AUGUST 18, 2015

By P R Chandrasekharan

THE 122nd Constitution Amendment Bill enabling the Central and the State Governments to levy Goods and Services Tax (GST in short) is still pending in the Rajya Sabha, caught in the political one-upmanship between the Government and the Opposition. Notwithstanding its final outcome, the question that should really concern us is whether we are ready to implement and enforce the said levy.

The proposed GST model envisages concurrent levy and collection of tax by the Centre (CGST) and the States(SGST) on the intra-State supplies of goods and services and by the Centre on imports and inter-state supplies by way of Integrated GST (IGST). While the proposed GST excludes from its ambit alcoholic liquor for human consumption, electricity duty, stamp duty and property taxes, petroleum and tobacco products, it subsumes Central and State taxes, such as, VAT, CST, Purchase Tax, Entry Tax, Entertainment Tax, Luxury Tax, Taxes on lottery, betting and gambling, CENVAT, Additional Excise Duty, Excise Duty under the Medicinal and Toilet Preparations Act, Additional and Special Additional Customs Duty levied on imported goods, surcharges and cesses. The proposed GST model also envisages four rates-a merit rate for essential goods and services; standard rate for all other goods and services; special rate for precious metals and a Nil rate. However, it is not clear, whether there will be a common list of goods and services for the levy of merit and nil rates, across the States.

The Constitution amendment is only an enabling provision. Art. 265 of the Constitution mandates separate Central and State laws for the levy and collection of GST. Though action is underway to draft a model GST legislation, determination of a revenue neutral rate and setting up of the computer network (GSTN) that is not enough for successful implementation of GST.

There are mainly three stakeholders in an indirect tax levy - the tax collector, the taxpayer and the ultimate consumer who bears the incidence of tax. Unless all the three stakeholders are willing and ready, no tax regime can be successfully implemented or administered.

Let us now analyse the preparedness of each one of these stakeholders.The ultimate consumer, who has to bear the tax burden, is never a party in any of the consultative process leading to the levy. The elected representatives, who are supposed to take care his interests, rarely show any interest or inclination in doing this onerous task. GST envisages levy and collection by both the Centre and the States on the supply of goods and services. At present, there is no state levy on the supply of services; once GST comes into operation, the States would also levy tax on services, which would be in addition to the present central levy. This implies a substantial increase in the incidence of service taxation. Since services constitute more than fifty percent of the GDP, there will be a substantial increase in tax incidence affecting almost all segments of the population. The increase affects not only the cost of services, but also the prices of goods as many services such as freight, insurance and storage are essential ingredients in the supply of goods. Thus the economy is bound to witness acost-push inflation on introduction of GST unless a conscious and determined effort is made to choose a tax rate which is reasonable and revenue neutral. Otherwise, the results could be disastrous. The State Governments have already raised the bogey of revenue loss on account of GST and compensation for such loss. Since the tax base is widened, a lower rate than the current combined rate should yield adequate revenue, considering the fact half of centre's excise revenue and about 35% of the States' tax revenue are outside the purview of the proposed GST. Producing states such as Gujarat and Tamil Nadu, have expressed the apprehension that they would lose substantial revenue on introduction of GST as revenue from the levy would accrue to the consuming States. To bring these States on board, it has now been agreed that such States can levy a non-vatable one percent additional tax for a period of two years. Such a levy would not only be distortionary but also inflationary. Since GST results in only a re-distribution of revenue rather than any real loss,the issue could have been easily resolved by suitably modifying the share of the States in Central Taxes. A high rate of GST would only increase the propensity for tax evasion and avoidance.

Another major issue for consideration is the preparedness of tax officials to administer the new regime. For the State Government Officials, service taxation is an entirely new area.Even with regard to taxation of goods, since the tariff classification under GST would be based on internationally accepted Harmonized System of Nomenclature (HSN), they would be handicapped as the current VAT regime is not based on HSN. Since the taxable event is not 'sale' but 'supply' of goods and services, it is necessary to notify the 'Place of Supply' Rules since GST is a destination based tax. The concept of valuation will undergo a change since there would be many situations, such as stock transfers, consignment sales, etc. where supply takes place without sale. Therefore, training of tax officers on these various aspects is an important pre-requisite for effective implementation.

As regards Central Government Officials, the Central Board of Excise and Customs (CBEC), the apex body implementing indirect tax laws, is unfortunately not a party to the GST policy making process. This function has been usurped by the IAS officers,contrary to the recommendations of the Chelliah Committee on Tax Reforms and the recent Tax Administration Reforms Commission. Thus, the design of the tax structure is left to those, who have practically little or no experience in tax administration. Be that as it may, the CBEC officials also face a handicap. Central Excise Duty is currently levied on 'manufacture' of goods. On account of the change in taxable event from 'manufacture' to 'supply' of goods, the number of taxpayers would substantially go up. The guesstimate is that as against the current figure of about a lakh of central excise assesses and about a million service tax assessees, the number under GST would go upto 5 or 6 million. Coping up with such a large number of taxpayers is a huge administrative challenge and how far the tax administration is geared up for this task remains to be seen.

