“In the interest of the prosperity of the country, a King shall be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity and prevent loss of revenue to the state.”
THE advent of GST is a very significant and historic step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State/UTs taxes into a single tax and allowing the set-off of prior-stage taxes, it would mitigate the ill effects of cascading taxation and pave the way for a common national market. There may also be revenue gain for the Centre and the UTs due to widening of the tax base, increase in trade volumes and improved tax compliance.
The GST would be applicable on the supply of goods or services as against the present concept of tax on the manufacture and sale of goods or provision of services. It would be a destination based consumption tax. It would be a dual GST with the Centre and UTs simultaneously levying it on a common tax base. The GST to be levied by the Centre on intra-State supply of goods and / or services would be called the Central GST (CGST) and that to be administered by the UTs would be called the Union Territory GST (UTGST).
The GST would apply to all goods other than alcoholic liquor for human consumption and five petroleum products, viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel. It would apply to all services barring a few to be specified. Tobacco and tobacco products would be subject to GST. In addition, the Centre would have the power to levy Central Excise duty on these products. The GST would replace the taxes currently levied and collected by the Centre –Central Excise Duty, Duties of Excise (Medicinal and Toilet Preparations), Additional Duties of Excise (Goods of Special Importance), Additional Duties of Excise (Textiles and Textile Products), Additional Duties of Customs (commonly known as CVD), Special Additional Duty of Customs (SAD), Service Tax, Central surcharges and cess so far as they relate to supply of goods and services.
The State taxes that would be subsumed under the GST are VAT, Central Sales Tax, Luxury Tax, Entry Tax (all forms), Entertainment and Amusement Tax (except when levied by the local bodies), taxes on advertisements, Purchase Tax , taxes on lotteries, betting and gambling, surcharges and cess so far as they relate to supply of goods and services.
The CGST and UTGST would be levied at rates to be decided by the Centre and States. The rates would be notified on the recommendations of the GST Council. The list of exempted goods and services would be common for the Centre and the States. Taxpayers with an aggregate turnover in a financial year of up to Rs. 20 lakh would be exempt from tax. [Aggregate turnover shall include the aggregate value of all taxable and non-taxable supplies, exempt supplies and exports of goods and/or services and exclude taxes viz. GST.] Aggregate turnover shall be computed on an all-India basis. All taxpayers eligible for threshold exemption will have the option of paying tax with input tax credit (ITC) benefits. Taxpayers making inter-State supplies or paying tax on reverse charge basis shall not be eligible for threshold exemption.
Small taxpayers with an aggregate turnover in a financial year of up to Rs. 50 lakh shall be eligible for composition levy. Under the scheme, a taxpayer shall pay tax as a percentage of his turnover during the year without the benefit of ITC. The floor rate of tax for CGST and UTGST shall not be less than 1 per cent. A taxpayer opting for composition levy shall not collect any tax from his customers.
The composition scheme is optional. Eligible taxpayers shall have the option of paying tax with ITC benefits. Taxpayers making inter-State supplies or paying tax on reverse charge basis shall not be eligible for composition scheme.
An Integrated GST (IGST) would be levied and collected by the Centre on inter-State supply of goods and services. Funds would be settled periodically between the Centre and the UTGST account to ensure that the UTGST portion of IGST is transferred to the destination State where the goods or services are eventually consumed.
Taxpayers shall be allowed to take credit of taxes paid on inputs (input tax credit) and utilise the same for payment of output tax. However, no input tax credit on account of CGST shall be utilised towards payment of UTGST and vice versa. The credit of IGST would be permitted to be utilised for payment of IGST, CGST and UTGST in that order.
However, the rollout of GST may encounter some difficulties for the reasons that GST has been split into CGST, SGST and IGST and the Centre as well as the State would be collecting the taxes. With the e-permit coming into play, the issue of bottlenecks at border check posts still remains. With majority taxpayers now with the State government, which is not attuned to the ease of business, the chances of return of the “inspector raj” looms at large.
THE pendency of refund and rebate at the State government is huge and the same is not known to sanction the same. This may lead to squeeze of liquidity from the business thereby increasing the transaction cost. A number of States are facing connectivity problems, which may lead to business getting affected as they would not be in a position to enter the transaction with ease. Units with multi-location in various states and having their units spread out along the length and width of the country, would face the problem of multiple registration and returns as each State would like them to register with them. This in turn would lead to increased transaction cost as well as problems for entrepreneurs and the Make in India effort.
Any order passed under the VAT Laws can be revised by the department even after five years (or six years in some States). These powers of revision don’t bring finality and closure to the tax implications of any transaction for a very long time. The procedure under the Central Indirect Tax Laws is different and provides an identical time frame to the taxpayer and to the department to file an appeal against any order of any officer of CBEC. This time limit is three months. However, the provisions relating to revision by the departmental officer have been retained in the draft GST Law at the insistence of the States. The GST Council needs to convince the States on this.
