In the case of Radha Krishna Industries v. The State of Himachal Pradesh, during the course of hearing on 6.4.2021 the Honourable Supreme Court observed that the taxman couldn’t just attach assets at the drop of a hat and that the tax officers create huge demands in the absence of any accountability. The honourable Court also observed that provisional attachment is draconian and pre-emptive strike. The Honourable bench comprising Justices Sri D.Y. Chandrachud and Sri M.R. Shah said: “The Parliament had intended the GST to be a citizen-friendly tax structure… the purpose of the Act is lost in the manner in which it is enforced in our country.”
The success of tax system anywhere lies in its simplicity. We all know that even in 400 B.C., Kautilya (better known as Chanakya) in his “Artha Sastra” specified the points and rates of tax leviable on various goods. There were import and export duties in the name of “sulka”, octroi and gate tolls were levied in the name of “dwarabahirikadeya”, road cess in the name of “vartani”, royalty in the name of “prakriya” etc. Sales tax on goods in modern India as a fiscal measure is the outcome of the last century only. Government of India Act, 1935 has for the first time empowered the States to impose sales tax on goods. The erstwhile Bombay State was the first State to impose a selective tax on the sale of tobacco in the year 1938. This was followed by levy of tax on the retail sales of petrol and lubricants in the year 1939 in Central Province and Berar (now, Madhya Pradesh). However the erstwhile Madras State was the first State to impose a multi-point sales tax on goods in the year 1939 in the form of ‘General Sales Tax’. Subsequently all the States had levied General Sales Tax. There was also Central Sales Tax. Service tax came to be imposed in the year 1994. People did not feel any compliance burden for centuries in relation to the levy of the above taxes.
Ease of compliance for tax professionals
One of the nine canons of taxation is ‘simplicity’. The provisions should be so simple that the tax payer can easily understand them and without the help of an expert. Complicated and confusing tax provisions are good incentive to evade tax. About 90% of the tax professionals, particularly practitioners doing original side work and large number of GST tax payers have been accustomed to ‘sales tax’ law and procedure, which has been in vogue for more than eight decades, compared to service tax law and procedure, which has just completed two decades. Tax Professionals expected that the GST law and procedure would be more akin to the erstwhile sales tax law and procedure, with which they are all quite familiar. However to their dismay, the GST law stepped into the shoes of service tax law and procedure. We can understand that ‘supply’ has to be substituted for ‘sale’ for Constitutional reasons, but by and large, the time tested sales tax procedures, known to every one for decades ought to have been retained for better compliance and success. In general, tax professionals have not been feeling ease of compliance. Naturally the new law is not citizen-friendly as observed by the Honourable Supreme Court. Several issues and concepts have been made highly complicated. As on 13.4.2021, Notifications numbering 599 have been issued (Central tax 333, Central Tax –Rate 111, IGST 26, IGST Rate 114, Cess 3 and Cess Rate 12). All stake holders are expected to study and understand these. Frequent changes in the tax system oppose the canon of certainty. Not even a single Notification has been issued after introduction of the VAT system of taxation in 2005 till 2017 in respect of Andhra Pradesh/Telangana Value Added Tax Acts. On a global analysis of about 8 years, the 2013-World Bank Report says that the economic growth appears to be more strongly linked to reducing the administrative burden on businesses than on reducing the rates of tax. Such is the effect of compliance burden. Draftsmen of the statutes and notifications must consider the level of stakeholders, who will be using them. Complexity in the tax system distorts economy. Are there complexity costs in the present system? We should not ignore the fact that simplification results in greater compliance and lower compliance costs as well lower administrative costs. It is time to ponder on whether we have ‘simple’ GST structure or not.
Some compliance issues
Real Estate Developers used to pay just 1% or 1.25% or 1.5% VAT, as the case may be and 4.5% Service tax. Compliance was the easiest and litigation was minimal. In GST law one has to go through several pages of Notifications and Circulars and comply with several conditions and dates. Naturally at some point, tax payer is caught for non-compliance or wrong compliance, may be unintentionally. Is it necessary to have such extensive knowledge of several GST provisions and conditions including the provisions in RERA and several Government schemes just to pay indirect tax.
