AUGUST 11, 2015

By Sumit Dutt Majumder

AS I am writing this piece, I can see that the Monsoon Session of the Parliament is in the midst of a cyclonic storm. Time only will tell whether there will be a lull after the storm and whether the GST Constitution Amendment Bill in Parliament will come out unscathed to sail through with the Monsoon tailwind. Meanwhile, as an irrepressible optimist, let me still hope that all will be well soon. With that hope in mind, let me have a critical look at the Rajya Sabha Select Committee Report on the GST Bill.

In a recent TIOL Tube video episode on Select Committee Report, Mr. Shailendra Kumar, the anchor and the Founder Editor of TIOL had started the panel discussion asking me whether I was satisfied with the Report. My answer had been – partly satisfied and partly dissatisfied. In the next few paragraphs, I'll explain – why.

On the 1% additional tax to be levied by the origin states, I am dissatisfied that it has not been deleted altogether. I need not repeat in details the ill effects of this origin based tax about which I've written enough in my previous pieces in TIOL. Besides cascading of taxes, it is likely to bring back all the dark sides of administering Central Sales Tax (CST), including the barriers in inter-state movement of goods that will hinder the cause of Common Economic Market. There has also been a suggestion that by agreeing to allow the origin states to collect the additional 1% tax, the Centre has basically attempted to reduce its share of the burden of compensating the States. It so, it has been at the cost of bringing in distortion in the GST structure. In this regard, Mr. Pratik Jain, an indirect tax expert made a good suggestion during the aforesaid panel discussion. He suggested that the government could fix an extra one percent tax in addition to the SGST rate, and that 1% tax could be distributed to the origin states based on the data of interstate movements which would in any case be captured by the GST Net. This would have spared the tax payers from the agony of dealing with another form of CST.

The bright side is that the Select Committee has recommended for adding an explanation for the purpose of Clause 18 dealing with the 1% additional tax as follows: Supply "All forms of Supply made for a consideration.” Thus, the Committee has taken care of the interest of the Stock Transfer, where this one percent tax will not be applicable since the supplies relating to Stock Transfer will not be for a consideration. But this may also lead to another form of distortion. A manufacturer in say Gujarat, who wants to supply his manufactured products to say Bihar, may now decide to have a warehouse in Bihar (although originally it was not in his plan) where he would first stock-transfer his products from Gujarat without payment of 1% additional tax, and then he will supply his products to his buyers in Bihar from that stock, thus avoiding payment of additional 1% tax. He will however incur the unnecessary additional expense of warehousing, simply for the purpose of getting the benefit relating to the stock transfer."

As for the use of the term 'Band' in the proposed Article 279A(4)(e), it is good to see that the Committee has recommended for defining the word 'band' in the GST laws as follows:

"Band" : 'Range of GST rates over the floor rate within which Central Goods and Service Tax (CGST) or State Goods and Services Tax (SGST) may be levied on any specified goods or services or any specified class of goods or services by the Central or a particular State Government as the case may be'.

While this is no doubt an improvement in terms of clarity, it still falls short of the expectation that the width of the band should have been specified, so that the band does not keep on getting wider by the years. If that happens, one will witness the same type of 'rate war' amongst the States, as it happened at the time of implementation of the State VAT.

On Petroleum and Petroleum Products, the experts had suggested that the Bill should specify a date for inclusion of these items in the GST – say by two years of the introduction of the GST. It was emphasized that a large part of the Petroleum and Petroleum Products were important intermediate inputs, and hence it was essential to bring them under GST sooner than later to eliminate cascading effect and its associated inefficient economic cost. But the Committee did not make any recommendation on this issue.

On Alcohol, my view has consistently been that it should be given the same treatment as for Tobacco & Cigarettes. That means – bring Alcohol within GST, and then allow the States to levy additionally the State Excise duty and State VAT at rates that would cover the difference between GST rate and current combined incidence of State excise & State VAT. The fall back alternative proposal was to give Alcohol the treatment that is being meted out to Petroleum. By doing this, at least constitutionally, Alcohol would be within the GST, while the States would continue to collect its State Excise and State Vat.

