OCTOBER 21, 2009

By S Sivakumar, CA

I had the opportunity to participate in a recent summit on GST, organized by a Bangalore-based chamber, and interact with some senior officers of the Central and State Governments, apart from representatives from the industry.

GST, as we all know, is an attempt to marry the taxes levied by the Centre and the States under a unified system. There is talk of a white paper being released later this month or in the first week of November 2009.  There is absolutely no doubt that GST is the need of the hour, at least in so far as the 'manufacturing' sector is concerned. From a currently applicable overall indirect tax dosage of about 22 to 24% (Central Excise of 9% plus VAT of 12.5% plus CST of 2%), the overall GST rate would come down significantly to about 18 to 20%.  Apart from the reduction of the taxes per se, on manufactured products, the manufacturing companies catering to a pan Indian market would also be able to significantly reduce their working capital requirements as the GST would have to be paid only at the point of the sale unlike the central excise duty, which has to be paid on clearance of manufactured goods from the factory. Under the GST regime, it is pure economics that would drive decisions regarding location of factories and not incentives offered by the States. This is great news for the manufacturing sector.

I, for one, am not disputing the economic logic of having a GST system in the country.

But, in our enthusiasm to introduce GST, we must not forget the lessons that we have learnt over the last few decades, in terms of the managing the central excise, VAT and service tax levies. This piece is an attempt to highlight some of the concerns and issues that Industry has, vis-a-vis GST, which the Governments must address while implementing GST.

GST must ensure a uniform law and rules, as between the C-GST and the S-GST which would a major concern from Industry. This, as we know, is easier said than done. Even after four full years of VAT, we still have major issues which differentiate one State VAT law from another. There is no uniformity even in respect of the VAT rates, with states like Gujarat and Rajasthan having already increased the VAT rates to garner more revenue. Under the GST, there has to be unanimity, not only as between the C-GST and the S-GST laws but also, as between the various S-GST laws. Most state VAT laws are extremely dealer unfriendly, including that of Karnataka, which can be termed as a progressive state. Most provisions in the Karnataka VAT Act, including mandatory penalties and re-assessments which can undertaken without any time limit, are obnoxious, to say the least. The whole purpose of GST would get defeated, if we are to see the current provisions in the VAT laws getting transitioned to the state GST law. The challenge would therefore, lie in having the States agree to a common legislation, based on the C-GST law, with common forms for filing returns, etc.

GST must minimize litigation and provide for a simple dispute resolution mechanism. This very important objective can be achieved only by drafting a law having simple definitions for 'goods' and 'services' and providing for simple appellate procedures. At present, most States including and notably Karnataka, have draconian provisions on appellate remedies and on suo-moto reopening of concluded assessments by the Commissioners.  Under the KVAT Act, dealers are required to deposit 50% of the tax amount appealed against, with the balance required to be paid in the form of an 'acceptable security'. Hence, in most cases, the dealer is dead and gone, before availment of appellate remedies. If this situation is to continue under the GST, the Industry would have every right to feel that the GST has brought nothing new.

The current dispute resolution mechanism under the Central Excise law is more or less OK and one would like to see these provisions being adapted in the State GST laws, as well. It is equally important to extend the Advance Ruling mechanism to all assessees, which could go a long way in minimizing disputes.

It now looks clear that most exemptions would go, under the GST regime. Export Oriented Units, SEZ Units and SEZ Developers could be hard hit, as under the current scheme of things, they are exempted from the levy of central excise (against the CT-3 procedure) on inputs and capital goods. Under GST, all exporters would need to go for massive refunds, both from the Central as well as, the State Governments, as most inward transactions including imports, would suffer GST. Most exporters have had very bitter experiences in terms of refunds from both Governments. Unlike the current provisions, where, refunds are given only to exporters, we need to have provisions for refunds arising out of mismatch in the cenvatting mechanism, where the inward GST could be significantly higher than the output GST, even in respect of domestic transactions.  The GST lawmakers would need to come out with simple refund rules and should consider, increasing the currently applicable limitation period of one year (Section 11B of the CEA) to at least two years.

Despite that the GST would be a common levy on goods and services, it would be disastrous, in my view, to have common rules and regulations regarding the implementation of the law, for goods and services. We cannot let go of the fact that, while goods are tangible in most cases, services are intangible. The Central Government has had a 65 year record of administering the central excise law on manufacture, while the States have had a 50+ year record in taxing sale of goods.  The central excise law has had some very obnoxious provisions including the powers to arrest, which have largely been misused.  As regards service tax, it is only for the last four or five years, that the Central Government has been seriously implementing the law on levy of tax on services and even over this short period, the service tax levy has managed to create some of the biggest controversies to date.  It needs to be ensured that, given the fact that service is a new concept in India, provisions related to prosecution, arrest, mandatory penalties, etc. are not used to harass service providers.

One biggest worry for service providers under the GST regime would be the manner in which the State Governments would implement the S-GST law, considering the fact that till now, pure service providers have been largely out of the purview of the State Governments.

And, how about the GST rate for pure services?  While, it seems clear that the manufacturing sector would stand to significantly benefit out of the lesser tax rates under the GST regime, it would seem that the services sector would be at a significant disadvantage in terms of the GST rates. Pure services which are being subjected to a tax rate of about 10% under service tax rules can now see the rates doubling under the GST regime. To this extent, the services sector which constitutes about 55% of the nation's GDP could have serious concerns related to the GST rates.

Yet other major concern that the Industry has, is on octroi and entry tax. Octroi and entry tax in lieu of octroi continue to be levied by most cities and States. Contrary to the initial expectation, it now seems that octroi and entry tax in lieu of octroi, would not get subsumed in GST.  This, if happens, would be a disaster, for sure. While it might not be possible to abolish multiple GST rates, to leave out entry tax and octroi would greatly undermine the very GST logic.

