JULY 01, 2013

By Sumit Dutt Majumder

TWO developments in the past few weeks in the context of roll-out of GST are significant. First, the statement of the Prime Minister that GST would be rolled out only after the general elections in 2014, and the second is the exit of Sushil Kumar Modi as Finance Minister of the State of Bihar and consequently as Chairman of the Empowered Committee of State Finance Ministers on GST (EC). These developments naturally led some people to think that the prospect of GST is doomed again. But that's not so. In fact, given the number of unsettled issues, it is a ‘blessing in disguise' that the launch of GST is delayed, and not pushed through in a haste. After all, ‘mistakes made at introduction are hard to undo' (Keen, 2009).

Amongst the pending issues, I would today discuss the issue of dual control over ‘Small Business', which is becoming an irritant in the relationship between the Central Board of Excise & Customs (CBEC) and the State Governments. The accepted structure of GST is Dual GST with the Centre and the States administering independently the Central GST (CGST) and State GST (SGST) respectively, as per Para 3.2 (viii) of the First Discussion Paper (FDP) released by the EC in 2009. But now the States are proposing that the dual control by way of CGST and SGST should be only for taxpayers having turnover beyond Rs 1.5 Crore, and that for those below this cut-off, there should be single control of the States who would collect not only SGST, but also CGST on behalf of the Centre. The reason given for this proposal is that the small traders should not be inconvenienced by making them to deal with two governments.

This proposition has a background. It terms of Para 3.2 (ix) of the FDP, the States considered that the threshold for CGST for goods may be kept at Rs 1.5 Crore and the threshold for CGST for services may also be kept appropriately high, while the threshold for SGST would be Rs 10 Lakhs. This was proposed by the States keeping in view the interest of small traders and small scale industries (SSI) so that they can avoid dual control. Immediately after the FDP was released, the CBEC had put it's views on the contentious issues in the public domain through the Ministry's Website, with the approval of Union Finance Minister. This was one such issue where the Centre had commented that there should be uniform threshold for goods and services for both CGST and SGST, and that the problem of dual control would be better addressed through a ‘Compounding Scheme' as well as administrative simplification for small dealers through various measures including the following:

++ Registration by a single agency for both SGST and CGST without manual interface

++ No physical verification of premises and no pre-deposit of security

++ Simplified return format

++ Longer frequency for return filing

++ Electronic Return filing through certified service centres / CAs etc.

++ Audit in 1-2% cases based on risk parameters

++ Lenient penal provisions

The States did not initially agree to Centre's views of uniform threshold.

Consequently the issue was discussed between Centre and the States for more than three years, when it was pointed out by the Centre that it won't make sound economic sense to keep the thresholds different inasmuch as, things would be complicated by much higher CGST rate due to shrunk tax-base arising out of higher threshold for CGST. Secondly, keeping a significant number of taxpayers outside the CGST ambit would be fraught with revenue risk. Besides, the IT architecture would also get complicated if thresholds of CGST and SGST were to be different. Finally in early 2013, the States agreed with Centre and decided to keep the threshold common at Rs. 25 lakhs of annual turnover.

But after the issue of threshold was sorted out, the States raised the present issue of single control by States for taxpayers below the cut-off of Rs 1.5 Crore of annual turnover, whereby the States would collect CGST also on behalf of the Centre, in addition to SGST. While citing the interest of small traders for such a proposition, it was also pointed out that in the existing Central Excise regime, manufacturers below the threshold of Rs. 1.5 Crore are not subjected to Central Excise control. The States were therefore of the view that ‘those who were earlier not under dual control, and with a lower operational margin should not be under dual authority in the GST regime.' But the fact of the matter is that the ‘first-stage' and ‘second-stage' dealers who trade in goods and issue Cenvatable invoices are already under Central Excise control irrespective of their turnover. Besides, all manufacturers have to give a declaration to the Central Excise the moment they cross the turnover of Rs. 90 lakhs, and they come under the watch of Central Excise from compliance angle. Further, a sizeable number of small manufacturers are not eligible for the SSI exemption of Rs. 1.5 Crore. These apart, a good number of enterprising small manufacturers are not even availing of the SSI exemption because they would like to avail of the Cenvat credit chain. Therefore the basic presumption about all manufacturers and dealers below the threshold of Rs. 1.5 Crore being outside dual control in the existing system is not correct.

There is another interesting aspect of the argument that those who were not earlier under dual control should not be under dual control in GST regime. If this argument is applied in the case of service providers, the result would be absolutely unintended,- the service providers would go outside the control of States, since they are now under the exclusive control of Centre. We must not lose the focus which should be on a composite bundle called ‘Goods and Services' – neither goods alone nor services alone. Further, going by assessee base, a big chunk of service-providers would fall in the range of Rs. 25 Lakhs (Threshold for taxation) and Rs 1.5 Crore (Proposed cut-off for dual control). Since the States have no experience in administering Service Tax, it would be in the interest of revenue not to give exclusive control to the States over these service providers. Rather, with dual control the States would gain from the experience of working with the Centre shoulder to shoulder.

