JULY 14, 2016

By Shailesh P. Sheth, Advocate

"…GOVERNMENT'S primary job is to make laws. However, as I see it, Government does not have the quality (skilled) manpower for drafting the laws. Today, judiciary is being criticized for the pendency of cases in the Courts. But let me say this-we are more responsible for this state of affairs as we are making the laws which lead to ten different interpretations. Where do we begin from? Shall we construct a grand building for the Court or make good laws in the Parliament? That's why, these days, I insist upon putting any draft law online for feedback from the people. It is my appeal to the members of the Bar to undertake, if necessary, even 'hairsplitting' job and dissect the draft law and bring it to our notice any lapses or errors in it. Then only there would be a "good law", a law with minimum errors-I cannot say that there cannot be any errors as we are all human beings, a law with 'minimum grey areas'. I don't think the judiciary will find any difficulty if good laws are made in this manner…."

[Freely translated excerpts from the Address of the Hon'ble Prime Minister on the eve of the Sesquicentennial Function of the Advocates Association of Western India on 14th February, 2015]

Background

The Empowered Committee of State Finance Ministers ("the EC"), entrusted with the onerous task of designing and implementing the "Goods and Services Tax" ("GST") in the country, held a two-days meet at Kolkata on 14th & 15th June, 2016 under the Chairmanship of Shri Amit Mitra, the Minister of Finance of the State West Bengal. The Meeting was also attended by the Union Finance Minister, Shri Arun Jaitley.

While the meeting of the EC was underway, the Union Finance Minister, on first day itself, announced the support extended by virtually all states to GST, barring Tamil Nadu, which has expressed some reservations and which were noted by the EC. Simultaneously, with this announcement, a 'Model GST Law' was also released by the EC in public domain, inviting feedback from all the stakeholders. The tempo is, thus, being built up towards an early introduction of 'GST' in the country. Almost everyone believes that the GST will be implemented from the next fiscal i.e. April 1, 2017, though, it must be noted that the Union Finance Minister has not set out any such deadline but has merely expressed his hope that all laws will be in place by the end of the current fiscal year.

It may be recalled here that the Constitution (122nd Amendment) Bill, 2014 has already been passed by the Lok Sabha and is awaiting the approval of the Rajya Sabha. The Government is confident of the passage of the Bill in Rajya Sabha in the Monsoon Session, with or without the support of Congress. While a passage of the Bill in the Rajya Sabha will be a major milestone to be achieved, let us not forget that quite a few big tasks would still remain to be completed before GST actually kicks in! These include the ratification of the Constitution Amendment Bill by at least 15 states, passing of respective GST laws by Union and State Government, drafting and issue of the machinery provisions like Rules and Notifications, to name a few. It is anybody's guess whether these herculean tasks could be completed within a short span of seven to eight months, if April 2017 is set as an 'undeclared deadline' for the introduction of GST!

Earlier, in October 2015, the Joint Committee of the EC has released four Draft Reports relating to Business Processes for GST covering Registration, Payment, Refund and Returns. At about the same time, a Report of the Sub-Committee-II of the EC on 'Model GST Law' of September 2015 was also available on some website, perhaps, unofficially leaked.

In this series of Articles, spread over three parts, a broad but critical analysis is attempted of the 'Model GST Law' released by the EC on 14th June, 2016 so as to see whether it is capable of ushering in this fundamentally transformational reform called 'GST' and catapulting the economy in a new-age Indirect Tax world!

Model GST Law & Its Structure -"It helps to know the basics!"

'GST' is being continuously branded as a 'Game Changing' Indirect Tax Reform - a Reform which will be unprecedented in its scale and impact post-independence. One, therefore, cannot be faulted for harboring an expectation that the GST Legislation would be one which is innovative, taxpayer-friendly and modern-day Legislation, adopting the best of international GST Legislations and Practices, considering the fact that there are more than 150 VAT/ GST compliant Countries around the world from which we can learn and choose.

