By Sumit Dutt Majumder
NOW that the esteemed Select Committee of Rajya Sabha has tabled its report after examination of the 122 nd Constitution Amendment Bill, on the 23 rd of July 2015, and it has since been placed in the public domain, I thought of sharing my experience in this regard with the TIOL netizens. I was requested to appear before the Select Committee on the forenoon of 16th of June, 2015. Besides the Chairman of the Empowered Committee of the State Finance Ministers, the Revenue Secretary, Additional Secretary (Revenue), Member (GST) and other senior officers of the Central Board of Excise & Customs, four experts were also invited on that forenoon. Excepting me, the other three experts were eminent economists viz Dr. Abhijit Sen, former Member, Planning Commission, Dr. Rathin Roy, Director NIPFP, Delhi and Dr. Pinaki Chakraborty, Professor, NIPFP.
2. At the outset, Mr Bhupendra Yadav, the Chairman of the Select Committee, while welcoming the participants, requested them to offer their views on the GST Bill, one by one. As the presentations started, the Members of the Select Committee also intervened from time to time seeking clarifications. In the next few paragraphs, I would like to set out a summary of my submissions before the esteemed Committee for the benefit of the TIOL netizens.
3. I submitted at the outset that it was my belief that compromises become necessary in a federal democracy, and as a corollary, the compulsions of cooperative federalism more often than not lead only to incremental reforms, and not necessarily a big bang reform in one go. It was explained that the Dual GST model proposed in the Bill would be like a joint venture between Centre and the twenty-nine States. In order to make this joint venture successful, all the States will have to be taken on board. Therefore, out of the compulsions of federal democracy, the Finance Minister had to make certain necessary compromises in the structure of the GST.
4. While appreciating the inclusion of Petroleum and certain Petroleum Products, within the ambit of GST, constitutionally, I made certain suggestions for the inclusion of Alcoholas well within GST on the grounds of keeping the input tax credit (ITC) chain intact and widening of the tax base so as to bring down the Revenue Neutral Rate (RNR). My view was that Alcohol, a demerit good should also be brought within the ambit of GST, as was proposed in case of Tobacco & Cigarettes, the other demerit goods. Further, State excise duty in addition to GST could be levied by the States on Alcohol so as to cover the duty difference between GST rate and the prevalent State Excise Duty Rate, as has been proposed in the case of Tobacco & Cigarettes. Such imposition of excise duty in addition to the GST/VAT on demerit goods like Alcohol and Tobacco is prevalent in EU countries as well.
5. However, if the States oppose this proposition, my alternative proposal was to give Alcohol the same treatment as was being given to Petroleum and its products. In either case, the clause ‘except taxes on the supply of the alcoholic liquor for human consumption’ would have to be deleted from the definition of GST at Clause 12A of the Bill. Further, as has been done in the case of Petroleum and its products, the levy of GST on Alcohol may be postponed to a later date to be decided by the GST council. Till that time, the States will continue to levy State Excise duty and State VAT on Alcohol. The advantage would be that no further amendment of the Constitution would be needed, when the States agree to bring in Alcohol within GST at a later date. At this point, I also mentioned that Petroleum and Petroleum Products should be effectively brought within the ambit of GST at the earliest opportunity after introduction of GST.
5. While appreciating the subsuming of ‘Entry Tax including Octroi’ within the ambit of GST, it was noted that there were some concerns that the abolition of Entry Tax and Octroi would adversely hurt the revenue interest of the local municipalities and Panchayats etc. I explained the importance of subsuming of Entry Tax in breaking the trade barriers in interstate movement of goods, and thus facilitating one of the main objectives of GST i.e. creation of ‘common economic market’. Since revenue losses by the States would be compensated by the Centre, it was suggested that this element of revenue loss by local bodies on account of subsuming of Entry Tax may be particularly factored into the calculations of revenue loss by the States, which in turn could allocate the proportionate compensation to the local bodies.