MOREOVER, the CAG is required to audit various industries/other business establishments as part of their work, which are contributing to the Consolidated Fund of India. As far as the audit pertaining to the CGST portion of the indirect tax collected by the Centre is concerned, the same would be tabled before the PAC of the Parliament. The same would be deliberated upon and responsibility fixed.However, the problem on the SGST part collected by the Centre or the CGST part or IGST part collected by the States would be as to where the CAG should table the report – in the State PAC or the Central PAC? Would the State fix responsibility on State officials for lapse on their part?
Besides this, in case of lapse pertaining to CGST on the part of the State officials, or complaints of harassment or integrity of the State officials, the Centre would not have any say and can only refer the matter to the State to look into and take action. The CBI or CVC would not have any jurisdiction over them.
The officials being under the control of the States, the Centre can do little for lapses on their part unlike the Central Government employees of the CBEC which are in the control of the Centre and where the CBI and CVC have full jurisdiction. This may lead to dilution and harassment of the trade.
The State government officials of commercial tax are not trained in audit procedures and lapses are bound to happen, as many matters are highly technical in nature. Such oversight collapses once the powers under IGST is delegated to the States and effectively leads to grant of power without any accountability. Constitutionally this may not be proper.
IGST is a Union levy as per Art. 269A. It has been decided to be cross-empowered to the State Government officers by the GST Council under pressure from States, contrary to the opinion of Ministry of Law. IGST is primarily for inter-state trade. The States would start fighting over the said trade and taxation leading to increased dispute and hence burden on the Courts; the inter-state water dispute is a living example. This would not only burden the Courts but also lead to uncertainty, and in turn would defeat the whole purpose of the scheme for a simplified tax regime. This would unnecessarily burden the trade and industry and would be against the concept of ease of business and against ‘One Nation, One Tax and One Market’ concept. Delegation of IGST powers to the States means empowering the originating State to adjudicate on revenue which belongs to the consuming State and the Centre. Such adjudication would take place after the monthly fund settlement has taken place for cross-utilisation of IGST against SGST and vice-versa. Therefore, from the perspective of designed philosophy also, IGST delegation to States does not seem to be rational.
The cross empowerment in Territorial Waters is another example of succumbing to undue demands of States. A supply arising in a Coastal State and reaching territorial waters is inter-State supply. Converse of such supply would also be an inter-State supply. It appears that Council has decided to classify the same supply as intra-State supply to continue with the old practice, which is not correct as there is no promissory estoppels in taxation law. Article 269A (5) does give powers to the Parliament to define, what constitutes inter-State supply; however, the use of such power to convert inter-State supply to and from territorial waters which is a Union Territory into intra-State supply in the coastal State may not be a fair exercise of such power. Even if it is assumed that such exercise of power is possible, there is a more difficult situation with supplies originating and getting consumed in the territorial waters. The draft IGST law has provided that supplies originating and consumed within the territorial waters be treated as intra-State supply in the Coastal State to which the territorial water touches.
Quite clearly such supplies are intra-State supply in the Union Territory. Even under Art. 269A (5), no such powers vests with Parliament. Supplies originating and getting consumed in the territorial waters, which is intra-State within the Union Territory cannot be deemed as intra-State supply in the Coastal State even by legislation, as no part of the sale takes place in the Coastal State and thus there is no nexus of any of the events of sale with the Coastal State. For a nexus to exist, at least some element of the four events namely, signing of contract, passing of property, delivery of goods or payment of consideration must take place in the State where it is proposed to be taxed. In the transaction under examination, no nexus exists with the Coastal State.
Further, the provisions of Art. 297 of the Constitution provide that the minerals in the sub-soil of territorial waters belong to the Centre. It would need to be examined whether converting supplies within Coastal Waters to intra-State supply in the Coastal State infringes on such ownership of the Centre, when the minerals are extracted as extraction and sale would amount to supply under GST law. Finally, Article 245 puts a bar on States from acquiring extra-territorial jurisdiction. There-fore, it may not be possible even by legislation to grant such rights to the Coastal States. Taxation powers constitute part of the basic structure of the Constitution and it may not be open even by legislation to convert intra-State supplies outside the Coastal State into intra-State supplies within the Coastal State. It will therefore be prudent to revisit the decision relating to Coastal Waters.
Further, GSTN has majority private stakes and has been manned by non-IRS officers at senior levels. There are security and financial concerns in GSTN, which could have been avoided by giving this work to DG, Systems, CBEC. CAG and Home Ministry gave already raised concerns regarding GSTN. For any business house, their financial data is secret and sacrosanct. The GSTN would be capturing all the data of a business house including the transactions, PL account and ITRs, etc., which is of great importance to the rivals. Such data is vulnerable at the hands of a private player having no alliance to the government. Compromise of the same may be detrimental not only to industry but the security of the country as well as a number of strategic manufacturing industries, which are into defence production.