In India, there is no practice of taking the tax officers into confidence while framing the law and everything is done in secrecy. The tax enforcement officials, by and large, remain ignorant of the legal provisions, until they are notified. The enforcement is by trial and error. When a paradigm shift in the tax regime is contemplated, the trial and error method is bound to lead to complete chaos and confusion and it would take months, if not years, to sort out the mess. It would, therefore, be in the best interests of all concerned to notify the GST laws and procedures, well in advance, before the new regime comes into force. This would give some breathing time to the taxpayer as well as the tax collector to understand the legal provisions and undertake modifications and improvements, wherever necessary, so that there is a smooth transition to the new regime.

Like any modern tax regime, GST is based on self-assessment by the taxpayer, who has to determine and discharge the tax liability. While large taxpayers would be able to cope up with this responsibility, the small and the medium tax payer will bear the brunt of tax compliance. Since GST entails tax-invoice based credit mechanism, in a country where there is a widespread lack of invoice culture, especially at the retail level, tax enforcement and compliance will be a huge challenge.

The proposed GST envisages PAN based registration with separate registration for a tax entity in each State. Each registrant would be required to take input tax credit, discharge tax liability and file tax returns separately. Thus there would be multiple registrations for a single tax entity which will substantially increase the tax-related workload.

For successful implementation of GST, it is axiomatic that it should be backed by a sound IT network which can be accessed easily by both the tax payer and the tax collector. Though such a network (GSTN) has been designed and is in the process of implementation,that alone is not sufficient. Both the Centre and the States should have their own computer set up to perform the various tasks involved in tax administration such as scrutiny and processing of tax returns, risk assessment for audit and enforcement. It is imperative to set up a central processing centre for CGST and IGST at the national level and similar processing centres at the State Headquarters for SGST. The Centre and the States should also consider early implementation of a fully automated invoice-level Input Tax Credit (ITC) verification system for comprehensive revenue reconciliation and detection of fraudulent availment/mis-use of ITC facility. The suppliers and receivers of goods and services should also be able to upload invoice details into the system, which would enable them to sort out the mismatches at their levels without involving tax officials. A transparent and non-adversarial automated tax system will encourage voluntary compliance, reduce disputes, and act as a major deterrent in preventing misuse of ITC, thereby augmenting revenue. Studies conducted in this regard (Driving Information Systems for Holistic Tax Initiatives, - October, 2014) for central indirect taxes and the Study Report on the Implementation of Value Added Tax in India by the C&AG -June 2010 in respect of State Taxes suggest that this crucial requirement is conspicuously missing, especially at the States' level.

The main control mechanism for GST is the selective, risk-based audit of the records of the taxpayer. With a large number of taxpayers' coming into the tax net, this objective cannot be achieved without computer-aided audit of the records of the assessee by qualified accounting and audit professionals. Neither the Centre nor the States have an exclusive cadre of trained officers for this job. It is high time the Government(s) thought of having a separate cadre of accounting and auditing professionals to perform this task. Since the tax base is common for both CGST and SGST, there could be a common pool of qualified professionals for undertaking tax audits, to avoid duplication of work. Till such time a cadre of competent audit professionals is available, the work could be outsourced.

Speedy and effective 'Dispute Resolution Mechanism' is the hallmark of an efficient tax regime. The present mechanisms available for dispute resolution are different in the States and the Centre. While the initial adjudication and the first stage appeals could continue to be undertaken by the Departmental Officers, there is a need to have a common second stage appellate authority at the Tribunal level,with officers drawn from the State and Central Revenue Services and legal professionals from the Bar or the State Judicial Services, to man such Tribunals. This would provide a sound and stable appellate mechanism for expeditious and divergence-free resolution of disputes. Unfortunately, not much thought appears to have been given to this important aspect of tax administration.

Another major impact of GST is on the compliance cost of taxation. Studies conducted abroad show that the compliance cost is high under GST with major burden falling on small and medium taxpayers. This could prove a major irritant in the GST regime.

To conclude, while GST is a greatly desirable tax system, there are many pre-requisites for its successful implementation. The consultative process needs to be wide and inclusive roping in all stakeholders. Sufficient time needs to be given to both the taxpayer and the tax collector to understand the statutory obligations/requirements so that the transition is smooth. There is no sanctity in fixing impractical time limits. Let us not act in haste and repent in leisure.

[The author is a retired Member (Technical) of CESTAT, WZB, Mumbai and has more than three decades experience in tax policy formulation and tax administration.]