Under the erstwhile General Sales Tax regime and VAT regime, there used to be contingent purchase tax. It was payable on the purchase of taxable goods, only when there was no possibility to pay corresponding output tax. Under VAT regime, hence, it was not available for tax credit. It is a cost. Payment of tax on RCM basis for example on raw Cotton and Tobacco leaves would be in the nature of tax investment. While such tax paid on RCM basis is available for credit and thereby became pass-through tax, there is no place for levy of tax on RCM basis on such commodities. Even before the goods are supplied, tax became payable, thereby eating away the investment. Such levy opposes the canon of taxation –‘convenience and ease.’
An impression has been widely formed that Advance Rulings are more pro-revenue and sometimes different State authorities have given conflicting Rulings. Instead of getting the solution, tax payers are more confused.
For paying tax at the lower rate or for claiming exemption, several conditions have been specified in the Notifications. It has become impossible for the ordinary tax payers to ascertain the conditions as and when a transaction has to be done. Any innocent violation would result in the levy of tax at the higher rate and the tax payer would be put to untold misery due to the cost involved. In the erstwhile Sales Tax regime, such conditions are a rarity.
First appellate authority used to remand the matter to the assessing authority, for de novo enquiry and passing the order afresh in the erstwhile regime. In the GST scenario, appellate authority cannot refer back to the assessing authority. In the indirect tax scenario lot of verification of documents has to be made for making assessment. Assessing authority used to have 4 to 5 sittings for that purpose and it is assisted by adequate staff. However the present appellate authority is hardly assisted by a first level gazetted officer and two assistants, who are always busy with regular appellate work. Further tax payer and tax professional are required to appear for verification of documents several times in the office of the appellate authority, if it intends to modify the assessment order. Added to this, offices of appellate authorities are situated at a distance of even 400 KMs. On the contrary, if the matter is referred back to the assessing authority, it is easier because the authority is located within 40 to 50 KMs. The present procedure of modification by the appellate authority has been causing severe burden both to the appellate authority and to the tax payer/tax professional.
If the recipient has not paid the consideration within the 180 days to the supplier, he has to reverse the credit claimed. For this purpose, he has to keep track of the transactions. It is an issue between two private citizens and the Government has no role. It is an extra compliance burden on the recipient.
Assessment notices and assessment orders are running into 20, 30, etc., pages, while under the earlier sales tax/VAT regime, they are generally from 2 to 6 pages, unless large number of facts are involved. For example, a tax payer pays tax @ 5% instead of @ 12%. The notice may just explain in few lines, why is it taxable @ 12%. There is no necessity to extract provisions running into 20 or 30 pages or bring facts which are neither relevant nor material. If the provisions are to be extracted they may be shown in Annexure and not in the body of the notice and order, so that the crux of the issue is not missing. It is consuming lot of time to go through several pages.
Another one relates to transport of goods. For example, a goods vehicle commences journey from Tamilnadu and proceeds towards Assam. In Maharashtra, the vehicle and goods are inspected by the Officer. It results in levy of tax and penalty. According to the authorities, appeal has to be filed in Maharashtra, where the order has been passed. It results in waste of time, money and energy. Some tax professional has to be found in that State for dealing with the appeal. In some States, there was a provision under the erstwhile law to refer the case by the inspecting officer to the assessing authority of the seller, who moved goods for taking required statutory action. If at all any tax and penalty have been levied, appeal is filed in the State of the seller only.
In the case of change in the rates of tax, Notifications may be given effect from the first day of the succeeding month instead of from a date in the middle of the month, so that changes in software and return filing would be easier.
Dealers and tax professionals were familiar with ‘assessment (provisional and final) and ‘assessing authority’ and nothing more under the erstwhile law. The terms ‘determination’, ‘adjudicating authority’, ‘proper officer’, ‘recovery’, ‘many proforma notices’ etc., are foreign to them. Five to six sub sections served the purpose of assessment, including provisional assessment and the best judgment assessment in the erstwhile tax regime for nearly eight decades. Courts never found fault with such few provisions and Revenue had no complaint. There is necessity to simplify the assessment procedure by pruning the present provisions in tune with the erstwhile provisions. Even the State Tax Officers have been feeling uneasy with such provisions.
There was no concept of ‘time of supply of goods’ in the sales tax/VAT/CST regime of about eight decades and there was never any issue on this subject. Dealers used to declare the turnover in the month in which the goods were delivered. Introduction of ‘time of supply of goods’ into GST law therefore may not be necessary. More and more conditions mean, burdensome compliance and possible penal action for innocent violation. Unless circumstances seriously warrant, payment of tax shall be free from conditions.