6. The Clause (4) of the proposed Article 279A at sub clause (e) states that the GST Council shall make recommendations to the Union and the States on “the rates including floor rates with bands of goods and services tax”. I had made two observations on this Clause. First, although the common perception is that this Clause has been added to provide elbow room to the States by giving the power to vary the State GST within a band of GST, an examination of this Clause would make it clear that this power has been given both to the States as well as Centre. That is because Clause (4) states that the GST Council “shall make recommendations to the Union and the States on – ….” [Emphasis Supplied]. This provision empowers the States as well as Centre, and thus it is a neutral one. The second observation was that although the common perception was that the band would be a narrow one, but the provision did not specify so. Therefore, it may be wise to add the word ‘narrow’ before the word ‘bands’ in the aforesaid sub clause (e). In fact, this band should not be wider than 1% (+ – 0.5%). Otherwise, there may be too much of variation of GST rates across the country causing harm to the objective of ‘common economic market’.
7. On compensation to the Sates by Centre in case of revenue loss by the States after introduction of GST, I observed that the Union Finance Minister had made the necessary compromise by proposing to incorporate a provision regarding compensation in the Constitution at Clause 19 of the Bill. The States have now demanded 100 percent compensation in all the five years, and not restricted upto the 3rd year. I explained that it is my belief that in the GST regime there will be high tax buoyancy due to two factors – widening of the tax base and efficient technology based tax collection machinery with much less scope of tax evasion. Once that happens, it can be expected that after about three years, there will be no loss of revenue by the states, and thus there will be no need for compensation. Therefore, having agreed to give compensation, there was no harm in Centre agreeing to give 100% compensation for all the five years, in case of loss of revenue; – that would raise the comfort level of the States, and bridge the evident trust-deficit between Centre and the States.
8. On the proposal to impose one percent origin based tax to be collected by the origin states in respect of interstate movement of goods and services in addition to the Integrated GST (IGST), it was pointed out that this tax would be against the basic principle of GST that the State’s share of GST would accrue to the destination States. Further, this provision was the sore point for the trade and industry as well, for the simple reason that there won’t be any input tax credit for this tax. This denial of credit will lead to cascading of taxes and consequent inflation. It would be still worse in the case of Stock Transfer where the one percent tax on supply (and not ‘sale’) will keep on accumulating with each transfer, thus increasing the tax incidence to 6% where there are six transfers. Moreover, at each state border there will be inevitable compliance costs – both visible and invisible. Thus, this tax would also undermine the growth of common economic market, one of the major objectives to be achieved through GST.
9. In this context, it was also explained to the esteemed Committee that there is an element of equity embedded in GST. GST being a destination based consumption tax, there will be enrichment through SGST of the less industrialized consuming States, and with such enrichment, the less industrialized states would spend on development of infrastructure in their respective states, which in turn would attract industries there. Consequently, the industrially backward consumption states would also become industrialized over a period of time, thus reducing poverty in that state and improving the purchasing power of people. It was also suggested that in order to raise the comfort level of the predominantly manufacturing States, it may be specifically mentioned in the Compensation scheme that this factor of loss of revenue may be specially taken into consideration while calculating the compensation amount for that state.
10. The need for a separate Dispute Settlement Authority for settling disputes between Centre and States, and among States, that would be independent of the GST Council was emphasized. As the cause of action giving rise to disputes would emanate only from the recommendations of the GST Council, it was felt imperative that the dispute is settled by a body independent of GST Council, to bring fairness and transparency in dispute settlement process.
11. It was also explained to the esteemed Committee that there was a need to change the definition of services. The Bill, vide clause 14 proposes to insert clause (26A) in Article 366 to provide a definition of ‘services’ which reads as under:
“(26A) ‘Services’ means anything other than goods;”
Defining ‘Services’ as ‘anything other than goods’ appears to be too wide. It might lead to litigation in interpreting the word ‘anything’. It is evident from the very definition of GST that the only activity that would be relevant in the GST regime is the ‘supply’, – ‘supply of goods’, ‘supply of services’ or ‘supply of both’. Therefore it would be better to define ‘Supply of Services’ instead of ‘Services’. The Committee was informed that in terms of the European Community (EC) Council Directive of 2006, “Supply of Services shall mean any transaction which does not Constitute a supply of Goods”, Taking a cue from that, the following definition of ‘Supply of Services’ was suggested, which appeared to be a better option instead of defining services: “Supply of Services’ means any business activity which is not supply of goods.”
