MARCH 21, 2018

By Vijay Kumar

THE World Bank last week released a note on India's GST. Some of their observations:

- The Goods and Services Tax (GST) was introduced in India on 1st July, 2017, after more than a decade of efforts. It replaced an existing system of fragmented and complex indirect taxes, consisting of multiple central and state taxes.

- Any tax on value added in a federal system of government with overlapping taxing powers is challenging, as taxing powers must be clearly defined and tax rates should be as uniform as possible across the country.

- The administration of GST has been harmonized between the center and the states using a common IT system and common rules with the powers to audit being shared. To support the administration of the taxpayers, a common nation-wide IT backbone called the GST Network (GSTN) has been put in place, through which all tax returns are required to be filed.

- The introduction of the GST to replace state level value added taxes was motivated by an attempt to harmonize indirect taxation across India, therefore eliminating state level barriers to trade and broadening the tax base.

- The number of different tax rates also determines the complexity of the GST, with multiple rates imposing additional costs on compliance for businesses as well as the tax administration and encouraging evasion.

- As is the case in India, it is also possible to introduce a simplified system in lieu of exemptions for smaller firms which is administratively easier. The disadvantage of introducing registration thresholds and having a simplified and presumptive tax regime is that it inevitably fragments the tax system, which may reduce the tax base and provide an incentive for larger firms to mask their size and benefit from the reduced compliance burden.

- The design of a GST systems faces trade-offs between revenue collection, protecting the poor and reducing the taxation and compliance burden on firms and consumers. The way that the design parameters are set is ultimately a policy decision that depends on the objectives of the government.

- Comparing the design of India's GST system with those prevailing internationally, the tax rates in the Indian GST system are among the highest in the world.

- The introduction of GST has been accompanied by state administrations experiencing disruptions in the initial days after GST introduction. This included a lack of clarity on discontinuation of local taxes (e.g. in Tamil Nadu where the state government devolved an entertainment tax to local governments in order to impose it over and above a 28 percent GST); demands for exemptions or lower tax rate (e.g. by the textile sector in Gujarat); and on account of coping mechanisms to preserve revenue collections (Maharashtra increased motor vehicles tax to compensate for losses due to GST). There also have been reports of an increased administrative tax compliance burden on firms and a locking-up of working capital due to slow tax refund processing.

- The GST council announced the introduction of an "e-wallet" scheme by April 1st, 2018. Under this scheme, advance refund payments will be credited to a virtual account, which can be used to make GST related payments. In addition, early 2018 is expected to see the wider introduction of the "e-way bill system", which facilitates a technology-driven tracking of movement of goods worth more than INR 50,000 and for sale beyond 10 km in distance.

- Despite the initial hiccups, the introduction of the GST is having a far-reaching impact on reducing tax related barriers to trade barriers which was one of the primary goals of the introduction. Logistics companies are reporting that trucks now cover an additional 100-150 km per day after GST an increase of up to 30 percent. Logistics companies are also consolidating their existing fragmented set of small warehouses in each state, now that the GST has removed state imposed barriers thereby increasing their efficiency. However, the introduction of the "e-way bill" may result in some fresh barriers to the free movement of goods in the form of road inspections to verify the goods being transported.

- Conclusion

The introduction of GST in India is a historic reform. Comparing the design of India's GST system to similar taxes on value added across other countries, India's GST system is relatively more complex, with its high tax rates and a larger number of tax rates, than in comparable systems in other countries. However, while teething problems on the administrative and design side persist, the introduction of the GST should be considered as the start of a process, not the end. With the economy adapting to the new system, the GST council has been evaluating and evolving the tax structure and its implementation. While international experience suggests that the adjustment process can affect economic activity for multiple months, the benefits of the GST are likely to outweigh its costs in the long run. Key to success is a policy design that minimizes compliance burden, for example by minimizing the number of different rates and limiting exemptions, with simple laws and procedures, an appropriately structured and resourced administration, compliance strategies based on a balanced mix of education and assistance programs and risk-based audit programs. A nuanced communications campaign is crucial to convey the various aspects of the new system of GST amongst businesses, consumers and key intermediaries, such as tax practitioners, as well as amongst the tax administration itself and the political class.

Litigation Unlimited:

While the World Bank was busy studying the complex Indian GST, the Government and some lawyers were busy agitating in the Supreme Court.

Let us go back to 17th August 2017 when the Government by Notification No. 22/2017-Central Tax, inserted the following Rule 44A in the CGST Rules.

"44A. Manner of reversal of credit of Additional duty of Customs in respect of Gold dore bar.- The credit of Central tax in the electronic credit ledger taken in terms of the provisions of section 140 relating to the CENVAT Credit carried forward which had accrued on account of payment of the additional duty ofcustoms levied under sub-section (1) of section 3 of the Customs Tariff Act, 1975 (51 of 1975), paid at the time of importation of gold dore bar, on the stock of gold dore bar held on the 1st day of July, 2017 or contained in gold or gold jewellery held in stock on the 1st day of July, 2017 made out of such imported gold dore bar, shall be restricted to one-sixth of such credit and five-sixth of such credit shall be debited from the electronic credit ledger at the time of supply of such gold dore bar or the gold or the gold jewellery made therefrom and where such supply has already been made, such debit shall be within one week from the date of commencement of these Rules.";

This rule was promptly challenged in the Delhi High Court in KUNDAN CARE PRODUCTS LTD and several others reported in - 2017-TIOL-1679-HC-DEL-MISC.

