Road to efficiency and better compliance

M. Govind Rao, a member of the 14th Finance Commission, had referred to the long-awaited implementation of the goods and services tax (GST) as a “bullock cart stuck in the mud” a while back. Suffice to say, things have changed a little bit now. Five years on, a broad consensus has been reached between the Centre and States on most aspects of GST through rigorous meetings of the Empowered Committee of State Finance Ministers. However, the maxim, “bullock cart stuck in the mud”, still appears to be relevant because Parliament has not yet brought GST to fruition. Although, the union government has repeatedly uttered its determination to roll out GST by the onset of the next financial year, it still seems like a challenging task. There are structural and administrative aspects to the GST that require greater clarity. Moreover, the general preparedness, especially on the IT front, of various stakeholders (State governments) and their expectations of GST are yet to be fully worked out. 

 

As conceptualised, the GST is not only a tax reform but also an ambitious policy vehicle to bring forth much awaited socio-economic reforms, as it addresses the issue of uneven development across India. The GST will restructure the indirect tax system with a vision to reduce distortions in the economy, broaden the tax base and create an Integrated National Market for goods.

The structure of GST builds on the destination principle. The tax base will shift from production to consumption and revenue will accrue to States, where the consumption takes place or is deemed to have taken place. In India, six net exporting States contribute 60 percent to India’s GDP. Excise duty is collected where goods are manufactured and not where they are consumed. Turnover Tax on domestic goods, high import tariffs, excises and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. The existing tax system has many anomalies; wherein few states are developing at the expense of others. Tax paid by a consumer in one State plays a role in augmenting the socio-economic infrastructure of the other state, where the particular good or service originates. 

Thus, there exists a situation that is against the fundamental ethics and foundation of an indirect tax system. With a destination based principle under GST, the tax paid by the consumer will be given to the State where he/she resides. As a result, revenue will accrue to the State in which the consumption takes place. Such a system would translate into enhanced economic welfare for the State. Therefore, under GST, it is expected that many States will have more funds to address various development concerns, including inequalities in income distribution.

 

In 2011-12, the revenue receipts from Service Tax were 97,509 crores. The Union Budget of 2012-13 introduced the concept of negative list in service taxation, which implied that except for certain identified services, the rest would be subject to taxation. The implementation of such a method created a comprehensive tax base and eliminated selectivity and discretion in service -based taxation. The outcome was obvious. FY 2012-13 recorded a revenue growth of 36 percent over 2011-12, and the trend continued in the following years. The yield in 2013-14 from service tax was 1,80,141 crores and from Central Excise 1,97,553 crores. It brought the service tax regime at par with VAT and Central Excise to determine the revenue sharing equation between Centre and States, under the proposed GST.

 

The current fragmented tax system has many loopholes. Evaders take advantage of it by declaring one account for sales, another for excise and yet another for income tax. Since, there is no effective institutional mechanism for communication and coordination among these departments, many unscrupulous elements get away. Clubbing of various taxes under GST and their integration with income tax reporting will prove to be a deterrent against such mala fide practices in a significant manner.

The vision of the proposed GST structure is to provide integration and uniformity in the treatment of intra-state and <g data-gr-id="89">inter-state</g> transactions, where the Input Tax Credit (ITC) chain has backward and forwards linkages with an inbuilt mechanism to simplify tax administration and reduce tax evasion.

In the June 2015 meeting of the Empowered Committee, a broad consensus was reached, with respect to various issues concerning the Centre and various State governments. Petroleum products and alcohol for human consumption have been kept out of the preview of GST for now. However, key aspects, such as tax base, place of supply rules, capacity building, and issues pertaining dual control are elements that are still being work out.

The GST shall have two components: One levied by the centre called CGST and the other levied by states called <g data-gr-id="98">SGST; and</g> would be applicable to all transactions except those that are exempted or outside its purview or below the threshold limit. <g data-gr-id="87">Inter-state</g> transactions will be taxed under IGST, rate of which would be CGST plus SGST simply for set off purpose. Cross utilization of ITC between CGST and SGST would not be allowed except in the case of inter-state transactions.

The <g data-gr-id="92">inter-state</g> seller will pay IGST, on value addition after adjusting available credit of IGST, CGST and SGST on his purchases. The exporting State will transfer to the Centre, the credit of SGST used in payment of IGST. The importing dealer will claim the credit of IGST while discharging his output tax liability in his State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information will also be submitted to a central agency, which will act as a clearing house mechanism, verifying the claims and informing the respective governments to transfer the funds. Since all dealers will be <g data-gr-id="93">e-registered</g>, and correspondence with them will be via e-mail, the compliance level will improve significantly.

 

There are fundamental issues regarding the design of the dispute resolution mechanism in a newly proposed system. First and foremost of these are the remarkable differences in the present practices prevailing in the Centre and the States when it comes to dispute redressal. Starting from “issue based adjudication vis-a-vis return based assessment”, the nature and structure of first and second Appellate authorities to review provisions and the need for a settlement commission, there are many concerns that need to be addressed.

The Centre believes that uniformity in appellate levels is desirable for the smooth functioning of GST. Presently, the first appeal lies before the Commissioner (Appeal) at the Centre, before the Joint Commissioner (Appeal) at the State level. On the issue of convergence at the first (Departmental) appeal level, the States have pointed out that a common bench of officers at Additional Commissioner (Appeal) may be considered as an alternative. Such a convergence would be taxpayer friendly and obviate a possibility of different decisions at the first appellate level, adversely affecting the sustainability of decisions at a higher forum. Consensus has not been reached on whether the first appellate authority should be a bench of officers drawn from Centre and States or whether the first Appellate Authority should be separate in both entities.

For the Second Appeal, the Centre opines that there should be one National GST Tribunal, having at least one bench at every place having a High Court bench. Every bench may comprise of three members- one member (Judicial), one member (Technical, CGST), and one member (Technical, SGST). The decision to have such convergence is yet to be taken.