IS GST FADING AWAY IN ABSENCE OF LEGISLATIVE MANDATE, RATE OF TAX, PROPER CLASSIFICATION OF GOODS AND SERVICES, AND SET-UP OF IMPLEMENTATION STRUCTURE AT NATIONAL AND STATE LEVEL
As per ET report dt. 2-11-2015 under title ‘Setting Stage for Passage of GST Bill’, it was stated that the Govt. was not going to wait till the ensuing Budget to kick in reforms in various sectors. The Empowered Committee meeting which was scheduled to meet in October 2015, but the meeting was deferred. Yet, by pushing hard on its reforms agenda, the Govt. intended to set the stage for passage of GST Bill in Parliament. Earlier, the Empowered Committee of State Finance Ministers released 3 reports on (i) GST payment process dt. April 2015, (ii) GST Registration dt. July 2015 and (iii) Refund process dt. August 2015 inviting stakeholders to debate on the same and send in their suggestions as early as possible improving the above processes. The Committee is expected to meet on November 20, 2015. Meantime, the Chairman of the Empowered Committee Mr. K.M. Mani, who was a Finance Minister of Kerala, has since resigned from the post. Obviously, now, the Committee has become headless till new Chairman is elected. Therefore, the draft legislations on Central GST (CGST), State GST (SGST) and Inter-State GST (IGST) circulated amongst the States for consideration are on hold. The CGST will be framed based on the model GST law. Also the States were to draft their own GST based on the draft model law, with minor variation incorporating State based exemptions.
The drafts of the above proposed legislations are based on 3 principles – (i) definitional clarity, (ii) certainty in assessment and (iii) promoting ease of doing business. Contrary to these principles, as per TOI report dt. 14-10-2015, it is stated that GST Panel has black listed defaulting dealers and suggested compliance rating for them, which will hurt buyers who will be denied input tax credit. In this context, following pain points have been noticed in GST business process:
• The dealers purchasing goods from black listed dealers, will be denied input tax credit.
• There is no centralised registration for Central GST and integrated GST.
• Exporters will no longer be able to obtain non duty paid inputs and will have to claim credit / rebate at a later stage. Thus, blocking their funds thereby a hazard in the way of doing business with ease, as promised.
• Even a partial refund will not be made upfront and automatically when a claim is filed; the entire refund will be made after due processing at one go, within the set time period. Again, this procedure will harm the flow of input credit and doing the business with ease as promised.
As per further TOI report dt. 22-10-2015 and ET report dt. 23-10-2015, on return filing procedures following pain points have been observed:
• Monthly forms, multiple formats increase compliance requirements for taxpayers.
• Returns to be filed in GSTN portal, either by the taxpayer after registering himself or through a recognised tax return preparer (TRP).
• No documents to be submitted with returns. Documents to be shown only during GST Audit when conducted.
• No revision of returns to be allowed. Adjustments to be made in the next periods return, interest for payment shortfall to be auto computed.
• Taxpayers’ filing compliance increases in terms of periodicity, number of different forms and levels of details.
• GST regime to have 8 forms for filing periodic e-returns for Central GST, State GST and Integrated GST.
• There will also be provision for filing GST returns by non-resident taxpayers in Form GST R-5. Non-resident taxpayers could include taxi aggregators like Uber.
• Late fees is suggested for non-filers and late filers of returns.
• Where return is filed without full payment of taxes, it is recommended that the said return will be treated as invalid return. Also, once returns are filed, there will be no provision for revision of returns. Indeed, such provision is unheard of in taxation matters as well as it is contrary to the principle of doing business with ease, as promised.
It appears that Mr. Arun Jaitley, Hon’ble Finance Minister, sensed the above scenario and recently opined at the meeting dt. November 9, 2015 of the high-level committee for central assistance to States (Business Standard dt. 10-11-2015) and stated that on what should be the rate of GST, he said, ‘the lower the better’ he further stated that the Govt. was open to suggestions on improving the architecture of GST. “I am for a GST with a proper architecture, and not for GST with a defective architecture”, he added.
The above two very recent observations of the Hon’ble Finance Minister, clearly indicate that GST is not going to come so soon.
