By B S V Murthy, former Member, CESTAT
PROPOSED model for GST appears to have been drafted by taking provisions from different legal provisions which already exist in various statutes that exist for collection of indirect taxes of different categories. It also appears that while adopting the provisions of earlier law, the disliked ones have invariably been taken and included. Whole country is looking forward to a GST regime which would make compliance simpler, reduce litigation and avoid disputes so that tax payment is not felt a burden. But if the model GST law comes into force as it is, this hope will remain a dream. Again it appears a good policy and a good taxation system will end up creating problems because of our policy making and implementation history.
An indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a manufacturer/traders/service providers) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax , which is collected directly by government from the persons (legal or natural) on whom it is imposed. The Model law proposed does not treat the tax payers as intermediaries since tax payment has no relationship to the collection of tax by the intermediary. While in the case of manufacture, the duty was on the activity of manufacture, collection was postponed to the stage of removal. In fact Excise duty is a British legacy. An alien government was not bothered about the convenience or the correctness of the method of collection of tax or the method of collection vis a vis nature of tax and therefore had introduced a system where duty had to be paid before the goods left the factory and government posted officers in each manufacturer’s premises. While presence of an officer and assessment and payment of tax before removal are no longer in the statute book, the law still requires Excise duty to be paid without any relation to the fact as to whether tax has been collected or not and whether the transaction is of such a nature that no consideration was to be received (e.g. removal to one’s own premises for further manufacture or process etc.). When several governments, parties have joined together and have agreed to come out with a new law, it presents a golden opportunity to simplify the law.
Time has come to propose a law for the honest tax payer and not to envisage all kinds of situations where evasion is possible and try to plug the same. When the law is complicated, it requires elaborate procedures and processes to enforce the same. Mistakes in following the procedures to the letter cannot be and in any case are not ignored. The real evaders of tax escape since tax administration is busy enforcing and ensuring that the procedures and processes are followed. Some of the proposals which can be considered to be against the basic features of indirect tax, namely it is borne by the ultimate consumer and collected by the intermediary and paid to the government are discussed below.
1. The law enumerates instances where supply without consideration can be taxed. This provision should have no place in the case of indirect taxes. It is felt that any supply of goods/services should be taxable only when it is supplied for consideration as per the definition given in the proposed statute. If this is done, no doubt interstate stock transfers and supply of goods for job work and supply for charitable purposes and manufacture for personal use and by the government for the use of government will go out of tax liability. In the case of stock transfer and job work, the liability will not go away but gets postponed. Therefore taxable persons may pay tax on their own in their own interest and it should not make much of a difference on what value he pays tax since ultimately it will be taken as credit while making further supply of goods/services. In the same manner, there is no need for a related person concept, since in the supply chain, at one stage or the other goods/services have to be supplied to unrelated persons and at that stage tax liability falls on the consumers which is basically the intention of GST. As regards job work, the manufacturer has to account for the inputs and show that they have been used for trading or production of output goods or service.
2. For determination of tax liability, the model law has elaborate provisions to determine the time of supply and determination of value. If it is proposed that the supplier should collect the tax and pay to the government and then it is provided that value would include all types of considerations which can be monetised it will make the process simpler and any amount received by a supplier of goods or service in relation to that transaction, he has to collect the tax and pay it to government. This will reduce enormous amounts of dispute that arise in implementation. It will also make the supplier an intermediary who collects the tax and pays to the government.
3. In India supplier of goods and services is always handicapped because if the purchaser does not pay, the legal remedy consumes enormous time and effort and even if a decree is ordered by the court, recovery is virtually impossible. What is needed to be remembered is the fact that if the tax rate is assumed to be 25%, the stake of a taxable person is 80% of the cum tax consideration and his stake is four times the stake of the government. Payment of tax after collecting consideration would at least save him from losing the tax paid to the government in the event of default by the receiver of supplies. It will be a truly indirect tax since supplier need not pay tax till he collects consideration. When we take the rate of tax into account it would be a substantial relief that the government can provide. This should act as a great incentive to businessmen to pay taxes honestly.
4. Experience of the tax payers in the past and the observations of the Tribunals on the quality of investigations and adjudication proceedings would show that a large number of cases arise because of interpretation of law but more often than not are considered as offences resulting in demands getting confirmed for 5 years (More in case of service tax). Evasion cases where investigation is thorough invariably land before the Settlement Commission. The fact that success rate of appeals filed by the tax payers is more than 80% and by the department is around 20% would support the view that tax departments have not been fair. In such a situation providing for pre deposit of 10% of tax, interest and penalty in situations where the tax payer would not have collected the tax itself would be totally against the basic philosophy behind collection of indirect taxes. Further, the law provides for normal period of limitation of 3 years and nine months for passing adjudication orders. This will result in further reduction of time available for a taxable person to present his case in defence since minimum time may be left by the officers between show cause notice and the order. This would result in more violation of principles of natural justice and more litigation. This also means that if a tax payer makes a mistake in collecting the tax, he has to pay tax and interest both of which would not have been collected by him and penalty on top. On the other hand if he has paid tax in excess without collecting the same, he is entitled to refund only for a period of two years without interest till the date of filing refund claim. We have to keep it in mind that most of the refunds now arise because of accumulated cenvat credit in the hands of exporters. Therefore, it may be appropriate to provide that as soon as it is found by the officers of the department at the time of visit/audit or scrutiny of return that a taxpayer has not paid tax which was liable to be paid or has taken the credit not eligible, he should be advised that he should start collecting the tax and pay the same or not take the credit in future pending investigation as to whether he had committed an offence in not paying or not. If there is no offence committed, there would be no liability for the past at all. This would be in line with the basic philosophy of indirect taxes.