By Sumit Dutt Majumder
DOUBT is being raised in some quarters that the Constitution (122 nd Amendment) Bill on Goods and Services Tax, commonly known as the GST Bill, will not see the light of the day during this Monsoon Session of the Parliament. The Bill has been referred to the Select Committee of the Rajya Sabha chaired by Mr Bhupendra Yadav. Going by media reports, people from different sections have expressed reservations or raised doubts or put in demands on certain provisions of the Bill, from their respective perspectives or areas of interest. For the ease of discussion, these are serialized below in order of perceived importance of the issues:
1. The provision of 1% origin based tax to be collected by the predominantly manufacturing states should be done away with; – a demand made by almost all except of course the manufacturing states.
2. Alcohol should be brought within GST, at least Constitutionally; – a demand made by the Alcohol industry and some economists and experts as well.
3. ‘Entry Tax including Octroi’ should not be subsumed in GST; – certain State Governments making this demand on behalf of local municipalities and panchayats.
4. Purchase Tax on wholesale purchase of Food Grains and Cash Crop should not be subsumed in GST; – a demand by certain Food Grain and Cash Crop producing States.
5. 100% Compensation by Centre to the States for full five years; – a demand by all the States.
6. GST rate must not add to inflation, and it should even be pegged down lower than Revenue Neutral Rate (RNR); – a rate between 16% to 18% was also suggested.
7. Flexibility has been given to the States to vary the State GST rates within a band of GST. This band should be specified to be a narrow band, not wider than 1% (+ – 0.5%); – an observation by economists and other experts.
8. There should be a separate Dispute Settlement Authority, independent of the GST Council; – a demand made specially by legal experts.
9. Electricity Tax and indirect taxes related to Real Estate sector should be subsumed in GST; – a demand made by a few economists and tax experts.
Let us now look at the issues one by one.
(i) Origin based 1% (additional) tax: Some predominately manufacturing states were resentful that in the GST regime they would be losing the states’ share of GST (SGST) to the destination based consumption states, on interstate movement. Therefore, to please them the Bill has proposed imposition of an additional one percent origin based tax on all interstate movement of goods and services. This tax will be collected and kept by the manufacturing origin States. This provision at Clause 18 of the Bill is against the basic principle of GST that the State’s share of GST would accrue to the destination states. There is an element equity embedded in the destination based taxation policy, inasmuch as through such enrichment by the share of SGST, the destination based less industrialized states will be enabled to become industrialized over a period of a few years. In the current proposal, the input tax credit of one percent would not be available, and therefore with each interstate movement, there will be cascading of taxes leading to high inflation. It would be worse in respect of stock transfer where the 1% tax will keep on accumulating with each stock transfer leading to incidence of huge tax without any credit. Moreover, at each State border there will be inevitable compliance costs – both visible and the invisible. Thus, this tax would also undermine the growth of common economic market, one of the major objectives to be achieved through GST.
In fact, this method of compensating the manufacturing states through one percent origin based tax is not at all necessary, since in any case the Bill itself envisages compensation by Centre for the states in case of revenue loss.
(ii) Inclusion of Alcohol: The Finance Minister sorted out the issue relating to inclusion of Petroleum in a novel way. He defined GST in the bill as “any tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption.” Thus, the Finance Minister excluded Alcohol from the ambit of GST, even constitutionally, but not the Petroleum & Petroleum Products, and Entry Tax.
Keeping in mind the principle of keeping the input tax credit chain intact and also of widening of the tax base, Alcohol, a demerit goods should also be brought within the ambit of GST, as is proposed in case of Tobacco & Cigarettes, the other demerit goods. Further, as is being proposed for Tobacco by the Centre, State excise duty in addition to GST may be levied by the States on Alcohol so as to cover the duty difference between GST and the prevalent State Excise Duty on Alcohol. 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.
If the States do not agree to this proposal, the other way would be to give Alcohol the same treatment as is being given to Petroleum and its products, which will effectively come within GST at a later date only after the GST Council so notifies.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. 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. This will save the rigours of another amendment of the Constitution in future.
(iii) Entry Tax including Octroi: The demand for keeping Entry Tax outside GST is basically on the ground that its consequent abolition would adversely hurt the revenue interest of the local municipalities and Panchayats etc. But, it has to be appreciated the subsuming of Entry Tax into GST and consequent abolition of its separate existence would immensely help in breaking the trade barriers at each entry point of a State in the course of interstate movement of goods, and thus facilitating the important objective of GST in creation of ‘Common economic market’. In any case, the Centre has agreed to compensate the States for revenue loss on introduction of GST. Thus, while computing the revenue loss, this matter can also be specially taken into consideration:
(iv) Purchase Tax: A few agricultural states producing huge quantities of food grains, pulses, cash crops etc, are demanding that the purchase tax should be kept outside GST since at present a big chunk of their revenue comes from Purchase Tax, and in the destination based GST regime, the revenue would accrue to the destination consumption states. It may be appreciated that Purchase Tax is similar to Sales Tax except that the responsibility for payment of tax is with the purchaser. This situation arises in transaction of commodities like food grains, cash crops, etc. where the sellers (mostly farmers) are much more in number than the wholesale purchasers, and therefore it becomes logistically convenient to collect the tax from the purchasers who are few in number. Keeping ‘purchase tax’ outside GST will leave a loophole, and the States may impose ‘purchase tax’ on any commodity (food grains, agricultural/forest produce, mineral, industrial inputs, etc.), thus effectively keeping that commodity outside GST. Hence, this demand is not tenable.
