TIOL - COB( WEB) - 952
DECEMBER 26, 2024

By Shailendra Kumar, Founder Editor

1st July, 2017: India viscerally experienced a kaleidoscope of emotions with the midnight unfurling of a historic tax reform i.e the Goods & Services Tax (GST). The 'Colossus' as well as the Lilliputians of the Indian political landscape unflinchingly pledged that it was the beginning of a new era in the history of tax reforms in India. Since then, the GST regime has sailed through many turbulent phases of evolution! What has played a large-sized role in stabilising its ground-level operations are the timely steps taken to steady its technology vessel i.e GSTN, which is now instrumental in garnering over Rs 1.8 lakh crore of monthly revenue collections. In the months to come, I can foresee this monthly figure swelling beyond Rs two lakh crore any time soon!

In fact, the larger slice of credit goes to the sui generis forum of cooperative federalism i.e GST Council. This constitutional body had its last meeting - 55th, at Jaisalmer, last week. Like the previous fiscal love-ins, it took a basket of decisions and also deferred almost in equal numbers for more jaw-jaws by the Groups of Ministers and Committees of officials. It is indisputably the savoury way of nourishing this forum. However, what may cause consternation to thousands of GST evangelists is the missing coyness in admitting drafting error in the GST laws! In reply to a question relating to the Supreme Court's decision in M/s Safari Retreats (2024-TIOL-101-SC-GST), the CBIC Chairman, a permanent member of the GST Council, said that although the expression 'plant and machinery' has been used at many places in the law, but what cost the Revenue in this case is the drafting error at one place where it was used as 'plant or machinery'. So, the Council has recommended to amend Section 17(5) to deny ITC retrospectively from 1st July, 2017. The Chairman, Mr Sanjay Agarwal, also said that it has been noticed by the Revenue that there are not many taxpayers who have utilised such credit. Secondly, even after the SC's ruling, not many taxpayers have rapaciously pounced on grabbing such benefits ratified by the court ruling! So, this retro amendment may impact only a sliver of taxpayers' community, he added.

So far, so good, for the Revenue! But, two suggestions I would like to make here, are - 1) What stops the GST Council from setting up a Task Force or a GoM or a committee of good drafters, from undertaking an antigenic operation to review the entire legislation once again and then carry out remedial amendments to glaring drafting errors in one go rather than doing it in a piece-meal fashion! Acting on such remedies after taxpayers fight through the legal battles and the highest court of justice rules against the Revenue, is certainly counterproductive for the confidence-building measures being taken to earn the trust of the taxpayers into the fairness of the tax system and also amounts to an affront for nation's justice delivery system. Retro tax necessarily reflects poorly on the ability of the policy-makers whose primary intent should be to earn the trust of the taxpayers into the new tax system. Resorting to retro amendments transports the nation back to the old regimes of Central Excise and VAT, which had atrophied and become dysfunctional to serve the interests of the exchequers, largely owing to too many glaring missteps. No efforts should be spared to protect the oomph factor of the GST - the best form of indirect tax in the world, thus far!

My second bout of concern is the growing weight of distortions in the original design of the GST. What was the uncut architecture? For brevity and clarity to all taxpayers, the primary design was to make GST truly a pass-through tax. It is certainly not a levy on businesses rather a burden for consumers, and that is why it is called consumption tax or destination tax. This entailed a seamless flow of ITC and a minimum tax rate on all goods and services. Indeed, political compulsions and the prevalence of diversity had compelled the decision-makers to block ITC in many cases and also grant exemption on various socio-economic grounds. As we know that every exemption simply means shifting of tax burden from one class of goods and services to another, and this comes into conflict with the frayed emotions of burdened taxpayers. Ideally, the GST Council should, at its every meeting, try to trim the list of exempted goods and services so that such a decision symbiotically serves the soul of the GST - the availability of ITC. Exemptions not only spike the tax burden for the harried taxpayers but also eat away the 'Gelato' of input tax credit! Such distortions should be minimised to improve the efficiency of the GST's revenue collection machinery. However, what is happening at every Council's meeting is that fresh exemptions are being granted and pivotal decisions to unblock credit are being deferred. For instance, when the Section 17(5) was worded, the original intent was to dilute it over a period of time when the revenue collections stabilise. In the absence of a clear-cut roadmap for such stability and periodic detection of drafting errors, followed by remorseless remedial amendments with retro effects, tend to enrich only the misty emotions of the taxpayers!