But this suggestion did not find favor with the Select Committee.

On the States' demand for keeping Entry Tax outside the GST, the Select Committee did not relent. However, the Committee dealt with in rather details the impact of subsuming Entry Tax on the financial independence of local bodies. The entry taxes are basically collected by or for the local bodies, Panchayats etc. Even as the Committee felt the need to protect and preserve the interest of local bodies, it did not consider it appropriate to advise, recommend and guide the State government what they have to do with regard to the interests of the local bodies'. The Committee however observed in its recommendations that it 'believes that all the State Governments would enact laws on the basis of Model GST Laws recommended by the GST Council and while making such laws States would abide by the constitutional provisions relating to Panchayats and Municipalities.

In that backdrop, the Committee strongly recommended that “while drafting the SGST laws due consideration to the third tier of the Government as has been guaranteed by the Constitution be given and provisions of devolution of taxes to the local bodies be made”. The Committee also expressed anguish that the 'State Finance Commissions (SFC) in some of the States are either non-existent or even when exist their recommendations were not accepted by the respective State Governments'. On this issue, the report concluded by observing that “the Committee while not venturing into the domain of the State List desires that for the betterment of our States in general and country in particular it would be prudent to abide by the recommendations of the SFCs”.

Thus, the Select Committee did well in doing a tight rope walking in making certain important observations and recommendations about the need of the local bodies, Panchayats and also the role of the SFCs.

On compensation to the States for loss of revenue, the Select Committee bowed down to the demands of the State for full compensation, and recommended as follows:

"19. Parliament may, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for the loss of revenue arising on account of implementation of the Goods and Services Tax for a period of five years."

On the demand for creation of a National Compensation Fund on the lines of National Calamity Fund, the Committee endorsed the view of the Fourteenth Finance Commission and thought it ' wise to keep the GST Compensation Fund out of the purview of the Bill as has been done in the present case, because it is a temporary component and that too only for five years.

The Committee also discarded the demand for a separate Dispute Settlement Authority, independent of the GST Council, by observing as follows:

"3.30 The Committee feels that each and every State is being represented in the GST Council by their Revenue/Finance/Taxation Minister. Be it a small State or a big State, in the GST Council, all of them enjoy equal status and power to cast one vote. In the event of difference, it can very well be presumed that the GST Council will try to evolve consensus on contentious issues before going for casting of votes, as all the States are members of the Council. Thus, modality to resolve any differences internally lies with the Council. If any Dispute Settlement Authority is created separately it will certainly hamper the functioning of the GST Council in general and Legislatures (Parliament and States) in particular. Thus, it would be judicious not to have a separate and distinct authority having far reaching powers and which could preempt and supersede the powers of Parliament and State Legislatures in the long run".

Further, while appreciating the cohesive role played by the Empowered Committee (EC) of the State Finance Ministers, the Committee observed as follows: "It would not be over exaggeration of facts if the Committee would say that on the one hand EC had worked as a forum where any issue of State importance could be raised and on the other hand it had gained the confidence of States in solving their problems and allaying their fears. Such confidence building measure had been initiated by the EC that it could well be termed as a forum where disputes are settled broadly with consensus."

While dealing with the role of financial institutions in Post - GST era, the united Bank of India, one of the Public Sector Banks raised the issue of the GSTN being controlled (51% equity share) by the private sector and there being no public sector banks although the bulk of tax collection was undertaken by the public sector banks. On this issue, the Committee recommended as follows:

"3.43 The Committee feels GSTN shall play a crucial role in implementation of GST as it shall provide the IT infrastructure for implementation of GST. It noted that Non Government shareholding of GSTN is dominated by private banks. This is not desirable because of two reasons . Firstly, public sector banks have more than 70% share in total credit lending in the country. Secondly, GSTN's work is of strategic importance to the country and the firm would be a repository of a lot of sensitive data on business entities across the country. In light of above, the Committee strongly recommends that Government may take immediate steps to ensure Non Government financial institution shareholding be limited to public sector banks or public sector financial institutions."