However, this was not to be! The 'Model GST Law' is substantially based on the present-day Central and State Indirect Tax Legislations, namely:

- Central Excise Act, 1944 ("CEA") and the Rules made thereunder;

- Finance Act, 1994 ("FA") and the Rules made thereunder;

- Customs Act, 1962 ("CA") and the Rules made thereunder;

- Central Sales Tax Act, 1956 ("CST"); and

- State VAT Legislations.

A large number of its provisions are either borrowed from or are based upon the existing provisions of the aforesaid Central and/ or State Legislations. The Model GST Law has all the bad or negative elements of the existing Central/ State Indirect Tax Legislations, though, mercifully, it also ingratiates a few good ones from these legislations and adopts certain concepts/ practices from International GST/ VAT Legislations as well. However, sadly, the 'bad elements' far outweigh the 'good elements'! When the 'recipe' is bad, the 'final meal' would obviously be bad! All in all, there is no inclination whatsoever to learn from the' mistakes of thepast' while attempting a 'giant leap in the future'. The 'giant leap', if any, is only towards tightening the noose around the taxpayer's neck, increasing compliance burden and penalizing the taxpayers with severe consequences, without any accountability on part of the tax administrators. The likely consequences of this amnesia,anachronism and anarchism are quite scary!

As George Santayana said, "Those who cannot remember the past are condemned to repeat it."

The Model GST Law is, by any standard, quite lengthy and the machinery provisions in the form of Rules and Notifications are likely to be equally long winding and never-ending! This may be expected due to generous use of certain ever-present phrases or expressions like "as may be prescribed" (used 128 times); "as may be notified" (used 8 times); "competent authority" (used 24 times") besides "on the recommendation of (GST) Council" (used 16 times)!

At this stage, let me refer to the 'International VAT/ GST Guidelines' published by OECD in April 2014. The Guidelines duly acknowledges the applicability of 'generally accepted principles of tax policy to VAT' laid down by Ottawa Taxation Framework Conditions (1998) which are as follows:

- Neutrality

- Efficiency

- Certainty and Simplicity

- Effectiveness and fairness

- Flexibility

Though the above principles were articulated in the context of taxation of electronic commerce, they are broadly applicable to VAT laws in both domestic and international trade, as noted by the guidelines. If the above principles, which are derived from the "same principles that governments apply to taxation of conventional commerce" are considered 'litmus-test' for the GST law, then the 'Model GST Law' hardly passes the muster! It is marred by extremely poor and vague drafting, fraught with inherent inconsistencies, littered with ill-defined and incomplete expressions, does not seriously address the issue of 'cascading effect of tax', displays rigidity of approach and, at times, borders on irrationality! A reading of 'Model GST Act' leaves the reader with an acute feeling of dismay, disbelief and déjà vu! It is disappointing, disturbing, distressing and diabolicalin design and content!

At the recently concluded 'Rajaswa Gyan Sangam' with the top echelons of CBDT and CBEC, the Hon'ble Prime Minister stressed on the need for evolving a 'Taxpayer-friendly' fiscal environment. If anything, the 'Model GST Law', if enacted and implemented in its present form, would certainly turn out to be one of the most 'litigation-friendly' legislations ever enacted! The taxpayers laboring under this 'Modern-age Legislation' may have 'Stone-age experiences', relatively speaking!

Though the above comments may sound a bit harsh to the Netizens, the discussion that follows may probably explain them.

Let us start with a few basic provisions of the Model GST Act.

S.1- Extent and Commencement of the Act - "All India coverage but will there be a piecemeal implementation?"

S.1 of the Act, as is a customary practice, provides for 'short title, extent and commencement' of the Act. As per Sub-section (2) of S.1, the CGST Act shall extend to whole of India. Similarly, the SGST Act shall extend to the state concerned. It is pertinent to note here that at present, the provisions of FA governing levy and collection of Service Tax does not extend to the 'State of Jammu & Kashmir'. However, the CGST Act shall apply to the 'State of Jammu & Kashmir' also. This reflects the intention of the policymakers to consider and convert 'India' into a 'single, borderless market' under GST regime and justifiably so. The intended extension of CGST Act to the State of Jammu & Kashmir is a significant step in this direction and has its own ramifications. However, it's a subject for separate discussion.