12. A note of caution was sounded on fixing the GST Rate stating that it must not add to inflation. The way to keep the GST rate low was also explained. The GST rate is a very important factor in earning the trust of the tax payers. Howsoever efficient the GST machinery may be, the tax-payers won’t welcome GST happily if the GST rate is kept high because that will lead to high inflation. Even in developed countries like Australia and Canada, GST was initially opposed by the poorer sections of the taxpayers because of high GST rate. It was explained that the GST rates are normally based on the Revenue Neutral Rate (RNR). In the present circumstances, the RNR is expected to be high because Petroleum and its products and Alcohol have been kept out of GST and consequently, the tax base would shrink. But, a high GST rate in line with high RNR would definitely lead to high inflation. Therefore, my submission was that the esteemed Committee may advise the Government not to go strictly by the RNR while fixing the GST rate. The newspaper reports suggested first a RNR of around 27%, and later it was reported to be somewhere between 20 and 23%. Internationally, GST rate normally varies between 16 to 20%, with exceptions like Australia at 10%, New Zealand at 15%, Japan at 8%, Germany at 23% and Malaysia at 6%. France has four rates, the highest 20% and lowest 2.5%, while UK has two rates 20% and 5%. To start with, India’s GST rate should not go beyond 20% for standard rate and perhaps 14% for reduced rate.
13. As for Food and Food products , at present these are mostly exempt from Central Excise duty, but these are charged to State VAT. As a welfare measure, all food items of use by poor, including some of the packaged food of essential items may be exempted from GST. The packaged food at higher end for use by the upper middle class may be charged at the reduced rate of GST. There may not be any food item at standard rate of GST except for certain special items identifiable to be consumed by the rich people only. It was explained that I was laying emphasis on low GST rate for food items, because this is the most sensitive issue for the poor and middle class. As is commonly known, the poor spend the highest percentage of their incomes in food and food products. Therefore high rate of GST on food items would hit the poor hard. Whenever we have seen agitation against GST across the world, it has been mainly due to increase in price of food and food products after introduction of GST.
14. As for the service component of GST, the consumers are currently paying Service Tax at 14%. The services sector contributes around 60% of the country’s GDP. In the GST regime, if the standard rate, which can be expected to be at least 20%, is applied to the Services as well it will lead to inflation, and it will affect adversely the service sector, whose contribution is the mainstay of our GDP. Therefore, it was submitted that barring a few identified services which are generally consumed by the rich, all other services may be charged to the reduced rate of GST which can be expected to be somewhere near the present Service Tax rate of 14%. I deemed it important to bring these aspects to the notice of the Select Committee, since peoples’ support is essential in introducing any big tax reform, and if the introduction of GST leads to price rise and inflation, the people will oppose it tooth and nail.
15. I further explained that there was a way to keep the GST rate lower than the RNR and yet achieve the targeted revenue , by simply denying the input tax credit of some identified items at the intermediate stage of the flow of goods. This will no doubt give rise to a little amount of cascading of taxes – but that can be managed in the overall interest of keeping the GST rate low, while not losing much revenue. It was pointed out that even now in the Central Excise regime, input tax credit is not allowed to certain Petroleum Products.
16. While talking about GST on Small Business , it was suggested that very small business should not be brought within GST, since that is not at all cost-effective, and administering them is cumbersome. An ideal GST law would demand that the thresholdshould be very low and the exemptions should be kept minimum. But pure economic laws cannot always be applied in the taxation matters of a developing economy due to many factors. The present limits in respect of Central Excise, Service Tax and State VAT are Rs. 1.5 crore, Rs 10 lakhs and Rs. 3 to 5 lakhs respectively. It was explained that the threshold limit for GST would decide whether we want to bring Small Business as well within the ambit of GST. The VAT/GST specialists across the world maintain that it is not at all advisable to bring the Small Business in the GST.
