JULY 27, 2016

By Sumit Dutt Majumder

THE States' demand for exclusive 'Single Control' instead of 'Dual Control' by Centre and States over the 'Small Business' with turnover below Rs 1.5 Crore in the GST regime has been in the air for some time now. The matter needs to be sorted out without any further delay. In the first week of July, 2016, the Central Board of Excise & Customs, the organization that would be responsible for administering Central GST and Integrated GST (IGST) for inter-state movement, has taken a timely step in forming a panel to identify the key areas of concerns and sort out the differences through dialogue with the State Government officials. It is expected that the issue under discussion in this piece would of prime concern for the said Panel.

Now, an analysis of the issues involved. On the issue of the demand for exclusive 'Single Control' over 'Small Business', the States have demanded that for taxpayers below the turnover of Rs. 1.5 crore, the States should be allowed to administer both SGST as well as CGST, in all its aspects, and that CGST amount will be sent back to the Centre by the States. This has been proposed to avoid dual control over Small Business. The Centre has maintained that both Centre and States should have concurrent jurisdiction over the entire value chain without any division of jurisdiction on the basis of turnover. The second issue is in respect of administering the IGST Act which deals with taxation of Inter-State transactions. While the proposed IGST Act envisages the administering of the Integrated GST (IGST) by the Centre (CBEC) as has been the agreed position from the beginning, the States have demanded certain powers under the IGST Act like the power of issuing show cause notices and of issuing orders pertaining to the Input Tax Credit. The Centre has maintained that the IGST Act is a Central Act and it has to be administered by Centre alone.

On the first issue, the States have argued that the Small Business should not face two authorities - Centre and State, since it will cause hardship to them. Further the threshold for State VAT being Rs. 5 lakhs, the Small Businesses are already used to deal with States, while they are not known to Centre, since the threshold for Central Excise is Rs. 1.5 crore. This argument is not correct inasmuch as the Centre also deals with Small Business for Service Tax where the threshold is Rs. 10 lakhs. Secondly, three basic functions like Registration, Payment and Filing of Returns would be supported by a common portal of the technology support, GST Net, where the taxpayers would file only one document for each of these functions at the front end, and these would be split into two for CGST and SGST authorities at the back end. Besides, the compliance requirement like periodicity of Returns filing, Audit etc. can be relaxed for the Small Business. It can also be considered whether in line with the concept of Large Taxpayers Unit (LTU), there could be the concept of Small Taxpayers Unit (STU) where the CGST, SGST and IGST authorities can sit together under one roof and facilitate the Small Business in their tax compliance.

There will be another concern of the Centre. On a rough estimate, about 90 per cent of Service Tax payers would be having turnover in the range of Rs.10 lakhs to 1.5 crore. The State Government has no experience with taxation of Services, an intangible thing. That makes taxation of Services a more difficult job, Naturally, therefore, the Centre will have concern about handing over the administering of CGST for units having turnover upto Rs.1.5 crore to the States.

Further, nowhere in the world of GST/VAT regime, except for one province of Canada - Quebec, the GST/ VAT collection of Centre is outsourced to the States. Revenue is important for both Centre and States - more so for the centre, since Centre has to take the higher responsibility of distributing revenue to the State where it is needed most.

On the second demand of the States for power to administer IGST, it may be pointed out that in the existing system, the Central Sales Tax (CST) for inter-State movement of goods is collected and kept by the origin State. But in the GST regime, the State's share of tax on inter-State movement of goods and services will accrue to the destination State. While in the case of CST there is no scheme of credit, there will be an elaborate credit system in the IGST scheme. The States have argued in favour of demand to admmister IGST by stating that it would be necessary for the States to verify inter-State transactions since credit on account of IGST is permitted to be utilised for payment of SGST, and that wrong availment of IGST credit can adversely affect the revenue of the States.

The argument, to say the least is fallacious. The scheme of IGST credit flow and distribution of tax to the States are very clear. The SGST portion of the IGST credit would be transferred to the States without verification of ITC of IGST. Thus, wrong availment of IGST credit would be a loss of revenue to the Centre and not the States. Further, the action to recover wrong availment of ITC of IGST would result in recovery of IGST and not SGST.

There is another serious issue in asking the States to administer IGST. Which State would administer the IGST? Naturally, the Destination State can't be asked to do that, since the administering has to be from the time and place of supply i.e. Origin State. If the Origin State is asked to administer and collect IGST, there would be the issue of conflict of interest. The origin State would have an interest (may or may not actually act on it) in trying to keep the tax in its own kitty by declaring, technically, an inter-State transaction as Intra-State transaction. Besides, there would be loss of compliance symmetry. It may also trigger unhealthy tax competition among the States-the like of what one has seen at the initial years of the State VAT implementation.

It may also be recalled that the States had on an earlier occasion demaded, through the Empowered Committee, an amendment in the proposed Articles 269A so as to give the States the power to Administer IGST. But the demand was rejected.

Under the circumstances, in respect of distribution of States Share of GST amongst the Destination based States, it's only the Centre that can do the job of an honest and unbiased broker. Further, it may be noted that none of the individual States have all India jurisdiction, in the absence of which, a seamless flow of ITC across the country will remain a far cry.

Therefore, it's for all to see that there should be dual control by both Centre and States althroughout. Another collateral benefit of this 'dual control' will be that the chance of infraction or tax evasion getting detected will be double simply because two authorities - CGST and SGST would be policing it. And it's no mean advantage.

(The author is former Chairman, Central Board of Excise & Customs and currently appointed as Senior GST and Customs Expert for an ongoing EU project in India. The second edition of his book "GST in India" is under print.)