Yet another example is the ill-treatment meted out to the Aviation Turbine Fuel (ATF) at the last meeting. Swapping of ATF from non-GST to GST basket was one of the agenda items at Jaisalmer. And the rationale was two-fold - A surge in the fuel cost for the aviation industry which is being denied credit for its inputs; and the second was to facilitate the industry under the UDAN scheme, which is to connect remote areas of India with the mainstream cities. Although fossil fuels were enveloped in the arms of GST, right in the beginning of the making of the law, but it was to be implemented only after the Council arrived at a consensus in the future. Strangely, the GST now inches towards its 8th anniversary but the States continue to remain a divided house of high-octane bickerers. Commendably, the Centre has mustered enough courage to let go ATF out of its Central Excise basket but the States are unwilling to ease their political stiffness and loosen their grip over the fossil fuels. This is notwithstanding their realisation that denial of input tax credit results in higher prices of these goods for the economy which is squirming in pain, inflicted by the intense run of inflationary pressure, persistent for the past two years. States' flatly tossing out this agenda item has clearly telegraphed a wrong message for the businesses which see fuel as one major component of high costs of production and also rendering of services. If India has to grow at a faster pace and grab a larger sliver of global exports, low fuel cost cannot be a coin-toss decision. States need to join hands, solemnly, with the Centre to ensure that the economy is not caught in the vicious cycle of hyper-sensitive macro parameters!

While addressing the media persons, the Union Finance Minister and the Chairman of the GST Council, Ms Nirmala Sitharaman, pointed out the appalling bout of news reporting in the recent weeks - unalloyed kite-flying and dissemination of half-baked news. Strangely, if there was no element of truth in such a news, somebody should have gone on record to rebuff it! One such news she probably hinted at, was the GoM recommendation of a new slab of 35% for the sin goods such as tobacco products, automobile and aerated beverages. Indeed, this came as a sinister bolt from the blue, and it sparked a pug-ugly hammering of the share prices of the listed companies. And the unlisted ones simply coiled in fear! Rather than reducing the overall burden of taxes on the consumers, creation of a higher tax slab defies not only senses and sensibilities but also countervails against the long-term interest of the GST system. Such a decision will be emblematic of the highest point of adhocism - too far away from the basics of the GST design! The fact that the compensation cess regime is going to evaporate by March 2026, and a GoM is already applying its mind - what to do beyond this period, it makes no sense to muddle the basket of tax slabs by adding one more, and that too, a bafflingly higher rate slab.

Secondly, it is equally urgent to define what elements may qualify an item as a 'sin good'! Mere loose talks and public perception should not be a guiding lamp for classifying an item as a demerit good. Scientific approach should be resorted to if one takes a leaf of legal wisdom from the last week's SC order classifying coconut oil in small packages as edible oil rather than cosmetic hair oil as classified by the Revenue during the Central Excise regime (2024-TIOL-123-SC-CX-LB). In this case, aerated beverages qualify as a non-sin good. Merely because it uses sugar as an input, it does not become a sin good. If it is so, all sweets, confectionaries, and many other goods having high doses of sugar, should be clubbed together! I sincerely hope that the Council would embrace only scientific methods to decide tax rates, and would also make all efforts not to truncate the pipeline of ITC, which alone would bring more businesses under the GST net. Availability of ITC alone would help amend some of the archetypal business practices of the industry, which nudge them to avoid paying taxes a la the recent insurance and banking cases booked by the DGGI! More revenue in the kitty should come from the growth of the economy rather than higher tax rates! Amen!