(v) 100% Compensation: On the demand for compensation to the States on account of revenue loss after introduction of GST, the Centre was of consistent view that there was no such need. The Centre had argued that in any case, the Constitution provides for the setting up of a Finance Commission every five years or earlier if required, to examine the issue of fiscal transfers from the Centre to the States and their distribution among the States. The Standing Committee of Parliament on Finance, while dealing with the 115th Constitution Amendment Bill introduced in Parliament in March 2011, however recommended that suitable amendments may be made in the Bill providing for a built-in permanent compensation mechanism with a view to addressing the legitimate revenue concerns of States.
Accordingly, the Union Finance Minister made the necessary compromise by proposing to incorporate a provision regarding compensation in the Constitution at Clause 19 of the Bill. Reports suggest that the States have now demanded 100 percent compensation in all the five years, and not restricted upto the 3 rd year. 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 is no harm in Centre agreeing to give 100% compensation for all five years, in case of loss of revenue; – that would bridge the evident trust-deficit between Centre and the States. As mentioned, it may not be necessary to invoke this at all.
(vi) Low GST Rate: 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 opposed by the poorer sections of the taxpayers because of high GST rate. The GST rate would normally be 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. India cannot afford to have high inflation at this stage of the economy. 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 2.1%, while UK has two rates 20% and 5%. To start with, India’s GST rate should not go beyond 20% for standard rate and an appropriate lower rate may be fixed for items of common man’s use.
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 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.
I’m 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.
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 again lead to inflation, and it will affect adversely the service sector, whose contribution is the mainstay of our GDP. Therefore, barring a few identified services which are generally consumed exclusively 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%.
There is 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. In fact even now in the Central Excise regime input tax credit is not allowed to certain Petroleum Products. It’s worth making an attempt in this direction.
(vii) Flexibility to vary the State GST: On the States’ demand for more fiscal autonomy, the Finance Minister has proposed for allowing them to vary the SGST rate within a band. That’s how he earned the trust of the States. However, it would have been better if this elbow room to vary the rate of SGST was not given, for the simple reason that this would be against the principle of same tax rate in all the states across the country so as to have a perfect common economic market. There is more to it.
First, although the common perception is that this Clause has been added to provide elbow room to the States by giving them 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 is that although the common perception is that the band would be a narrow one, but the provision does 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, thisband 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’.
(viii) Separate Dispute Settlement Authority: This demand has legal connotations relating to the principles of natural justice. The Bill has proposed in the Clause (11) of the Article 279A that the GST Council ‘may decide about the modalities to resolve dispute arising out of its recommendation’. The question that arises is -should a person / body be the judge of its own action / recommendation? It’s advisable to have a separate and independent dispute resolution authority. The 115th Amendment Bill had dealt with the matter in an elaborate way at Clause 12 (Article 279B) of that Bill. It proposed an independent GST Dispute Settlement Authority ‘to adjudicate any dispute or complaint referred to it by a State Government or the Government of India arising out of a deviation from any of the recommendations of the Goods and Services Tax Council constituted under article 279A that results in a loss of revenue to a State Government or the Government of India or affects the harmonized structure of the Goods and Service Tax…..’
In the course of examining the issue in the aforesaid 115th Amendment Bill, the aforesaid Standing Committee of Finance concurred with the view of then Chairman EC and recommended for omitting the clause relating to setting up of the GST Dispute Settlement Authority (DSA). The Standing Committee noted that ‘it may be expedient to make a provision in Article 279A itself empowering the GST Council to decide about the modalities to resolve disputes arising out of its recommendations.’ It was thought by the said Standing Committee that the existence of a separate DSA would interfere with the States’ fiscal autonomy.
As the cause of action giving rise to disputes emanates only from the recommendations of the GST Council, it is imperative that the dispute is settled by a body independent of GST Council, to bring fairness and transparency in dispute settlement process. Further, the earlier Bill provided for appeal to Supreme Court in case any of the party to the dispute is aggrieved with the decision of the Dispute Settlement Authority, whereas the current Bill is silent on the appellate avenue. In the circumstances, it would be better if the Dispute Settlement Authority is made an independent body who would be in a better position to adjudicate the disputes arising out of the recommendations of another authority i.e. the GST Council. The structure of that independent today need not necessarily be the same as proposed in the 115th Constitution Amendment Bill of 2011.
