The 'STU's can house both CGST and SGST authorities under one roof in each of the State capitals and other cities and towns with high commercial activities. The objectives, eligibility, facilities etc. for an STU can be worked out in details. Surely, the STUs along with the simplified measures discussed before can allay the apprehensions about the rigors of dual control over the 'Small Business'.

On this issue, there is another concern of the CBEC. A ballpark estimate suggested that the Centre's tax base with cut-off of Rs.25 Lakhs for threshold as well as 'Dual Control' would be around 22.50 Lakhs; but the tax-base would come down to 8.50 Lakhs and 3.5 Lakhs with cut-off of Rs.1.5 Crore and Rs.5 Crore respectively. This is because around 92% of Service Providers have a turnover up-to Rs.1.5 Crore. If the proposal of the States is accepted, 92% of the tax-base of Service Providers will be outside Centre's control. The present assessee base for Central Excise and Service Tax with the current thresholds is around 8.30 Lakhs. If the proposition of the States with respect to Dual Control is accepted by the Centre, the assessee base would come down sharply for the Centre, and there may be a problem of 'surplus' in the cadre strength of Central Excise & Service Tax employees - given the added consideration that the administering of GST would be technology driven. So, it is imperative for both Centre and the States to maintain separate administrative control over the entire value chain of supply of goods and services in the two independent streams of CGST and SGST respectively.

GST is a joint venture which has to be implemented with an adequate degree of mutual trust, and more appropriately, mutual respect for each other's competence. That is how dual control works in Canada and many other federations. As evident from the above discussions, there are no valid reasons for us to deviate from this position. Our motto should be 'Dual Control' with minimum hardship to Small Business.

Apart from the foregoing areas of dispute between Centre and the States, other issues that need to be settled on priority are finalisation of cut-off for Composition Scheme, finalisation of Common List of Exemptions, determination of Tax Base, Revenue Neutral Rate and thereafter fixation of GST rate(s). The last three issues can be fixed only after there is finality on the first three issues. Thankfully, an agreed Threshold of Rs.25 Lakhs and an agreed cut-off of Rs.60 Lakhs for Compounding have been finalised. Once the common list of exemptions are finalised, the estimation of tax base can be more accurate, which would in turn help fixing the RNR.

The next pending issue is finalisation of the "Place of Supply of Goods and Services Rules”. The concept of 'Place of Supply' is the keystone of the proposed GST architecture, simply because GST is a destination based consumption tax and, therefore, it is important to know and define the place of supply. The Place of Supply of Goods and Services Rules are required to determine whether the supply is subject to SGST in a given State. Further, these rules determine the place i.e. taxable jurisdiction where the tax should reach. Compared to goods, taxation of services is an extremely complex issue. The major challenge for taxation of Services under the GST regime in the federal set-up is that services being intangible in nature, it is not easily feasible to determine the exact place, where services are acquired, enjoyed and consumed. Another important concern is with respect to finalisation of some pending issues like Input Tax Credit Mechanism, Applicability of Reverse Charge Mechanism, etc. Finalisation of these issues is essential before finalising the 'Place of Supply of Goods and Services Rules'.

Another pending issue is the finalisation of Rules, Procedures and related formats for Registration, Returns, Payments and Refunds. A report in this regard has been submitted by a Committee formed in this regard to the EC during its meeting in March'14. The EC has now set up another Sub-Committee to examine the recommendations made in the said report. This needs to be expedited.

Finally, GST cannot be introduced without a robust infrastructure in place. At present, the IT ability of different States in respect of indirect taxation is at different levels. Much before the GST is introduced, all efforts would have to be mobilised to bring in all the States at par with each other. The GSTN which has been formed in August 2012 should now concentrate in helping the States to bring parity in IT ability, since introduction of GST will take some more time. As for the concerns expressed on different issues relating to the GSTN being a Private Company, although the concerns may be genuine indeed, there does not appear to be any scope for looking back, now that the Cabinet approval has already been obtained and the GSTN already formed. But special care has to be taken to ensure that the safeguard measures with respect to data security, retention of 'Strategic Control' by the Government and retention of core functions by the Department, as explained in defence of the GSTN being a private entity, are properly implemented. Reports have already appeared in the Press about the political leaders blaming the Centre for unpreparedness in IT infrastructure for GST. All efforts will have to be concentrated in identifying the hurdles and crossing them so as to put in place such a State of the Art IT infrastructure for GST that will deliver good, even as 'data secrecy' is maintained, 'strategic control' remains with the Government and 'core functions' of the indirect tax departments of both the Centre and the States are retained.

Thus, whoever blocked the GST for so long the moot point is that the next Government at the Centre, to be formed after the General Elections, would have to take up the issues politically with the leaders of Opposition parties so that Centre and the States can jointly sort out the issues amicably. After all, GST is inevitable - whichever political party forms the next government.

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