Sub-section (3) of S.1 provides that the Act i.e. CGST Act or SGST Act, as the case may be, shall come into force on the date notified by the Central/ State Government, by Notification in the official gazette. However, Proviso to Sub-section (3) empowers the Centre/ Sate to appoint different dates for commencement of different provisions of the respective Act i.e. CGST Act or SGST Act. Apparently, a leaf has been taken from out of the recently enacted Companies Act, 2013 wherein Sub-section (3) of Section 1 of also contains similar provisions about the powers of the Central Government to implement its provisions in a piecemeal manner. No doubt, this may provide flexibility to the Centre/ State in the initial stage of implementation of GST Act. However, it needs to be ensured that 'uniformity' does not become a 'casualty' if a flexible approach is adopted, particularly by the States, in the matter of implementing the provisions of the respective State GST enactments. This is essential so as to facilitate seamless, uninterrupted and hassle-free transactions of supply of goods/ services, both, in the course of intra-State and inter-State trade.

S.2-'Definitions Clause'- "Casual, Callous and Careless drafting!"

S.2 of the 'Model GST Act' is a 'Definition Clause' and by and large, is designed to serve common purpose for CGST, SGST and IGST. Needless to say, 'Definitions Clause' of any enactment remains one of the most fundamental and important provisions of the enactment since, more often than not, it lies at the root of interpretation-related disputes. It is, therefore, expected that this Clause, in a way forming a 'backbone' of any legislation, would define the various phrases or expressions in a crystal clear and explicit manner, leaving not much scope for varied interpretations. The unambiguous language, decorum and consistency are pre-requisites for the "Definitions clause".

However, 'Definitions clause' of the Model GST Act leaves much to be desired! The clause, to a large extent, suffers from 'copy-paste syndrome', poor and vague language, inconsistencies and contradictions. One gets an impression as if the draftsmen were too casual, if not 'careless' about their task on hand! A few examples could be mentioned here.

At the outset, it may be noted that S.2 contains a total of 109 definitions. Interestingly, the 'Model GST Act' of September 2015 contained 77 definitions only. The Sub-Committee II of the EC had suggested 9 additional definitions taking the total to 86 definitions. Out of this, the present "Model GST Act' has adopted total of 79 definitions (with or without modifications) and discarded 7 definitions proposed earlier.

What is, however noteworthy is the fact that out of these prescribed 109 definitions, 29 definitions are either bodily lifted from the existing Acts/ Rules or are substantially based on the existing definitions and adopted with minor or contextual modifications. Here is the break-up of these 29 definitions which are adopted from the existing legislations:

- 15 from FA, 1994;

- 3 from Place of Provisions of Supply Rules, 2012 ("POPSR")

- 1 from Service Tax Rules, 1994 ("STR")

- 2 from Cenvat Credit Rules, 2004 ("CCR, 2004")

- 1 from CEA and

- 6 from Maharashtra VAT Act, 2005 ("MVAT Act")

- 1 from Point of Taxation Rules, 2011 ("POTR")

Apart from the above, the definitions of certain crucial phrases/ expressions are 'conspicuous by its absence' in the Model GST Act and one may have to wait for its prescriptions in the final enactment or the GST Rules.

Casualness and inconsistency in the drafting of 'Definition clause' is also clearly visible. For instance, when any other enactment is referred to in an enactment, it is a protocol and even essential to specify the number of the enactment referred of that particular year, say, "Finance Act, 1994 (32 of 1994), Central Excise Act, 1944 (1 of 1944)", etc. This established practice is given a 'go-bye' in the first 18 clauses as well as in sub-clause (2) of S. 63 defining the term 'local authority', though, the practice is followed in the clauses beyond clause 19 of S.2.