(ix) Electricity Tax and Indirect Taxes related to Real Estate: From the initial stages of discussion on GST after the Finance Minister’s announcement regard introduction of GST in February 2006, it was agreed between the States and the Centre that Electricity Tax and Real Estates would be kept outside the purview of GST, to start with. Therefore, we see no discussions whatsoever in various deliberations on GST including Electricity Tax and Real Estates within GST. Now at the eleventh hour, it won’t be wise to bring these issues on the table.
Two more issues relating to the Bill:
Besides aforesaid issues, course-correction in two more issues will make the Bill a better one.
(a) Omission of Clause (29A) of Article 366: Given that ‘sale’ including ‘deemed sale’ will no longer be a concept to reckon with in the GST regime, where the only relevant concept would be that of ‘supply’, the Clause (29A) of Article 366 would need to be deleted.
This provision deals with ‘deemed sale’ in certain circumstances such as (a) transfer of property in goods otherwise than in pursuance of contract for cash, deferred payment or other valuable consideration, (b) transfer of property in goods involved in the execution of a works contract, (c) hire purchase, (d) transfer of right to use any goods, (e) supply of goods for deferred payment or other valuable consideration etc., and (f) supply of goods in a catering contract etc. The ‘deemed sale’ 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 including the transactions mentioned at (a) to (f) above. In view of Article 246A empowering both Centre and States to levy tax on supply of goods and services, the Clause (29A) of Article 366 may be considered for deletion as this would become redundant. It may be mentioned that the 115th Amendment Bill of 2011 had a proposal vide Clause 14 of that Bill to omit Clause (29A) of Article 366.
(b) Change in 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’ . 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’ appears to be a better option instead of defining services: “Supply of Services’ means any business activity which is not supply of goods.” This definition would provide more clarity.
The measure of a tax policy reform is largely defined by how it is implemented. Therefore, a few critical implementation issues are also discussed below.
(i) Consultations with Taxpayers: Since Centre and the States will have similar legislation and uniform procedures, the model laws and rules and the related business processes will have to be finalized soon. Further, before embarking upon a reform of this magnitude, the Government must release all important draft documents relating to the GST laws, rules and procedures in the public domain, and get the feedback from all stakeholders. The government will have to inspire the taxpayers, and earn their trust to make the GST reforms successful. Unfortunately, after the First Discussion Paper which was released in 2009, no worthwhile draft document has yet been put in the public domain. Similarly, no information has been shared with taxpayers about the functioning of the GST Net, the Common IT platform for all the stakeholders to work in the GST regime. The disclosure of documents and information would help the taxpayers in their preparations for the GST. Just about nine months are left for implementation of GST, and the taxpayers are still groping in the dark. Waiting for the Bill to be passed in Parliament before putting the documents in the public domain will delay the consultation process. Time available for the taxpayers to deliberate and give feedback would be rather short.
(ii) Administrative Structure: 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 administration. In this context, it may be mentioned that it is disappointing that except for some passing references to GST, the latest Tax Administration Reforms Commission (TARC) report submitted in February 2015 also does not throw any light with regard to administering the GST, although it was known that GST was slated for introduction in April 2016.
As for manpower deployment, the present strength of the State VAT administrations is much smaller compared to the strength of the Central Excise & Service Tax cadre, because 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.
(iii) Deputation of Service Tax officers from Centre to States: As mentioned above, 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. On the other hand, the officers of the Central Board of Excise & Customs (CBEC) have the experience in dealing with both goods and services.
It would therefore 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. 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 element of Services in GST.
(iv) Quasi-Judicial Proceedings on Technical Issues: The quasi-judicial proceedings 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. But, 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 respectively. 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 would have to 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 doing business’. Lot of cases in the existing Central Excise and Service Tax issues are pending at different stages of the appeal proceedings. One must avoid doubling of work by having separate quasi-judicial proceedings before Centre and States.
In the aforesaid paragraphs, an attempt has been made to put the doubts, questions and demands from various quarters in their perspectives. Certain suggestions relating to the implementation issues have also been discussed with the belief that a reform is as good as its implementation. While talking about reforms, one has to realize that in federal democracies, compromises do become necessary in formulating reforms so as not to hurt the cause of cooperative federalism. In the process, certain aberrations do creep in the reforms proposals. Under the present circumstances, the GST as proposed in the current Bill is no doubt a good one that would produce benefits in terms of reduced compliance costs – both visible and invisible, reduction in the price of goods and services, growth in GDP and creation of common economic market. Still, as discussed, there is scope to make it better. If the critical proposals perceived by many as aberrations are removed or modified, the GST Bill would surely sail through in this very monsoon session of Parliament. It’s history in the making. The country has waited for long. It’s time for everyone to join hands, do the doable course corrections now, and leave the rest for the GST Council to carry forward in near future.
[The author is former Chairman, Central Board of Excise & Customs; he is also the author of the book – “GST in India, its travails, tribulations and challenges ahead”.]
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