Fortunately payment of tax on the advances received for the supply of goods has been omitted. But still tax has to be paid on the advances received in relation to supply of services. For this purpose, tax payer has to keep the track of events till the supply is completed. It is not convenient to have tax payment even before the supply of service has commenced. One of the nine canons of taxation is ‘convenience or ease’. As per this canon, tax payer is required to pay tax at such a time that it affords to his maximum of convenience. There need not be any discrimination between supply of goods and supply of services, because what has been received in both the cases is ‘consideration’ only. Such condition results in substantial compliance burden. In any case, tax has to be paid on the entire consideration, whether received or not from the recipient.
GST Practitioners have to pass the examination conducted by NACIN within a specified period. It is felt that such an examination has become infructuous. Instead of conducting such examination, it is desirable to conduct one-week long GST training course periodically to the GST Practitioners in all the States, by charging fee. Well trained and well informed Practitioners are assets to the Department.
Where services have been provided to ‘Governmental authorities’ and ‘Government Entities’, lower rates of tax are applicable. There is no clarity on these two terms. Assuming the recipient as for example a ‘Government entity’, tax has been charged at a lower rate. The proper officer disputes, in his own way as usual, that the recipient is not a Government Entity. It is impossible to know the percentage of the control. the State/Central Government has in that entity.
Ordinary tax payer can never understand the computation and formulae mentioned in Rules 42 and 43 of the CGST Rules, 2017 for claiming eligible ITC. Such a highly complicated formula will give the officers a stick to beat, as there are bound to be a number of mistakes resulting in claim of higher quantum of ITC. In AP/Telangana VAT Act, there used to be the most simple formula A x B/C, which is explained as—
“A is the total amount of input tax for common inputs for each tax rate excluding the tax paid on the purchase of any goods mentioned in sub-rule (2).
B is the sales turnover of taxable goods including zero-rated sales
C is the “total turnover” including sales of exempt goods”
Even a high-school studied rural accountant was correctly applying the above formula for over a decade in VAT regime. It is not too much to expect such simple procedures and computation. In the case of Krishna Iyer v. State of Kerala (1962—13 STC 838), the Full Bench of the Honourable Kerala High Court observed ‘the Legislature does not suppose our merchants to be naturalists, or geologists, or botanists.’ Similarly, one cannot suppose tax payers to be professors of mathematics and software engineers.
Another heart-burn is mismatch. Authorities expect the recipient, who has no control over the affairs of the supplier, to ensure that the supplier files the return correctly and completely and pays tax. For example, a supplier supplies goods and services in a month say, to one hundred tax payers and doesn’t file the return for that month. Instead of taking action against such single supplier, who is the known defaulter, all the hundred recipients face action, resulting in dent into their finances, due to restriction of ITC. See the compliance burden—one hundred recipients receive notices, which have to be complied with. Can the law compel a person to do something which cannot possibly be done (lex non cogit ad impossibilia) or will he be excused as there is no default on his part.
To make compliance simpler, Government may kindly think of making inter alia, certain changes like:-
Easier formula to compute eligible ITC, which, even a less educated person can understand and follow
Curtailing too many conditions against several entries in Notifications Nos.11 and 12/2017 Central Tax – Rate dated 28.6.2017.
Doing away with mismatch concept and making the supplier responsible for all his misdeeds.
Omitting payment of tax on RCM basis especially in the case of raw cotton, tobacco leaves, etc.
Publishing State-wise list of ‘Governmental authorities’ and ‘Government Entities’, so as to avoid discretion by the authorities.
Restructuring the Advance Ruling mechanism, as by and large the present set up has created more confusion than clarifying the issue.
Instructing the authorities to issue brief notices and orders with the provisions, etc., in the Annexures, to save precious time.
Amending the law requiring the inspecting officer of the goods vehicle to refer the case to the assessing authority/proper officer of the supplier with a request to take action as may be deemed fit under the law.
Amending the provision relating to reversal of credit, if the consideration has not been paid within the 180 days to the supplier.
Giving effect to the changes in the rate of tax from the first day of the succeeding month.
Providing simplified assessment procedure.
Amending the provision to allow the appellate authority to remand the matter to the assessing authority.
Removing the condition of payment of tax on the advances received for the supply of services and
Organizing periodical training course to the GST Practitioners, instead of conducting examination.
There may be many more issues of compliance burden. It is time for the Government after about 4-year GST experience to constitute a Committee consisting of trade and industry representatives, tax professionals and State & Central Tax Officers to look into the issue of simplifying the provisions to ensure substantial reduction in the compliance burden. Let us hope, as hope is eternal.