NOVEMBER 26 , 2013

By Sumit Dutt Majumder

IT is sad that the apprehensions about the prospects of early rollout of GST, expressed in my previous article in this column about three weeks back, have turned out to be true. The salubrious place like Shillong that has been testimony to many an accord which was in national interest, could not add another feather.

The recommendations of the Parliamentary Standing Committee on Finance led by Yashwant Sinha for not excluding Petroleum & its products and Alcohol from the ambit of the GST in the Constitutional provision has been discarded by the Empowered Committee of State Finance Ministers (EC). Although this decision has been claimed to be unanimous, reports suggest that a good number of States had in fact held a different view; they were more inclined to accept the recommendations of the Parliamentary Committee on this issue.

Some of the States again raised the bogey of loss of fiscal autonomy of the States, even though the all-party Parliamentary Committee in its report unequivocally allayed the fears on this count. The States have also opposed the recommendation of the Parliamentary Committee for subsuming the ‘entry tax’ in general within GST.

On the issue of ‘Declared Goods’, where the Centre has the Constitutional authority to declare any goods as being of special importance and deny the States the power to impose duty on such goods over a stipulated rate, the States did have certain reservations about its continuance in GST regime, and they had made it known to the Parliamentary Committee. Consequently, the Committee had recommended suitable amendment of the Clause (3) of Article 286 so as to ensure that there was no unilateral decision by the Centre regarding taxation of ‘Declared Goods’ in respect of goods kept outside the purview of GST. The Centre, in deference to the recommendations of the Committee suitably modified the said Clause (3) of Article 286 by factoring in the role of GST Council in the Revised Constitutional Amendment Bill that was given to the States for their comments. But the States have now opposed that authority of the Centre with regard to the ‘Declared Goods’.

The States have also reiterated their demand for a formal Constitutional mechanism for compensating the States for revenue losses they could face after rollout of GST. They are not satisfied with the Centre’s assurance that revenue loss, if any after introduction of GST, will be compensated by Centre through the existing mechanism of Finance Commission. The States are also not convinced by the Centre’s argument that compensation scheme of any nature could not be a permanent one and that it could only be ad-hoc and temporary. The States seem to have forgotten the experience of VAT, which had shown that after the implementation of the VAT the fiscal position of most States actually had a marked improvement; based on revenue and GSDP data for 29 States between 1993-94 and 2008-09, the direct revenue impact of the VAT was reportedly found to be positive by a big margin in two-thirds of the sample States. One can therefore safely infer that the Centre as well as the States would stand to gain in respect of revenue after implementation of GST.

Thus, with regard to the Constitution Amendment Bill the States have in effect turned the clock back, going back even on the issues agreed at the Bhubaneswar Meet of January 2013. The hard work done by the Parliamentary Committee in giving its reasonable recommendations after interacting with all the stakeholders including the States have also been set at nought in the Shillong meeting of the EC. Everybody knew that GST could be rolled out only after the general elections next year. But nobody expected that in the name of ensuing general elections, decisions in public interest would also be shelved on some excuse or other. The passing of the Constitutional Amendment Bill has its own gestation period. Besides, there are many other follow up actions to be taken after the passing of the Bill by the Parliament. If only a revised Bill agreed to by both the Centre and the States could be passed by the Parliament in the winter session, the road to GST would have been that much easier. Going by the current happenings, one does not see any chance of a revised Bill, agreed to by both the Centre and the States before the new Government takes over at the Centre after the elections. With the expiry of the present Lok Sabha in 2014, a new Lok Sabha will have to deal with a new Amendment Bill since the present Bill would lapse. A fresh Bill would entail fresh reference to a new Parliamentary Committee, fresh interactions with the stakeholders, fresh recommendations of the new Committee, and fresh examination of the Committee’s recommendations by the Centre and the States.

