TIOL - COB( WEB) - 540
FEBRUARY 09, 2017

By Shailendra Kumar, Editor

FOR the Union Budgets in the past the indirect tax proposals used to be much-awaited and the most sought after by the entire economy. And the sole reason was - the hikes in the rates or a new levy used to be triggered by the provisions of the Provisional Collection of Taxes Act enacted way back in the year 1931. And the amended tariff used to come into force from the midnight of the day the Budget used to be presented. As for Service Tax provisions, they are a different ball game altogether. In contrast, the direct tax proposals even today come into force only after the Finance Bill is enacted. In fact, some proposals have to be notified after the enactment of the Bill. So, unlike in the past, I did not get the subliminal happiness when the Union Finance Minister, Mr Arun Jaitley, presented his budget this year. It had everything but very little for indirect taxes! And the obvious reason was the tectonic shift in the tax jurisdiction from the domain of the Union to a pooled-sovereign body namely the GST Council.

The GST Council has taken a string of historic decisions which are going to lay down the foundation for a robust and hybrid VAT/GST system in the country. As against the global experience and experiment with innumerable types of value added tax, the Council deserves kudos for evolving a typical Indian-variety of hybrid GST. No doubt, this mini-Parliament intelligently sorted out many ticklish technical knots by finding innovative solutions but it also seems to have erred in finding a way-out to the problem of cross-empowerment at its ninth meeting. It probably happened because it was running out of political patience, and also the time zone frozen by the Constitutional amendment.

Let me examine where and how the GST Council has probably erred!! All noted tax commentators across the world such as Richard Bird, Sijbren Cnossen and Oliver Oldman, have observed that one of the key essentials of a successful VAT system in any economy is a strong tax administration, preferably a Single Agency. If that is not possible, against the matrix of dual agencies, a systemic bias should be in built towards the federal tax administration. And such a bias is natural for any CVAT kind of a system as it alone stitches together and holds tight the sub-national or State VAT systems. From the assessee's perspective this is more important as the federal agency acts as a distributor of credit in case of inter-State transactions.

What India has done is to fragment the taxing rights of the federal government. GST in India has been designed on the foundation of what is globally known as the Versano's "Little Boat Model". This model eliminates the need for zero-rating inter-state supplies; minimises the strain of cash flow requirements for the business and obviates the need for refund. The attractive features of this model were the persuading reasons for India to adopt the IGST model. In the Indian context, IGST acts as an intermediate tax for transfer of credit across sub-national (state) authorities. This model was further refined by the CBEC officers who designed a ladder for credit flow i.e. the ranking of the CGST, SGST and IGST credit, depending on the nature of transactions. The significant point which needs to be noted here is that the very design of the credit flow architecture requires the intermediate tax or the "Little Boat" to be owned by the Union rather than the sub-national (the States).

What the GST Council has decided is to cross-empower the sub-national (State) VAT officials to collect IGST. While deciding so, the GST Council has ignored the legal opinion of the Law Ministry (AG was probably not contacted) which was available on record. And its decision now entails the Parliament to do what the Constitution of India does not permit. Let's visit Article 245 which allows extra-territorial jurisdiction to the Union but certainly not the States. But what GST Council has decided is to permit States to have jurisdiction up to 12 nautical miles and also to tax any sort of transactions taking place in the territorial waters. This clearly means that the GST Council wants to 'gift' deemed jurisdiction to Coastal States coming into conflict with the Union Territory jurisdiction.

As per the Constitution, territorial waters constitute UT and only the Union of India can have jurisdiction over UTs. But, the GST Council wants to amend the law to lend deemed jurisdiction to States by perhaps overriding the spirit of the Constitution. Another important question is - Whether the implementation of such a decision of the GST Council by a deeming fiction would not alter the actual boundary of a State notified as per the law? When a Coastal State acquires the taxing right over the territorial waters, does it not amount to extending the boundaries of these States without a separate Act being enacted by the Parliament? The subsequent question that crops up is - Should Parliament really allow the GST Council to play with the physical boundaries of the Coastal States extending them to territorial waters to which sovereignty of each federating State of India extends to through the Union? Thus, does it mean that the GST Council exercises supremacy over the Parliament?

Let's examine this issue in the background of Articles 297 and 366(30). Even a cursory reading of these Articles makes it clear that all economic activities in the territorial waters around the coast are to be regulated by the Union Government. Secondly, the issue of taxation in coastal waters falls in grey area of tax litigation, and at present the matter is pending before the Supreme Court under the present laws. Union Government has filed an affidavit in the matter to say that the taxing powers in territorial waters belong to the Central Government. But the fact remains that the Union Govt has been flippant in taxing transactions in territorial waters in the past. I am sure the Ministry of Finance and the Ministry of Home must be having valid reasons for not levying central levies in territorial waters and beyond. It is also true that since the nature of such a tax is of inter-State sale it always remained beyond the purview of the CBEC. But, the larger point to be noted is that two wrongs do not make a right.

In the proposed GST regime, a supply originating in a Coastal State and reaching territorial waters is an inter-State supply. But what the GST Council seems to have recommended is to make such supplies as intra-State supplies. Even the reverse will be inter-State supplies. What is worse is - some States have been demanding that supplies originating in territorial waters and being consumed there should be treated as intra-State supplies in the Coastal States. What may trigger debate is that whether Article 269(5) really vests such powers with the Parliament to convert intra-State supply in one State to an intra-State supply in another State. Supplies originating and getting consumed in the territorial waters, which is intra-State within the Union Territory supply can really by legislation be deemed as intra-State supply in the Coastal State as no part of the sale takes place in the Coastal State.

In my little understanding of the Constitution, taxing rights form the most important bricks of the basic structure of our Constitution. And even by legislation the Parliament may not convert intra-State supplies outside the Coastal States into intra-State supplies within them. Therefore, the GST Council should review its IGST decision rather than rocking the "Little Boat" that may amount to fatal blows to the proposed GST even before it is implemented.