India Tax Insights – ninth edition
GST: pitfalls and promises
V S Krishnan, Tax Advisor – Tax Policy Group, EY India
The implementation of the Goods and Services Tax (GST) has had a roller coaster ride, starting in 2006. It has been heralded as the most important economic reform in post-independent India. It is claimed with some justification that what Sardar Vallabhai Patel did for the political unification of India, GST would do for the creation of a unified Indian economic entity.
The passing of The Constitution (122nd Amendment) Bill on 3 August 2016, which provides the design for the GST, set the ball rolling for the implementation of GST. This legislation unifies what hitherto was a fragmented tax system into an integrated tax system in which the Center and the states would concurrently tax the entire value chain from raw material to retail. This will be achieved by legally empowering the states to tax manufacturing and services and the Center to tax value addition in trading. In addition, the Constitution Amendment legislation deletes Entry 52 in List II in Schedule VII of the Constitution of India, which empowers states to levy an entry tax when goods enter its territorial jurisdiction. The removal of entry tax, therefore, creates conditions for free movement of goods and services, ushering in an Indian common market. There is much that still needs to be done, and the fulfilment of the economic potential of GST lies in getting many things right.
GST, from a tax practitioner’s perspective, can be examined within the framework of the following three dimensions:
The deliberations of the GST Council on the proposed rate structure were watched intently by the industry, which seeks a more benign rate regime. After intense discussions, the Council agreed upon a four-tier rate structure — 0%, 5%, 12%, 18% and 28% — with a special rate for gold and jewelry to be decided later. It was also decided that a cess would be levied on four items — namely, pan masala, cigarettes, aerated water and luxury cars — at a rate that would represent the difference between the existing duty rate and the 28% rate. The consensus was that the cess proceeds that would accrue entirely to the Center would be used to compensate the states. The Council also decided that broadly, essential goods and goods consumed by the poorer sections of the society would be fitted into the exemption and merit rates, while certain goods consumed by the more affluent sections would be put into the 28% rate slot. The remaining items would fall under the standard rate of 18%. A Committee of Secretaries was constituted and directed to look at individual items and fit them into the rate slots based on the broad principles agreed by the Council.
Define the path for valuation and transition that minimizes dispute
The other important area is the whole GST legislation and rules that have been put in the public domain as a Draft Model Law. This again represents a product of discussions and conclusions reached jointly by the Center and the states. While a large number of representations have been received, the worrying feature relates to dispute-resolution, valuation and the transitional provisions.
One of the key concerns of the industry is that there must be certainty and uniformity in assessment across the country. This may require a centralized system of binding instructions in assessment cases vested in a technical secretariat or an assessment directorate. The states also have to replicate this arrangement. This may require amendment in Section 157 of the revised Model GST Law relating to Miscellaneous Provisions so as not to forbid any centralized competent authority from issuing binding instructions to any GST officer on a particular assessment matter. In order to narrow the domain of disputes, it would be necessary to codify minor procedural infringements so that instead of imposing minor penalties, these are converted into non appealable administrative levies.
In the area of valuation, there is considerable concern in the industry on the introduction of the transaction value concept in value-added tax. It might be more appropriate if the transaction value is replaced by invoice value representing the amount paid or payable.
Finally, trade and industry are also worried about the proliferation of disputes in the case of self-supplies made within the same legal entity. Here again, the definition of “supply” might need to be tweaked so that taxable supplies within the same legal entity are confined only to supplies for re-supply. The transitional provisions may also need to be modified so that firms are allowed to take credit of duties paid, such as Excise and CST lying with dealers/stock traders on the date of implementation.
Dig deep on dual control
Dual control is another vexing problem of GST. The trade and industry would ideally like to deal with one tax administration in the area of compliance verification. However, the GST Council is looking at two models — one a cut off based on turnover, and the other based on a vertical division wherein the Center and the states would exercise the rights for compliance verification of both goods and service entities based on a predetermined formula of percentage of units to be covered and an exchange of risk assessment lists, which might consist of various parameters such as trends in input credit and compliance history. It may be a good idea at this juncture for each state to have a GST secretariat, which would bring senior Central and state-level officials of the Commercial Tax Department on a common institutional platform. This body could be registered under the Indian Societies Act, much like the Empowered Committee of the State Finance Ministries, and provided with a dedicated secretariat. This body could forge the bonds of trust and understanding between Central and state officials. The state GST secretariat may also provide a forum for trade and industry to jointly represent their views to both Central and state officials.
The GST journey has been a long and arduous one, and there is insufficient appreciation of how much the country has achieved in coming to this point. In a recent article, written jointly by the Chief Economic Advisor and the Secretary (Revenue), these thoughts were echoed quiet eloquently: “The time is ripe to collectively seize this history opportunity; not just because the GST will decisively alter the Indian economy for the better but also because the GST symbolises Indian politics and democracy at its cooperative consensual best.”