Thus the wheels of the GST chariot are now pushed back quite a few miles. And please hold on! That was not the only setback. That was only on the count of Constitution Amendment Bill. There have been some more negative developments with respect to the technicalities of implementing Dual GST. Disregarding the fact that in the First Discussion Paper released by the EC in November 2009 it was unequivocally announced that the integrated GST (IGST) model proposed by the Centre (read Central Board of Excise & Customs) would be implemented for GST on inter-state movement of goods and services, the issue has been reopened. It may be recalled that GST on interstate movement of goods and services is the most critical part of the design of the Dual GST model where both Centre and States levy and collect Central GST (CGST) and States GST (SGST) respectively. While there is no issue in administering the SGST for intra-state transactions, problems arise in the case of inter-state transactions. In the present Dispensation of Central Sales Tax for interstate movement of goods, the tax is collected by the Origin State, whereas in the GST regime, the tax would accrue to the destination State, the GST being consumption type. The framers of our Constitution, perhaps being aware of possibility of inter-state disputes on the issue of taxation of inter-state transactions, authorised the Centre in place of the States to levy the GST on interstate transactions. In keeping with the vision of the Constitution framers, the EC had decided, as announced in the First Discussion Paper that the GST on inter-state transactions would be levied and administered by the Centre. In fact, the search for the appropriate model for GST on inter-state transactions was on for a pretty long time. In 2007, the Road Map for GST recommended to adopt the Bank Model for inter-state transaction of goods. The mechanism of this model was basically based on the existing vast banking network. A Sub-Working Group setup by the EC to find the most suitable model for the purpose examined nine models proposed by various quarters, and concluded that the Integrated GST (IGST) model would be the most appropriate one. The EC accepted the views of the Sub-Working Group and that is how the announcement came in the First Discussion Paper for adopting the IGST model with Centre levying and administering the tax and passing on this tax to the Destination State through the use of modern IT infrastructure. The tragedy is that some of the States are now dissenting even this proposition; they want a role for the States in administering GST for interstate movement. As mentioned, the Constitution now authorises only the Centre to levy tax on interstate transaction. So, if demand of those States are to be met, the Constitution would need to be amended on this count as well.

The matter has not ended there. On the issue of Dual GST whereby the Centre and the States were to administer independently and concurrently the Central GST (CGST) and States GST (SGST) respectively, the States have sought to administer and collect CGST on behalf of the Centre, in addition to SGST, for taxpayers with an annual turnover of Rupees One and half crore and below. It the Centre relents on this as well, it would warrant inclusion of this issue also in the Constitutional amendment. But that would be against the spirit of our Constitution. The framers of our Constitution had made it clear that on the three aspects of Defence, Foreign Affairs and Finance, the supremacy of the Centre over the States would have to be maintained and respected. Collection of a Central tax by the States would militate against this basic principle enshrined in our Constitution. These apart, prudence would warrant that the experience of two decades of administering the tax on services by the Centre (read the Central Board of Excise & Customs) should be put to good use, even for the Small Business. This would help the States to gain experience by working shoulder to shoulder with the Centre. Besides, it would be presumptuous to think that the Centre would not have concern about the issues faced by Small Business. A slew of measures to mitigate the difficulties of the Small Business have already been suggested by the CBEC in the past. In one of my previous columns, I had written about having ‘Small Tax Payer’s Unit’ (STU) in line with the LTU for providing the facilities to the Small Business under one roof to deal with both CGST & SGST authorities.

But, alas! Things seem to have become more difficult by the day. Politics seems to have taken over Economics. Even the Chambers of Commerce & Industry seem to have decided to play the waiting game by postponing the campaign for GST till after the general elections in 2014.

In the conspectus aforesaid, I feel compelled to repeat ad nauseum, - let us follow the suggestion of Sijbren Cnossen, the international VAT/GST expert and work for quick introduction of Central GST for all the Central Indirect Taxes,- to start with. I’ve reasons to believe that it would be a successful venture, and that the States would also join soon after seeing the success of Central GST from the view points of both the enhanced revenue collections and more transparent indirect tax administration, just as it happened after the rollout of the States VAT. But then, the bottomline seems to be that even for this step one would have to wait till after the next general elections. Till then, let us keep our fingers crossed, and prepare ourselves for the next earliest opportunity!

[The author is Indirect Tax Ombudsman, Delhi and former Chairman, CBEC; the views are personal]