NOVEMBER 26, 2019

By Naresh Minocha, Consulting Editor

THE Government should show political will to re-design & stabilize goods and services tax (GST) system. The Government has so far taken in stride both grave concern and suggestions pertaining to this issue. It didn't appear shaken by valuable advice from diverse quarters including the World Bank and Comptroller and Auditor General (CAG).

It should at least now bite the reforms bullet in response to repeated calls from Fifteenth Finance Commission (15thFC) Chairman N.K. Singh for reinventing GST to achieve its original objectives.

On 18th November 2019, Mr. Singh pitched for undertaking GST and other tax reforms. While launching TIOL National Taxation Awards portal, he noted that GST needs to undergo " fundamental changes " to achieve its intended objective.

Four days later, he articulated his vision for GST reforms while delivering L.K.Jha memorial lecture organized by Reserve Bank of India (RBI).

Mr. Singh is epitome of wisdom on GST by virtue of his long association with the revenue administration. He has had unique honour of being entrusted twice by the Modi Government to lay roadmap for fiscal reforms.

Mr. Singh is now pitching for GST reforms after getting detailed feedback from all stakeholders –the Centre, the States, economists, businessmen and academics.

And the decisive & exhaustive logic for reforms would, of course, be contained in eagerly awaited report of 15thFC.

Instead of waiting for 15thFC report, the Government should first make up its mind to turn GST from growth retardant to growth booster.

Delivering the Lecture titled 'Fiscal Federalism: Ideology and Practice 'Mr, Singh observed: " GST Council is still in its nascent phase and needs to revisit its design and decision-making process in a more fundamental way. This is also necessary to enable it to fulfil its original purpose ".

PTI quoted him as telling SBI Chairman Rajnish Kumar at the Lecture: " If you do not simplify GST, you will be defeating the very purpose and intention of why we took this far reaching step ".

He has time and again voiced his amazement over the frequent changes in GST rates. The word 'frequent' is, however, new normal for the GST Council (GSTC). It recommends to the Centre and the States to make regular changes in tariff, rules, exemptions, proforma etc. This has put almost all businesses in wait-and-watch mode, thereby slowing down capital expenditure.

Listen to the latest concern emanating from the horses 'mouth. Says Adani Transmission Limited: " The GST regime is at a nascent stage and the law relating to GST is undergoing frequent amendments ".

In its offering circular (OC) for 0 million overseas debt issue dated 14th November 2019, it cautions investors: " Such changes in law and rate clarifications may impact the Issuer's operations, profitability and cash flows ".

India Infoline Finance Limited (IIFL) has been more forthright in its OC dated 1st August 2019 for $ one billion debt issue. It says: " Since the GST is in its nascent stages and continues to evolve, there is bound to be a degree of uncertainty and obfuscation in the indirect tax regime in India which is likely to affect the economy of the country in the near future ".

In its external debt OC dated 8th October 2019, Bharti Airtel's Mauritius-based subsidiary Network i2i Limited notes: " The GST has increased administrative compliance for Indian companies, which is a consequence of increased registration and form filing requirements ".

The same concern was voiced in Fullerton India Credit Company Limited's OC dated 4th October 2019 for overseas debt.

Cautioning foreign investors on uncertainty caused by GST flux has become the standard operating procedure for companies resorting to external commercial borrowings (ECBs).Even for domestic equity issue, companies believe it is prudent to make some disclosures.

Thus,Indian Railway Catering and Tourism Corporation Limited (IRCTC), in its recent, draft red herring prospectus, says: " As GST is implemented, we cannot assure you that we will not be required to comply with additional procedures or obtain additional approvals and licenses from the government and other regulatory bodies or that they will not impose onerous requirements and conditions on our operations. As the taxation system in India will see significant changes as a result of GST, its consequent effects cannot be determined at present ".

Even State Ministers have pressed alarm over the way GST is getting implemented, leading to revenue leakages. At 35th GSTC meeting held on 21st June, 2019, Uttar Pradesh Finance Minister, Rajesh Agarwal, referred to GST frauds.