With the above latest background, I had an opportunity to go through the views of celebrities in the taxation field, namely, Shri Parthasarathi Shome and Mr. Dorab R. Sopariwala. Views of both these distinguished personalities are worth consideration. Hence, the same are reproduced below:
Let us share the views of Shri Parthasarathi Shome:
“I write today because I care about this tax, having assisted some 30 countries in its reform or introduction, becoming involved in India since 1995. Neither I will be shy in revealing that as a Chairman of the task force on tax policy and administration for India’s 10th Five Year Plan in 2001 that report recommended seamless tax on goods and services with parallel channels for the Centre and States. I made presentations to Mr. K. C. Pant, the stalwart Dy. Chairman, Planning Commission. Addressing me as a Professor, Pant replied solemnly that I should present the best and not think of downsizing for which others would be readily available.
Thereafter, much water has gone down the bridge. A decade letter Mr. Sinha, then Chairman, Parliamentary Finance Committee invited me to provide views on GST which are on record. The 2015 Parliamentary Select Committee on GST also invited me for my views.
The current GST proposals fail essential tests including Mr. Sinha’s Parliamentary Committee recommendations. The shedding occurred reflecting individual States’ interests. They bypassed National concerns while the Centre, appearing to be in a hurry, accommodated this watering down process. I wonder what Mr. K.C. Pant would have to say were he to witness these developments.
First, presuming that GST will occur on April 1, 2016, India is the first country I have experience with considerably less clarity regarding the intricacies in its proposed structure, transitional arrangements, administration and procedure and framework to contain inflationary ramifications. In other countries consultation on the actual proposals would have taken place in an open manner.
Second, one major characteristic of GST is that it should not distinguish between goods and service. Yet, in its GST, India is likely to continue with this distinction. The argument put forward is that services are currently be taxed at only 14 per cent at the level of centre; hence, any equality of rates between goods and services would raise the tax rate on services too much. But the solution is not to keep a separate lower rate for services, rather to consult, educate and arrive at understanding with business chambers and traders.
Third, States have been allowed to have bands in their GST rates. This debate started with States initially pleading they should be given some flexibility with rates in periods of emergency for temporary extra revenue. That then snowballed into full-fledged bands that even their prevailing VAT rate does not allow. Theoretically a band being a continuous line, the SGST could have infinite rates. I cannot imagine the impending impossible life of an inter-State dealer. Thus, GST could potentially go back to the future, reinvesting the sales tax era that prevailed prior to VAT.
Fourth, excluding petroleum products will robe GST of comprehensive Input Tax Credit (ITC). Relatedly, capital goods would continue to be given ITC only over two years and not in one year. Both these would result in considerable cascading or ‘tax on tax’ for business and, since they will certainly attempt to pass this downstream to consumers, the latter will face an array (if prices that would not reflect market demands accurately). Instead, the relative prices among all goods and services will reflect different cascading elements in them, reducing GST to a hybrid production / consumption tax. Exemption of alcohol for domestic consumption will also suffer from, and contribute to, similar limitations. Given that one State that would considerably enjoy protection of revenue from petroleum production is the Prime Minister’s own, this is the moment to rise above State specific interests and, in the national interest, include petroleum fully in GST, just as he displayed acumen by retracting his 2015 Land Acquisition Bill to reincorporate social impact analysis and States’ views.
Fifth, a one per cent inter-State trade tax will be retained and reviewed by GST Council. This tax will cascade since exporting States will retain its revenue without allowing ITC. Again, this will favour exporting States that are richer. Fiscal federalism comprises not just Centre-State but also inter-State equity. The Finance Minister could boldly remove this tax from GST framework, declaring it will not only be insufficient due to cascading but inequitable among rich versus poor States, just as he has accepted not to impose MAT on FIIs.
In sum, their remains much work to design a good GST. Otherwise, it can be called GST but neither will price distortions reduced, nor business decisions or consumption reflect demand-driven prices, nor administration and compliance be simplified, nor GDP be impacted positively, nor revenue excel, nor the world accept it in a global pantheon of GSTs.”
(Source: Business Standard dt. 16-9-2015)
Views of Mr. Dorab R. Sopariwala
“There is wide consensus in India that the GST is a good idea primarily because it stops the cascading of taxes, unites goods and services under one head, reduces leakages and brings more products and services into the tax net.