THE adjudication of cases and the Constitution of Appellate Tribunal is another concern post GST. As far as the Centre is concerned, adjudication is being done up to the level of Principal Commissioners. The same is not the case in the States, where it is assessment and not adjudication. In the Centre, assessment is being done up to the level of Deputy Commissioner, besides the work of adjudication which is a quasi-judicial function and goes up to the level of Principal Commissioners. This is not same in the States. Thus, this would create legal problems as two sets of law may not be applied to trade/industry placed on similar grounds and may be ultra virus in the eyes of law of equality, as enshrined in the Constitution. In States, Commercial Tax Commissioners do not assess at all and play only administrative roles. Functionality of the tribunal would also be a grey area. Then the issue of equality of officers selected trough PCS (Group B Non Gazetted) and UPSC (Group A Gazetted) would also crop up.
The massive tax evasion in VAT in various States is also a cause of concern. The total collection of VAT across the States in 2015-16 was approximately Rs. 5,94,300 crore (as per the Finance Commission Report) and total collection of Central Excise and Service Tax in 2015-16 was approximately Rs. 5,00,000 crore. Central Excise is levied at the point of manufacture and VAT is levied at the point of sale. There is at least a 100 per cent value addition from the point of manufacture to the point of sale. Thus the VAT collection should have been at least Rs. 10 lakh crore.
However, the same is at Rs. 5,94,300 crores, indicating nearly 100 per cent evasion. In the present GST Council recommendations, 90 per cent assesses below Rs. 1.5 crore turnover are kept exclusively with the States. This shall lead to mushrooming of a large number of proprietorship concerns by taxpayers in order to remain below the threshold turnover or under-report their turnover to remain out of dual tax administration, thereby incentivising the dishonest taxpayer and generation of black money.
IN the European Union, when GST was being implemented from 2006-11, there was massive evasion of duties known as the “Carousel Fraud” (or the “Missing Trader” fraud) where there was a GST evasion of 200 million euros. This fraud was possible as different member-states of the EU could not cross check data which was being submitted to other states. Similarly, if 80 per cent of all assesses are kept beyond the control of the Central Government, the States would not be able to monitor linked transactions happening in other States being conducted with the purpose of tax evasion. With the recommended assesses base, the GOI will be collecting only Rs. 3,70,000 crore in comparison to the current Rs. 4,80,000 crore – a loss of Rs. 1,10,000 crore. The cause of concern is that there will be more tax evasion, as in any case, the tax-evading States will get compensation from UOI for five years with 14 per cent escalation each year, but from where will the UOI get the money to compensate the States!
However, the Indian Revenue Service (C&CE) as a committed service and CBEC as a committed organisation are determined to make GST implementation a big success story. This is because both IRS and CBEC have decades of successful experience of indirect tax administration, courtesy excellent expertise developed by them in handling complex nature of Central Excise duty on manufacturing of goods and Service Tax which was a brand new concept in India in 1994 (Services contribute 56 per cent of the Indian economy). The IRS & other officers under CBEC have handled the work of assessment, audit, adjudication, etc., very efficiently and effectively, which has been appreciated by the trade and industries all over India.
The officers have successfully changed themselves from pre-1991 era in a positive manner after liberalisation of the Indian economy in 1991-92 so much so that a recent survey conducted by FICCI and KPMG on behalf of the Government (with a sample of 45,000 plus participants) revealed that 72 per cent of the respondents saw perceptible change in the policies of CBEC, 45 per cent saw attitudinal change among senior functionaries, 51 per cent acknowledged improvement at the ground level, 76 per cent respondents found improvement in customs clearance process while 75 per cent said they were highly satisfied by the IT enabled services of CBEC. This proves the enthusiasm and readiness of CBEC and IRS officers to continuously change as per expectations of the public and the need of the hour.
The CBEC is doing its job of tax administration in quite an efficient manner which is also evident from the Cost of Tax Collection as displayed in the graphs.
Thus, India is much better than countries like Australia, South Africa, Russia Argentina, Brazil, Germany and even Japan in this regard.
India is not the first country to implement GST. We have several examples of other countries that faced this transition and found it to be not smooth, as teething problems will always remain. However, CBEC and its officers having years of experience and high level of expertise can achieve the results desired by the Government of India. CBEC is capable of handling CGST and IGST completely, as has been proved in the past, CBEC officers can handle all GST related work very efficiently and effectively including assessment, adjudication, auditing, etc. It has come up to the expectations of the taxpayers of India and all officers are committed to make GST a huge success in India.
In post GST era, the Centre and all the States need to work together and IRS and all officers under CBEC are confident that they can implement and execute GST in a very efficient and effective manner and bring out a smooth and successful roll out of GST.
The writer is from IRS 1984 batch, and is President, All India IRS (Customs, C. Excise & Service Tax) Association