In the light of the foregoing discussion, conventional wisdom would warrant acceptance of the model of Dual control over the entire value chain in GST, as envisaged in the FDP, with of course adequate safeguards to take care of the interest of small taxpayers or ‘Small Business', as is known internationally.

The ‘Small Business' is seen by many as synonymous with business enterprise, creativity and dynamism, healthy competitive markets and most importantly the creation of employment and a generator of economic growth (Jeff Pope, 2008). Overall, there is a strong positive relationship between small business entrepreneurship and both the level of GDP per capita and GDP growth. Therefore, in economic policy terms, favourable tax treatment of small business is justified. In a paper published recently on GST in India, Sijbren Cnossen has inter alia stated that for administrative reasons, the GST should exclude ‘Small Business' which tend to have less reliable books of account, although an option for tax should be provided for such ‘Small Business' who wish to pass their GST on inputs on to registered firm. Further, while ‘Large Business' benefits from economies of scale of tax compliance, VAT/GST compliance costs for ‘Small Business' are clearly regressive and much higher than that for ‘Large Business'. European Commission (2005) research suggests that the VAT compliance costs for small and medium sized enterprise are at 2.6% of turnover, and considerably higher when compared to large companies at 0.02%. Concerns about compliance costs have led many VAT countries to introduce various forms of special treatment for ‘Small Business'. One of the key decision points in VAT design is whether the ‘Small Business' can be subjected to some simplified tax (Bird & Gendron, 2007). Unfortunately, however, overall tax evasion by ‘Small Business' worldover is quite significant. An important reason for this is the large number of taxpayers that generate a relatively low amount of tax revenue; consequently, auditing and enforcement costs of tax authorities become high, and it becomes much more cost effective to focus on ‘Large Business' (Jeff Pope, 2008).

The need is therefore of a balanced approach. The relief that can be offered to the ‘Small Business' in the context of the proposed GST are as follows:

++ Threshold for taxability for both goods and services at Rs. 25 Lakhs of Annual Turnover. This will put ‘very small business' outside the ambit of GST.

++ ‘Compounding Scheme' for ‘Small Business' upto Rs. 60 Lakhs of turnover. Once this option is availed of, another big chunk of ‘Small Business' will get relief.

++ Various administrative measures specified at third para of this article.

The proposed IT architecture for GST i.e. GST Net would be quite capable of facilitating the implementation of the proposed administrative measures. With the GST Net in place, the basic functions like registration, self assessment, payment and returns would be done electronically, and there will hardly be any physical interface (control) with the ‘Small Business'. It is only in cases of specific intelligence or on the basis of risk profiling of taxpayers that there will be physical intervention by taxmen. Verification of input tax credit (ITC) transfer is essential for a destination-based consumption tax like GST to succeed. For this purpose, it is imperative for both Centre and the States to maintain separate administrative control over the entire value chain of supply of goods and services in the two independent streams of CGST and SGST respectively. Thus, both Centre and States will have to perform their sovereign functions of tax levy and collection in their respective jurisdictions in the scheme of Dual GST.

As for the logistic difficulties of approaching two tax authorities – Central and State – when physical contact is needed, an idea that can help is the principle of Large Tax Payers Units (LTUs). One of the objectives of LTUs is taxpayers' facilitation by housing Central Excise, Service Tax and Income Tax authorities under one roof so that a taxpayer gets to sort out all his problems in these taxes at one place. This arrangement ensures prompt and authoritative clarifications, consultative approach for dispute settlement, and collation and integration of information gathered from tax returns/ declarations. It also facilitates creation of multidisciplinary teams cutting across organisational boundaries so as to enhance operational efficiency in areas such as audit, scrutiny and investigations,- and all these under one roof, at one place. LTUs in India, though introduced in a limited way, is a success story. Thinking out of box, we can also cull out the concepts of LTU and implant it for tax administrations for both Centre and the States with respect to ‘Small Business'. We may perhaps call them ‘STU' – ‘Small Taxpayers Unit'. STUs can house both CGST and SGST authorities under one roof in each of the State capitals and other cities and towns with high commercial activities. The objectives, eligibility, facilities etc for an STU can be worked out in details. Surely, ‘STU's along with the simplified measures discussed before can allay the apprehensions about the dual control over the ‘Small Business'. That's the food for thought for all GST stake-holders!

There are a few more interesting and challenging ‘yet to be settled' issues between Centre and the States like GST treatment of Inter-State transactions, GSTN architecture, Place of Supply of Goods and Services Rules, Finalisation of Tax Base and Tax Rate and Constitutional Amendment, and these are left for another day.

(The author is Indirect Tax Ombudsman, Delhi and former Chairman, Central Board of Excise & Customs; Views are personal)