A strong proponent of GST, Mr. Adi Godrej has been saying for 5 years or more that it will add one per cent to India’s Gross Domestic Product (GDP). Others have been saying that it might add even two per cent or more. And what is the evidence? Probably, the 2009 study by the National Council of Applied Economic Research, which states that GDP could increase by 0.9-1.7 per cent if a comprehensive GST was implemented.
So, what is the problem? Well, the problem is the usual one. It is an awfully crafted tax; a constitutional elephant created in Committee. For the past 7-8 years, the GST Council has been trying to thrash out the problems. Already there are compromises galore and one is left wondering what other surprises are in store.
Some months ago, Finance Minister Shri Arun Jaitley said the best was often the enemy of the good and that we should not look for the ‘ideal’ GST in this first, hesitant effort. That is certainly true but it is equally true that the bad is also the enemy – and a mortal one – of the good. Which is what this GST Bill is. And the hoped-for increase in GDP was premised on a ‘comprehensive’ GST – not a moth-eaten, half-baked one.
The GST is, by definition, a destination – based tax. To add one per cent tax on inter-State transaction is to violate the very principle of the GST. Even Arvind Subramanian, the Government’s Chief Economic Advisor, has spoken out against it. The Government now proposes some tinkering (such as excluding inter-company transfers across States) but that will create its own problems and more avenues for ‘creativity’ in tax arbitrage. Does the Government need to succumb to this demand, which militates against the very principle of GST – particularly as States are now being fully compensated for the loss of CST for the preceding five years?
But the Gorilla in the room is that electricity, real estate, petroleum products and potable alcohol are out of the GST net. These ‘left out’ categories taxes account for probably 40-50 per cent of States’ revenues. Thus, industries does not get a set-off for, say, their use of petroleum products etc. and the cascading continues. It is just my convoluted mind or do others also think that these four sectors are the once that are cash cows for our political masters?
If India is to benefit fully from the GST, there must be a clear provision in the Bill that ensures these four products do come into the net – even if they do so several years later. Else, going by our record, it will never happen.
We are told that ‘all indirect taxes’ will be subsumed in the GST. India will be one common market. One country, one tax. But each State is allowed to have its own GST Bill and no law requires these laws to be in harmony. And there appears to be nothing to prevent a State from having a different rate from others or imposing a ‘temporary surcharge’, during, say, a financial emergency, which could last for years (like the ‘Bangladesh Refugee’ Surcharge, levied in 1972 on bus tickets in Maharashtra, which lasted forever 40 years!)
Further, what do we do if a State imposes an additional indirect tax under another guise ? And what happens if some States declined to give input credit on some products as they currently do under Value Added Tax, on the ground that input credit is a facility and not a right of a taxpayer.
The GST is an idea whose time has come. This is a big bang reform and the Government has to get it right and not wholly or in full measure but very substantially. A slipshod bill will result in the country paying a heavy price for this most significant attempt at reforming our indirect taxes and facing global challenges for the future.
While the GST is sacrosanct, April 1, 2016 is not. Getting it right is. So, let us debate, discuss and finally roll out a reform that the country can be proud of.”
(Source: Business Standard dt. 11-9-2015)
All in all, considering the above scenario and updated views of eminent experts, it is our humble view and suggestion that the Hon’ble Finance Minister Mr. Arun Jaitley, should himself get involved into the gamut pertaining to GST, and not fully depend on Empowered Committee and its reports, if the whole exercise is to be completed in a time bound schedule. Further, he should invite or pay visits personally across the country’s main business centers and all the interests and in particulars Tax Bars and its Apex body, namely, All India Federation of Tax Practitioners, Mumbai, for a large scale discussions, which are going to be affected by the proposed GST. In this context, the latest information is that Mr. Arun Jaitley while at Dubai remarked thus : “Without compromising on architecture, and keeping a general consensus between States and the Centre in mind, I think a discussion on GST is possible.” Viewed from this point of view, let us not fix in a hurry any deadline for its immature implementation. Of course, apart from the above, the Winter Session of the Parliament and the deadlock in the Rajyasabha, holds the key for further course of action in the matter. Notwithstanding this, let us be positive about the ensuing GST.