17. Reportedly, the negotiations were going on between Centre and the States on the threshold; – Centre wants a threshold of Rs. 25 lakhs which would deservedly leave a good number of Small Business outside GST. However, the States are demanding a threshold ofRs. 10 lakhs. It was pointed out that if the States’ demand is accepted, a huge number of very small business will come within GST, and it would be chaotic to administer them.
18. The Clause (29A) of Article 366 of the Constitution deals with deemed sale in certain circumstances. The ‘deemed sales’ will have no utility once both the Central and States Governments are empowered to levy tax on the entire value chain of goods and services. In view of Article 246A empowering both Centre and States to levy tax on supply of goods and services, it was my view that the Clause (29A) of Article 366 may be considered for deletion, as this would become redundant.
19. Considering that the implementation issues would be as important as the Policy Formulation issues in a big tax reform like GST, a few critical implementation issues were brought to the notice of the Committee . These are summarized below.
20. It was submitted that even as the target date for implementing GST is 01.04.2016,there has been no serious consultation so far with the Trade and Industry and other taxpayers and stake holders. With just a few months to go, the taxpayers are completely unaware of the proposed laws, rules and procedures etc. for the GST. They are in the dark even on the common IT portal, the GST Net with which they are supposed to interact for the basic functions – i.e. Registration, Payment of Tax and Filing of Return. It is the taxpayers who would be in the best position to provide feedback and state where the shoe is likely to pinch. On the urgent need to start interactions with the taxpayers, I explained that there are a few generally accepted precepts for implementing tax administration reforms. The most important precept is that before embarking upon a major tax reform, the government must bring out a high quality consultation document for extensive consultations with all stakeholders. Even the draft laws and rules arising out of the reforms must be put in the public domain well in advance. It is also important to get an Impact Assessment (IA) done for the proposed reforms, and the draft IA should be shared with the taxpayers for their feedback. After finalizing the laws and rules in consultation with the stakeholders, the Government should publish ‘Guidance on Application of Law’ and publicize it. The government has to win the taxpayer’s trust by starting ‘Road Shows’explaining salient features of the tax reforms, and pointing out how it would help the taxpayers in doing business with more ease. These Road Shows should start a few months before the reforms set in, and continue all throughout the first year of implementation of reforms, so as to get the feedback from stakeholders continuously even after starting the implementation.
21. It was pointed out that after the release of the ‘First Discussion Paper’ by the EC in November 2009, one has not seen any other important GST draft document in the public domain till date. A few draft documents of utmost importance would be ‘Place of Supply of Goods and Services Rules’, the draft model GST law and the documents relating to the processes like Registration, Return, Audit, Refund etc. It was submitted that the feedback from taxpayers and other stake holders about deficiencies, if any, would help the tax administrations immensely. Similarly, the stakeholders would need to know more about the GSTNet, the Special Purpose Vehicle that would provide the common IT platform for all the stakeholders to work on in the GST regime. That would help in their preparations for working in the GST scenario. It was further submitted that the issues relating to the preparations for implementation of GST as explained in foregoing paragraphs showed how the basic precepts for implementing tax administration reforms were missing so far.
22. Further, it was explained to the esteemed Committee that the administrative structure of the Central GST and State GST authorities will have to be uniform. Considering the vast coverage of GST across the cities, small towns and rural areas, both the Centre and the EC should jointly finalize the administrative structures on priority. Based on that, the infrastructure and logistics for functioning of the different field formations will have to be kept ready well before 1.4.2016. Nothing much has been heard in these areas relating to the GST administrative structure. In this context, it was also mentioned that it was disappointing that except for some passing references to GST, the latest Tax Administration Reforms Commission (TARC) report submitted in February 2015 does not throw any light with regard to administering the GST, although it was known to the Commission that GST was slated for introduction in April 2016.