According to the minutes of the meeting, Mr. Agarwal suggested that "physical verification of (GST) registrants should be considered seriously as a large number of 'laptop companies 'were operating in the field ".

Delhi Deputy Chief Minister Manish Sisodia also pointed that bogus bills were being issued by 'laptop shops'. To rein in the trend of fake inputs tax credit (ITC) invoices issued by fly-by-night operators, Geo-tagging of entities registered under GST system is underway. This means increased cost of compliance.

The World Bank pressed alarm on this issue in November 2018. As put by WB's Report captioned 'The Challenges of the Goods and Service Tax (GST) implementation in India', " In India, the key challenge GST implementation could face is proper control, of fraud-prone refunds particularly. Since the GST is a self-assessed tax that is collected throughout the entire production chain involving a long paper trail of invoices, robust control mechanisms are critical. This is particularly the case for refunds, which can be highly vulnerable to fraud ".

The Report concluded: " the enforcement framework through onerous reporting requirements for businesses places a huge compliance burden on businesses especially SMEs. The government could reduce the burden by providing a longer transition period for businesses. Further, reducing the cash flow burden on exporters and reducing cases of refunds would require policy changes ".

Apart from frauds, ITC accounting is prone to inadvertent errors as many stakeholders are still learning ropes of GST. It is here apt to cite Railway Board's letter dated 20th November 2019 addressed to general managers of zonal railways and production units.

Referring to earlier letter on this issue, the Board says: " All the Zonal Railways may now take correction action in consultation with GST consultants and complete this exercise within stipulated time ".

On the issue of filing annual GST returns for last two financial years, another letter dated 19th November 2019 says: " It is desired that GST cell of Principal Railways must immediately undertake the exercise of familiarizing themselves with the amended Form GSTR-9 in consultation with GST Consultants, so that annual returns can be filed well within the extended deadline ."

Railways' plight shows how simple is GST!

Meanwhile, GSTC failed to resolve internal differences over CAG's plea to have powers in auditing of GST accounts. It,therefore, referred the issue to its Law Committee for further deliberations at its 35 th meeting.

Like Law Committee, there are several other panels that are operating under the aegis of GSTC. Proliferation of committees makes one wonder whether GST is a good and simple tax as branded by Prime Minister Narendra Modi.

The mandate of various committees requires some elaboration to visualize why and how GST would remain a complicated taxation system in works. This trend might get stretched over the medium term, if GSTC continues to work the way it does at present.

GSTC thus constituted Committee of Officers (CoO) last month to suggest measures to augment GST revenue collection and administration. GSTC wants CoO to consider " wide range of reforms " so that a comprehensive list of suggestions may emerge.

The areas that GSTC has identified for CoO include: 1) systematic changes in GST including checks and balances to prevent misuse; 2) measures to improve voluntary compliance: 3) policy measures and relevant changes needed in the law; 4) improved compliance monitoring and anti-evasion measures using better data analytics and 5) better administration coordination.

On 15th July 2019, GSTC constituted a CoO on risk-based management (RBM)of taxpayers under GST regime. Its terms of reference (TOR) envisages recommending the modalities of KYC verification of a taxpayer through various agencies, parameters for risk-based profiling of taxpayers so as to identify 'risky' entity in an automated manner.

CoO is also required to suggest modalities for assessing the financial credibility of a taxpayer vis-a-vis his GST profile and also suggest various threshold limits for such target taxpayers. The Committee is required to propose " reasonable restrictions " that should be imposed on taxpayer based on risk parameters to regulate issue of invoice, utilization of ITC, passing of ITC, refunds, etc.

TOR also mandates CoO to suggest changes in the GST law and rules to enable profiling and regulating risky taxpayer. CoO is expected to recommend measures for implementing suggested RBM on " immediate basis " and any other mechanism to check & curb multiple type of frauds.

On 12th July 2019, GSTC constituted a Group of Ministers (GoM) to monitor and resolve IT challenges faced in implementation of GST. An IT Committee of officials from Centre, States & GSTC already exists since May 2017.