There are very serious concerns on the manner the GST law could get administered at the ground level. This is perhaps, the billion dollar question regarding GST. As we all know, the Central Revenue Department is yet to get over its hangover, in terms of administering the 65 year old central excise law, which we all know, is a levy on manufacture. We have already seen how badly the service tax provisions are being administered by a department filled in with people with a central excise background. Most senior revenue officers are still unable to differentiate between goods and services, sadly enough. Under the GST law, it would be a case for as much of unlearning of the central excise law as much as, for learning the new GST law. I wonder as to how the Revenue Departments would cope up with this challenge of the century. And, as regards the State Revenue Departments, the lesser said, the better it is.  With absolutely no understanding of 'services', one should expect a miracle to happen from these State Babus who are trained only in handling 'goods'.

A lot of investment in training the central and state revenue officers would necessarily has to happen over the next few months, if the administration is to be made ready to implement the GST.

In a city like Bangalore, the Large Taxpayers Unit ('LTU') has largely met the expectations of large companies and one would expect the LTU concept to continue under the GST regime, as well.

The Administration would also need to use computerization as a major tool for reducing the need for Industry to physical interact with the Departmental officials, which could go a long way in reducing the harassment to the taxpayers. Though we have seen some half hearted attempts in this direction, a lot needs to be done in this direction.

Industry is concerned about the carry forward of unutilized Cenvat credit and unutilized input VAT credit, as of April 1, 2010. The Government needs to be keep in mind the fact, that is has to honour its commitments to the assessees in terms of the credits availed and allow for the credits to be utilized, without any time frame or other restrictions, under the GST law, by incorporating the appropriate transitional provisions. Any attempt to curtail or restrict the carry forward of the Cenvat and input tax credits would be seen in a highly negative manner, by Industry and this is something, that the Government can surely do without.

Industry has major concerns on the manner in which inter-state transactions, stock transfers and on  movement of goods across States thro' check-posts, which is currently a night mare. The success of GST would get largely measured on the ease with which goods can physically move across check posts, for sure.

With the incidence of taxation shifting to the place of consumption, there are concerns on what would happen to the incentives offered by the various States which, in many cases, have formed the basis for locating manufacturing plants, over the decades including the very recent decision of Mr Ratan Tata to locate Nano car plant in Gujarat. The GST regime, per se, would benefit the States which consume more, as contrasted to States which produce or manufacture more goods. As we all know, the State Governments have been using industrialization based on fiscal incentives, as a tool for promoting social welfare including employment for the locals, especially in backward areas. The big concern is, under the GST regime, who would want to set up factories in remote and backward areas?

There are concerns on how B2C transactions would get treated, under the GST regime. While there is a lot of clarity on B2B transactions in terms of entitlement for credit in the hands of the receiver of the goods/services, for B2C transactions, it looks unclear as to the credit availment process, in the hands of the goods/services receiver, considering the fact that the consumer would not be having an outward GST liability.

There are major concerns on the treatment of currently running export incentive schemes like EPCG covered by the Foreign Trade Policy, under the GST. Many exporters could be in the process of importing goods under the EPCG scheme or the Served from India scheme and what would happen when GST gets introduced, is a concern.

 The Government needs to ensure that the provisions under the GST, on Cenvat credit both in respect of the C-GST and the S-GST are made available for all business purposes. The current provisions contained in the Cenvat Credit Rules and the State VAT Laws have succeeded in denying credit on a number of input services and goods. We have had the Apex Court commenting that the Cenvat credit provisions are badly drafted. The Government badly needs to learn from its mistakes arising out of bad drafting and ensure that, under the GST, credit is made availed across goods and services without any restrictions.

And lastly.... how would the Realty Sector get covered under the GST levy. It seems that the Government is working on introducing a statutory provision to include the first sale by the Developer/Builder as a taxable transaction, under the GST regime. If the Government is able to achieve deliver this master stroke, most of the current controversies surrounding the levy of service tax on sale of flats, would get a decent burial under the GST. The Realty Sector would be concerned on the manner it is covered under the GST.

Before parting...

++ The GST regime could throw up unique challenges and issues. For instance, talking of a State like Karnataka.... with a significant portion of the software exports happening from this State, will the State Government be happy with the prospect of refunding tens of hundreds of crores of rupees as S-GST refunds, with no corresponding collection of taxes from the software industry.

++ How would 'right to use' goods get taxed under GST. My guess is as good as anybody else's.  Currently, this is a no-man's land, as a leasing transaction for immovable property could get taxed either based on the state in which the agreement gets entered into or on the basis of the location of the immovable property. Under the GST, assuming that the lease agreement is entered into in Bangalore in respect of an immovable property situated in Maharasthra, which state would be allowed to levy tax. And, what would happen to the Supreme Court's decision in the 20th Century Finance case, wherein,  it had been held that, the place where the lease agreement is signed, would form the basis for levy of sales tax.

++ What would happen to the Sales Tax Tribunals established by the States. Will the GST law provide for common Tribunals to handle for issues arising out of C-GST and S-GST?  It would be good to have the Central Tribunals deciding cases on all GST issues including the S-GST issues.

++ Why is the Government not giving time for Industry, in the matter of implementing the GST, as contrasted to the Direct Tax Code? For a law that is proposed to be implemented with effect from 1-4-2011, we already have the draft code which is being hotly debated in Industry circles. For a much more complicated indirect tax law involving the States expected to be implemented from 1-4-2010, we don't even have a white paper, as of now. Why this step motherly treatment to indirect taxes?

++ Let's keep our fingers crossed till the White Paper gets released. But, it would be good to see the Paper addressing these major concerns of the Industry.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)