23. On manpower deployment, it was pointed out that the present strength of the State VAT administration is much smaller compared to the strength of the Central Excise & Service Tax cadre, because the current work load on Central Excise and Service Tax is much higher than that of State VAT. The manpower deployment would therefore be an issue, particularly for the States GST Administration. There is also a specific problem for the State Officers in that they have no experience whatsoever in dealing with services, the Service Tax having been in the exclusive domain of the Centre. It was elaborated that the State VAT officers have been dealing with the taxation of only goods (Sales Tax), and they have not dealt with services, which are intangible and therefore more complicated with respect to interstate movement of services. On the other hand, the officers of the Central Board of Excise & Customs (CBEC) has the experience in dealing with both goods (Central Excise) and services (Service Tax).
24. It was therefore suggested that it would be administratively expedient for the Centre to send some officers from CBEC at all levels, who have the experience of working in Service Tax, to the States for the initial period of say three to five years. It can be expected that by working shoulder to shoulder with the experienced CBEC officers, the officers from the States would learn better, and over a period of time, they will also be fully conversant with the taxation of Services in GST.
25. It was explained that the Dispute Resolution arrangements with respect to technical issues between the taxpayers and taxmen attain particular significance because there will be two authorities – Central GST authority and State GST authority, and they will have to work in tandem. The process of dispute resolution will start with the issuance of show cause notice by the taxman to the taxpayer. Since the two authorities for CGST and SGST would be governed by two different Acts i.e. CGST Act and SGST Act, the show cause notices for the same violation of law or rule will have to be issued by the two authorities independently. It was suggested to the Committee that to ease the agony of the taxpayers,the adjudication proceedings followed by the appeal proceedings should preferably be done at one place by a Bench of Adjudicators and a Bench of Appellate Authorities.The Bench could comprise one from the CGST authority and the other from the SGST authority. This will ensure that the taxpayers do not have to represent / appear before two authorities separately either at the adjudication or in appeal proceedings. Orders emanating from those Benches could be made applicable to both the CGST and the SGST authorities. The details could be worked out. This will add to the cause of ‘ease of dong business’.
26. As for the benefits that would flow out of the GST in the proposed format, it was explained that first of all the price of the goods will come down due to two factors . First, by doing away with multiplicily of taxes, the things that would go are multiple collection points, and hence multiple points of contact between taxpayer and taxman. This will reduce compliance cost of taxpayers – both visible and invisible. Secondly, by subsuming different taxes, the GST rate will definitely be much less than what a consumer pays today individually because of all these separate taxes like Central Excise, Service Tax, States VAT etc. Such reduction of cost will leave more money in the hands of the investors who would then invest more, leading to more employment and more growth of GDP . Thirdly, by breaking the barriers of Entry Tax and different VAT rates at different States, the GST will ensure free interstate movement of goods and services – a genuinecommon economic market for the entire country.
27. I finally said that the Indian GST, although still an ‘imperfect GST’, will be a good GST that India would be proud of. A purist may not like these compromises. But, it is a bitter truth that compromises do become necessary for furthering the cause of cooperative federalism in federal democracies . The question is – how long can the country wait with endless negotiations between Centre and the States. It’s time to move forward with an ‘imperfect GST’ and let the all powerful GST Council make further course corrections at the earliest opportunity so that we can quickly move to get the perfect GST in the near future. Today’s imperfections in the Dual GST model can surely be corrected when the unfounded fear of the States about loss of revenue is dispelled by virtue of tax buoyancy which would definitely happen with wider tax base and technology based efficient tax collection machineries in the GST regime. Before concluding, I pointed out that a perfect and ideal GST has not yet been practiced in any federal democracy, and that the GST proposed to be implemented in India would be a good GST with aspirations for a better GST, with a proactive role of the GST Council, very soon.
(The author is TIOL Consulting Editor & former Chairman, Central Board of Excise & Customs and he is also the author of the book – “GST in India, its travails, tribulations and challenges ahead”.)