Rule 44A was challenged as being ultra vires of Section 140 of the CGST Act as well as the rule making powers under Section 164. It was contended that the impugned Notification is grossly discriminatory and unreasonable and has imposed the restrictions which are applicable only to imported gold dore bars. It was submitted that if the interim orders are not granted then the credit of CVD already availed and utilized for payment of tax on finished goods by the Petitioners would be electronically reversed and they would have to deposit cash. This would be severely prejudicial to them.

The Court was of the view that the Petitioners have made out a prima facie case for grant of interim relief in their favour. Further, the balance of convenience is in their favour for grant of interim relief. Accordingly, it was directed that till the next date of hearing, no coercive steps shall be taken by the Respondents to recover the credit already availed by the Petitioners.

A totally interim order with the issue yet to be decided. But the Government was seriously aggrieved by this interim order and took the matter to the Supreme Court against all the seven assessees; the Supreme Court had to open seven case dockets, all because the Revenue was aggrieved by an interim order. Obviously they were so aggrieved that they couldn't wait till the High Court passed a final order. The petition ran into 855 pages which contained the following defects.

The Supreme Court on 19.03.2018 passed the following order:

As the present special leave petition(s) are filed against an interim order, we are not inclined to interfere with the same. The Special Leave Petitions are accordingly dismissed.

The hope of the lawyers that there would be enough cases, for them to thrive, is not without reason.

Verification of Transitional Credit :

The CBEC is embarking upon a massive verification of Transitional Credit. The Chairman of the Board in a D.O. letter D.O. F. No. 267/8/2018-CX.8, dated 14.03.2018 addressed to the Chief Commissioners states:

- Further steps have to be taken to verify the correctness of the Transitional credit taken, in a more focused and concerted manner. To facilitate the same, a detailed guidance note is issued to aid and assist the field formations in verification of transitional credit.

- In the guidance note, various checks have been prescribed in relation to the various entries provided in various tables of TRAN 1. The verification in terms of the above mentioned Guidance Note has to be conducted in respect of the list of top 50,000 GSTINs in the order of transitional credit availed.

- For tax payers who have been verified in terms of past instructions, further verification shall be conducted in terms of checks listed above in the Guidance Note and past checks already applied need not be duplicated.

- It may be reiterated that credit verification shall remain one of the focus areas in the year 2018-19. It would be desirable to plan the activity of verification for the entire year.

- Record of results obtained shall be maintained in the Commissionerate concerned and reported to the Board, on or before the 10th of the month following the quarter in which verification is completed, in the format prescribed in the Guidance Note. Chief Commissioners may divide the work between Executive and Audit Commissionerate to achieve the best possible results.

If you are covered, be ready for a friendly interaction with your helpful GST (of the Central variety) officials. The guidance note circulated by the Chairman stipulates:

- Taxpayers who have availed transitional credit greater than Rs. 25 lakh and where the closing balance of CENVAT credit during the period of 1st of October, 2016 to 30th of June, 2017 has grown by 25% or more may be directed to prepare a statement of purchases during this period

- CGST officer of the Central Government shall have the jurisdiction for verification of Transitional Credit of CGST irrespective of whether the taxpayer is allotted to the Central Government or the State Government for the purposes of GST. This is because, TRAN Credit verification process can only be done by the tax authority which had legal jurisdiction under the erstwhile law and also has the requisite past record of the taxpayer.

- Summon should be issued only where the taxpayer is not sharing information even after repeated requests and lapse of an unreasonable period of time. (Now, what does this mean? Is it a reasonable period of time or unreasonable? Suppose reasonable time is one month and unreasonable time is five years – should summons be issued only after five years?)

- Circular is being issued by the GST Policy Wing prescribing inter alia the procedure for the reversal and recovery of credit.

- Taxpayers who have shown steep growth in credit over 25% and have availed credit of more than Rs. 25 lakh amongst this list of 50,000 top TRAN credit takers has also been uploaded. Reason for this excessive growth may be ascertained and informed in due course to the Board.

- Taxpayers can be informed about the precise checks the department intends to carryout either through a communication or trade notice as felt convenient. The checks in the Guidance Note can thus be shared with taxpayer. Taxpayers should be encouraged to take corrective action on the excess TRAN Credit taken in terms of the law.

For some strange reason, these instructions were not well publicised, though several newspapers reported them. The general trend seems to be now to leak information than provide it.

What happens to the GST collected?

This is what the FM told the Parliament.

And what does GST do?

The Official twitter handle of the GoI proclaims.