Revamped GST calls for change in Basic Design!
TIOL - COB( WEB) - 583
DECEMBER 07, 2017
By Shailendra Kumar, Founder Editor
THE GST is, theoretically speaking, a simple tax, but only if its model or the most idealistic version is adopted by a nation. But, since the model GST does not fit into empirical socio-economic and political ecosystems of any country, its re-engineered or jugad version is adopted with simplicity as one of its avowed GOALS. The same story is valid even for the Indian GST version which was launched with fanfare and an unmistakable goal of a good and simple tax. How near or distant is this good and simple goal is to be discovered only by undergoing the pangs of trouble. And here goes the credit to the GST Council for benevolently admitting the wrong steps taken and overt willingness to carry out mid-course corrections. Several Committees with different and certain overlapping terms of references are on the job with a deadline in sight.
One of the committees has submitted its quick recommendations to the GST Council Secretary General and has accommodated many demands of the industry and trade in its report. One of the good and delayed recommendations is to widen the perimeter of the Composition Scheme even for the services up to Rs 1.5 Crore annual turnover. There was no valid reason for the differential treatment being meted out to the services sector when the essential character of the Composition Scheme is not to burden small businesses with too much compliance and high incidence of tax rates. If certain schemes are good for the goods, it is equally good for the services. When the GST laws themselves refer to supply of goods or services or both, why should a country discriminate against the most vibrant and expanding sector of the economy. In fact our law makers should not forget that one essential feature of a developed economy is the developed services sector which contributes more to the economy and thus the Exchequer. Merely because the services are intangible and prone to tax evasion, differential treatment is not called for. One of the fundamental principles of a modern tax system is to trust your taxpayers. Merely because small service providers may evade tax or create multiple entities to remain within the composition threshold, it should not be bothering the tax administration much as its human resources also need to be gainfully engaged in anti-evasion or preventive intelligence gathering. Therefore, I strongly feel that since small services providers have taken a serious blow post-GST (same is indicated by the latest HSBC PMI), it calls for immediate and fair treatment by the GST Council.
However, the demand made by the traders and the recommendation made by the Expert Committee to allow inter-State trade by composition dealers is not fair and goes against the basic structure of the GST Design which should not be tampered with. It is important for the GST Council to debate and make public certain features of the Indian GST System as basic structures and, therefore, they are not negotiable. If Composition dealers are allowed inter-State trade then there would not be much in the design to make a distinction between a normal taxpayer and a composition dealer. What does a normal taxpayer gain vis-a-vis a composition dealer - only two things i.e. All India Market plus seamless flow of input tax credit. The recommendation to exclude supply of exempted goods from the aggregate turnover required for meeting the eligibility test for the Composition Scheme is a fair demand and the Council should accept it without any whimper.
The Committee is believed to have recommended that the ITC benefits should be extended to buildings and offices. Going by the GST laws, ITC has been denied in some cases and also partially blocked in many. In some cases, the cascading of taxes has been in-built to deny credit such as hotel accommodation. Such legislative restrictions are incorporated in GST laws by an economy, depending on the health of the exchequer, size of the digital transactions vis-a-vis the GDP, political commitment to certain underprivileged sections of the society and many more. As the economy grows and the tax compliance index improves, the legislatures or policy makers relax the cap imposed on ITC. The Indian industry and trade are familiar with such restrictions whether it is a case of capital goods or inputs from the Modvat and CENVAT days.
Now, the larger question is - since the denial of 100 per cent credit is a politico-cum-legislative reality, why to make it so complicated that it results in avoidable litigation today and even tomorrow. So, what could be a simple solution? I came across one such suggestion recently where it was argued that if certain percentage of the legitimate expenses of a business entity is to be disallowed as credit, why can't the GST Council make it as simple as - ITC is to be allowed on 80% of the total legitimate expenses incurred for the purpose or furtherance of business. This makes it clear to all taxpayers that if one has incurred Rs one lakh as business expenditure in a year, credit upto Rs 80K can be availed. It would be easy to enforce and may also help the Income Tax Department as there would be two layers of scrutiny of legitimate business expenses - one for the GST and another for the Profit & Loss purpose. Of course, it would require a couple of more safeguards but such safeguards can be designed in the interest of a good and simple tax system with minimal litigation.
Since simplification is the goal during the prevailing lull period, some of the suggestions given by the infrastructure industry representatives to the Union Finance Minister yesterday as part of the Pre-Budget suggestions are equally attractive and valid. One such suggestion was to remove GST on intra-entity transfer of services within the same legal entity. Since one of the slogans of the Indian GST is - One Nation One Market One Tax, why to unnecessarily complicate the laws and increase the cost of doing business by taxing intra-entity supply of services. The FM was also urged to extend the quarterly return-filing system to all taxpayers rather than making it only for the composition taxpayers. Returns are based on self-assessment and the key function of the GST Administration is to audit the same declaration to find loopholes. This can be done on a quarterly basis provided the taxpayers are allowed to compute their own tax liability and pay the tax on monthly basis so that the Govt is able to run its own business smoothly. Such delinking would be a mega step in the direction of easing the compliance burden. In fact such a system is working fine in case of TDS where every taxpayer deposits TDS on a monthly basis but files returns on quarterly basis. Where is the hassle? The CBDT has developed certain markers or 'sensors' which indicate manipulation and further Survey under Section 133A; followed by a Search operation u/s 132 if there is more tangible and actionable intelligence.
This brings us to the most contentious issue of anti-profiteering provision. The Government's concern is that the tax rate benefits must be passed on to consumers. It is a valid concern and the industry must cooperate with the Govt on this issue. But, I guess, the bigger concern is the misuse of this provision by the tax administration. The second concern is the missing clarity - whether it would be applied at product or entity level and whether it would be examined at the State or Central level. Since cost is the most mischievous parameter in any business, it is difficult to make it one to one with the price of a product. Then, there are several aberrations arising out of the structural changes done by the GST such as dispensing with the CST and the corresponding denial of C Form leading to a hike in the energy costs. Therefore, the Govt needs to tread this path very carefully as this provision has the inherent 'fire' to further 'burn' the recovery stamina of the economy.
Finally, I would like to call upon the law makers to revisit the provisions of Advance Ruling and make it more meaningful instrument to infuse certainty in the tax system rather than a potential trigger for future litigation. Going by the present systems prevailing in the tax administration, it would be difficult for the middle-level officers to give a verdict against the treasury in the capacity of advance ruling authorities. Secondly, it goes beyond debate that such a ruling given by one State may not be acceptable to other States. So, if there are conflicting rulings on the same issue, what gets defeated is not the taxpayer but the larger goal of certainty in the tax system. Therefore, the GST Council should act quickly and make it a more meaningful forum for the industry as well as the Revenue.
Before I conclude, my sincere suggestion to the Council would be to take a magnanimous call and defer the e-Way Bill which has huge and crude potential to further disrupt the economy. A call may be taken after the GST laws stabilise over a period of two years. If the statistics collected by the GSTN indicates that there are numerous instances of manipulation and tax evasion, such a provision may be brought into force. Similarly, the RCM provisions may be used only as a 'Brahmos' and may be kept in abeyance for two years. Since the Govt has achieved the goal of growing digitalisation of economic activities, it may not require RCM provisions for a large section of the economy in future. The present goal of the Council should be to reinvent the GST Design so that the halted wheels once again start moving!