On the same day, GSTC constituted another CoO to consider examining feasibility of designing a Special Composition Scheme for brick kilns, sand miners, stone crushing and menthol units.

The maze of committees appears more amusing if one notes that CoO on generation of electronic invoice (e-invoice) through GST Portal constituted two working sub-groups (WSGs) on 23 rd May 2019. One WSG is studying policy issues for generation of e-invoice and the 2 nd one is deliberating on technical issues for generation of e-invoices.

There is already a permanent panel named GST Implementation Committee comprising officials from Centre, States and GST council. GSTC also has another such panel that studies issues faced by exporters. It recommends suitable strategy for helping the export sector in the post-GST scenario. It is required to submit quarterly reports to GSTC.

The sprawling work in GSTC shows GST is actually a great stunning tax . It is pertinent to again invoke WB. In an earlier paper prepared in January 2018, WB compared the design of India's GST system to similar taxes on value added across other countries.

The paper noted: " 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 ".

It concluded: " Key to success is a policy design that minimizes compliance burden, with a single rate, limited exemptions, 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 ".

Nothing of that sort has happened. This is evident from 15thFC-commissioned study titled 'Fiscal Implications of Introduction of Goods and Services Tax in India'. Submitted by National Institute of Public Finance and Policy (NIPFP) in July 2019, the Study points out that tax payable should be equal to the sum of ITC claimed and cash paid.

The study has, however, found " mismatch between Tax Payable and Tax Paid in GSTN database " for three quarters of 2017-18 and two quarters of 2018-19. It observes that " discrepancy between tax payable and tax paid is not specific to any one head but general across all heads ". It adds: " Unless the data matches, any analysis based on such data may be erroneous ".

In the absence of all the required GST data from a single source, the study relied on multiple sources. In the absence of data convergence across sources, NIPFP economists found it difficult to project GST revenue. It has nevertheless forecast GST revenue to financial year 2024-25 under different scenarios with two separate methods.

The Study has also estimated state-wise shortfall in GST revenue collection with reference to revenue protected under the Goods and Services Tax (Compensation to States) Act of 2017. Excluding the States for which data is not available from Department of Revenue, the Study finds that revenue requirement to compensate States will increase over time.

The GST Compensation period ends on 30 June 2022. 15thFCmight well recommend continuation of compensation keeping in view States 'demand. The Commission would obviously take into account, estimates, conclusions and recommendations made by different studies commissioned by it.

The NIPFP Study has assumed that GST compensation cess will continue after GST compensation period and, therefore,States will continue receiving GST compensation at least till 31 March 2025.

According to another study commissioned by 15thFC, GST revenues are not reaching the expectations and opinions were expressed on possible reforms.

Undertaken by Institute of Economic Growth (IEG) in July 2019, the Study notes:

" A further apprehension is about the provision of compensation that exists for the states which are not able to meet the revenue target of 14%, and whether this can consequently reduce the incentives for such states to deepen or widen the tax base ".

Another significant observation made by IEG study is the emerging changes in revenue collection after roll-out of GST in July 2017. As put by the Study, " The more pertinent problem of concern to states arises because GST is a destination-based tax. It is a worry to more industrialized states like Gujarat, Maharashtra, Tamil Nadu etc because goods produced in these states are consumed elsewhere in the country yielding tax revenue to jurisdictions in which they are purchased and used ".

15thFC is well aware of all such unforeseen problems and is expected to suggest solutions in its report. It would be interesting to know what it has to say about indefinite exclusion of crude oil, natural gas, petrol, diesel and aviation turbine fuel from GST framework.

Sooner these commodities are brought under GST, the better it is for value-chains and economic efficiency. Their inclusion would also create equitable taxation opportunity and revenue collection by the Centre and States. At present, Centre collects more revenue as excise on these products as compared to sales tax receipts made by States.

To sum up, a simple way to reform the so-called good and simple tax would be finalize A to Z reforms, seek public consultation and make changes within three months. The resulting GST should be frozen for next five years. Only anomalies should be addressed during the interregnum.