The TIOL netizens may recall, this issue was dealt with in details in some of my previous columns, and hence are not being repeated here. [The link is given below:………………]

On the other issue of GST treatment of Banking services, the Committee had the following to say:

"3.44 Endorsing the views of the SBI, the Committee having same feeling as the bank recommends that the best practices followed internationally may be followed and if possible banking services may be kept outside GST. Furthermore, if this is not possible then, interest, trading in securities and foreign currency and services to retail customers should not be liable to GST 70 and suitable provision should be there to avail of CenVAT credit of input services taken to provide activities involved in such services. Further, single registration coupled with IGST provision should be made available to enable CenVAT credit for consumers of banking services.

3.45 The Committee is of the considered opinion that if the GST rate is more than the service tax rate of 14%, the increase in the tax rate will further increase the cost of banking services. This results into cost of doing business to be much higher in India as compared to other competing countries. Therefore, the Committee recommends that to be internationally competitive, the GST rate for banking industry should be minimum".

On the issues relating to the GST Rates including the Floor Rates with Bands and Revenue Neutral Rate (RNR), the Committee basically recommended for a moderate rate and stated as follows:

"3.56 The Committee feels that although the GST Council has been entrusted with the task of fixing the rate including floor rates with bands in mutual consent with other State Governments who are part and parcel of the Council. But implementation of GST in other countries has shown GST rate is a very important factor in earning the trust of the consumers. If the GST rate is kept high, it will surely erode the confidence of the consumers badly and may lead to high inflation. Therefore, the Committee is of the considered view that while fixing the rate, the GST Council may opt for a broad base and moderate rate as it is an essential feature of a good tax system and as far as possible multiplicity of tax rates may be avoided."

These in short have been the main features of the Select Committee Report. When looked at critically, one finds that the Report has made only a few recommendations, and a wide range of observations on issues related to the Bill – both directly and indirectly. Contrary to expectations about deletion of the 1% additional tax, it has justified its imposition; the only redeeming feature is the concession granted for stock-transfer. On the includibility of Petroleum and Alcohol, it has suggested no change. On Petroleum and its products, the least one expected was to recommend an outer time limit for bringing Petroleum in. But that was also not done - obviously at the behest of the States. Having included Tobacco and Cigarettes in GST, there was no logic in not including Alcohol, the other demerit goods. The least that the Report could have done was to give Alcohol the same treatment as was done for Petroleum - bring it inside GST constitutionally, and then keep it out effectively till the GST Council decides so. The Committee has done well in recommending a definition of 'Band' for its incorporation in the GST laws; but it has stopped short of specifying the width of the 'Band' – thus leaving it open-ended for the States to vary the width, thus reminding one of the dark days of Rate War in the implementation of State VAT. On entry tax, the Committee did not yield to the pressure of the States, and did well to urge the States very diplomatically to take care of the needs of the local bodies and Panchayets, and also to activate the State Finance Commission. While the Committee stood its ground in rightly rejecting the demand for the National Compensation Fund, it gave in accepting the State' demand for full compensation for five years in place of a scheme for tapered withdrawal. It is sincerely hoped that with the high tax buoyancy in the GST regime, there won't be any need for the Centre to compensate the State after three years of its introduction. On GST rates, the Committee has rightly recognized that the rates cannot be embodied on the Constitution; nevertheless, it has advised for a moderate rate and avoidance of multiplicity of tax rates.

Thus, while the Report fell short of expectations of the people, at the same time one must say that there were quite a few good take-aways from the Report.

(The author is former Chairman, Central Board of Excise & Customs and he is also the author of the book – "GST in India, its travails, tribulations and challenges ahead".)