S. 2(38) defines the term 'document' so as 'to include written or printed record of any sort and electronic record as defined in the Information Technology Act, 2000 (21 of 2000). The definition is a replica of the definition contained in the S.2 (10) of MVAT Act, 2005 with an important difference that the latter refers to 'Information Technology Act, 2002'. Incidentally, there does not appear to be any Act titled 'Information Technology Act, 2002'. The original 'Act of 2000' only stood substantially amended vide 'Information Technology (Amendment) Act, 2008'.

The definition of 'Capital Goods' vide S.2(20) is almost a verbatim reproduction of the definition of the term contained in Rule 2(a) of CCR, 2004 but with some contextual modifications. Entry (i) of Para (A) of S.20 describes the 'capital goods' by 'Chapter' or 'description with Chapter Heading' that purports to be of 'Schedule to this Act' (i.e. GST Act). However, there is no 'Schedule' appended to the Model GST Act that specifies any Chapter/Headings for the purposes of S. 2(20). Similarly, Entry at Sr. No. (viii) of Para (A) refers to "Motor Vehicles other than those falling under tariff headings…" but without even specifying the enactment of which these 'tariff headings' form part! Remember that nowhere in the Model GST Act, the 'Central Excise Tariff Act, 1985 (50 of 1986)' has been referred to. It is but obvious that the 'Chapter and/ or Tariff headings' referred to in S. 2(20) can only be that of CETA, 1985 and the new 'Schedule', as and when inserted in the GST Act, would, in all likelihood, refer to or be a replica of the CETA, 1985 only. But why this casual approach and shoddy drafting?

Similarly, S.2 (42) defines the term 'exempt supply' and includes 'such supply of goods and/ or services which are specified in the Schedule of the Act….'. However, such 'Schedule' specifying the list of 'exempt supplies' is not appended to the Model GST Act as on date and may be included later. It also remains to be seen as to whether a common schedule specifying the list of 'exempt supply' is provided for both, CGST and SGST or not and whether the same will be based on the 'recommendation of the GST Council' or not.

Interestingly, while S. 10 empowers the Central and State Government independently to exempt, by a notification or by a special order, any specified 'goods or services' from payment of tax, the same shall be based on the recommendation of the GST Council.

S.2(43) of the Model GST Act defines the expressions 'Export of Goods' as under:

"S.2 (43)- 'export of goods' with its grammatical variations and cognate expression, means taking out of India to a place outside India."

However, whereas the definition speaks about 'taking out of India', it does not even say 'taking out what' so as to make sense out of the definition. It is left to the imagination of the reader that the definition is referring to 'goods'! Same is the case with S. 2(51) that defines the expression 'import of goods'. Can there be a more glaring example of 'poor drafting'?

Going forward, S 2(58) defines the term 'input tax credit' so as to mean "credit of 'input tax' as defined in section 2 (56)". However, S.2 (56) defines the term "Input Service Distributor" and the definition of 'Input tax' is contained in S.2(57)!

S.2 (66) defines the term 'Manufacturer' as under:

"S.2 (66)- "Manufacturer" shall have the meaning assigned to it by the Central Excise Act, 1944 (1 of 1944)."

The draftsmen have again not bothered to specify the relevant clause of CEA that defines the term "Manufacturer".

The entire 'Definition Clause' (S.2) is littered with many such examples but I would stop here. The above few examples are enough to show to the Netizens that whosoever were involved in the drafting of the Model GST Act and particularly, the 'Definition Clause', were not very alert, articulate and serious about their task! One would even wonder about their competence to undertake this crucial job! One also gets an impression as if the task of defining various expressions must have been divided by and amongst the few members of the Sub-Committee of the EC and after they have completed the job - at times, by resorting to 'cut-n-paste', the definitions have simply been arranged alphabetically, without anyone taking care to scrutinize the final version before release!

"This is how bad laws are made: You compile a bunch of populist sections, then cleverly hide in them some draconian ones, which ultimately become the central laws".[Ali Sabamba]

To be continued...