TIOL-DDT 2585
27 04 2015
Monday

THE Finance Minister explained to the Lok Sabha on Friday, the concepts of GST. Excerpts from his speech:

Though this Bill has been styled as the Constitution (One Hundred and Twenty-Second Amendment) Bill, in fact this Bill is the 100th Amendment to India's Constitution. In the matter of revenue and taxation, probably this is the most important Amendment that has ever been taken up in the Constitution itself. Our current structure of indirect taxation empowers both the Central and the State Governments to levy different kinds of taxes.

These taxes by the Central Government may be in the form of Excise Duties; they may be in the form of Service Tax, taxes by the State Government or VAT plus other multiplicity of taxes by the State Government. The object of this Constitution Amendment is to bring about a certain amount of convergence between these taxes so that the taxation mechanism becomes extremely simple.

As far as the advantages of the GST structure are concerned, the difficulty being faced by the present set up is that there is no uniformity of tax rates and structures across the States. Therefore, different taxation in different States prevents a seamless transfer of goods and services as far as the country is concerned. The second problem, which has been noted with regard to the present structure is that if different levies of taxation are made, we have the concept of tax being levied on tax itself. Therefore, if you have Excise Duty in the first instance being levied by the Central Government, and subsequently a VAT, those quantum of fresh taxes which are levied are also levied on the tax input which has already gone into as a result of which both goods and services can become costlier.

It will simplify harmonise the indirect tax regime as far as the whole country is concerned. It is expected to reduce the cost of production and inflation in the economy thereby making Indian trade and industry more competitive, domestically as well as internationally. It is also expected that the introduction of GST will foster a common or a seamless Indian market and contribute significantly to the growth of the economy. GST will broaden the tax base and result in a better tax compliance due to a robust IT infrastructure. Due to this seamless transfer of input credit from one stage to another in the chain of value addition, there is an inbuilt mechanism in the design of the GST that it would incentivise tax compliance. Therefore, evasion itself would become difficult.

History: In 2003, Kelkar Committee was appointed when the NDA's first Government led by Mr. Vajpayee was in power. Thereafter the proposal to introduce a national level Goods and Services Tax was first mooted by the Finance Minister Mr. Chidambaram in his Budget Speech of 2006-07. Since it involved reforms, not only in the indirect taxes of the Central Government but also in indirect taxes of the State Government, it was necessary that the entire design structure for this taxation be prepared. It is because, by virtue of this Constitution Amendment, ultimately the taxation design structure of the States will also change.

Therefore an Empowered Committee of State Finance Ministers was appointed. This Empowered Committee, along with the Parliamentary consensus, both have worked in tandem since then. Based on these inputs and various other Working Groups which were appointed, the Constitution Amendment was framed and in March, 2011 the then Finance Minister, hon. Shri Pranab Mukherjee introduce the Constitution Amendment in Parliament. This Constitution Amendment went to the Standing Committee and the Standing Committee almost for more than two years, for two and-a-half years, deliberated on it. In August, 2013, the Standing Committee gave its detailed Recommendation as far as the GST structure was concerned. Based on this structure, we went back, re-altered the Bill. This re-alternation took place when UPA-II was in power. So, this went back to the Empowered Committee of the State Finance Ministers.

The Empowered Committee of the State Finance Ministers had two doubts in mind. The first doubt was that there are some States which are the manufacturing States. GST is the destination tax. The goods may be produced in one State, sold in another State or traded in another State and the tax advantage of that will go to the consuming State itself. Therefore, all the consuming States felt that they would be the beneficiaries in the first instance but the manufacturing States had some doubts that they could lose out. Gujarat had some reservations because Gujarat, Tamil Nadu and Maharashtra are the manufacturing States.

Let me explain this. When the manufacturing States had reservations so, the consensus had to be arrived at. The Empowered Committee of the State Finance Ministers again met. They not only met but they had to go back to their States. Every State - I say this without fear of contradiction - has given its concurrence to those proposals. The change that was made was that, can we for a period of two years on IGST, have an additional levy of one per cent? This was suggested by Gujarat and Maharashtra because these were the manufacturing States and therefore, this was the via media which every other State accepted.

After every State accepted this, the only other question was that what will happen if any State stands to lose revenue. This would not happen because this was the fear of the unknown when the VAT came into existence. Therefore, there was some delay in the implementation of VAT. When VAT was implemented, every State's revenue subsequently has gone up. Nobody has to lose. So, the Central Government then took upon itself that for the first five years, we will try in a particular tapering manner underwrite the loss which may be caused to the States.

The underwriting procedure is that for the first three years, 100 per cent of the loss, if any State suffers, will be compensated by us. In the fourth year, 75 per cent loss will be compensated by us. In the fifth year, 50 per cent loss will be compensated by us. This became the point of consensus between all States. Therefore, based on this, the general consensus which emerged between the Standing Committee recommendations and the empowered committee of the State Chief Ministers was that as far as Central Taxes are concerned, the Central Taxes in terms of Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty, etc., will all be subsumed. Now, Service Tax is entirely payable to the Centre. As of today, the States do not get it. In this changed design, the States will also be entitled to be a part of this Service Tax. Therefore, this will necessarily push up the revenue.

The anticipation is that besides Service Tax, besides easier compliance, besides the ease of doing business in India, expansion of the volumes and the trade itself will grow and, therefore, the taxation of the States will not be lost in any manner.

Structure of the GST: There will be the Central GST; there will be the State GST; there will be the interstate GST, that is, IGST - Integrated GST, as we call it. Now, after this, what are the rates at which there would be revenue? The experts will decide a revenue neutral rate. But eventually, the rates will be decided by the GST Council.

Veto in GST Council? Who will be the GST Council? This is the Cooperative Federalism in action. About the GST Council Structure, the Standing Committee has approved it; the Empowered Committee of the Finance Ministers has approved it. So, it is not my structure. The structure is that two-third of the voting right belongs to the States and one-third of the voting right belongs to the Centre. Therefore, as far the Central and State Taxes are concerned, it is this Council which will decide it where the States have a two-third majority. So, this Federalism leans in favour of the States. Every decision is to be taken by a 75 per cent majority. Therefore, the inbuilt consensus is that in terms of Cooperative Federalism, the Centre and the States will then have to work together. That is how India is run. Federalism does not mean trampling the rights of the States. Federalism does not mean India that is a Union of State, the union ceases to exist. So, it does not mean that the Union does not have a say in the taxation structure. If some of the States come together - let us forget all - they can prevent the Union from taking a decision. Do you accept that as a formula? Because States have two-third majority and therefore, if even half of them come together, they have a veto. About this inbuilt Council, this is not my wisdom, this is not the wisdom of the present Government, this is also the wisdom of the UPA Government, this is the wisdom of all the 27 Finance Ministers taken together. This is the wisdom also of the Standing Committee with their unanimous recommendations that the structure must be such that two-third of the power belongs to the States, one-third of the power belongs to the Centre, and you need a three-fourth majority to approve a decision. That is the decision making process. That is how they integrated the whole system of the Cooperative Federalism in this taxation structure.

Income Tax - MAT - FII - CBDT Clarification

IT has come to the notice of the Board that several Foreign Institutional Investors receiving income from transactions in securities claim such income as exempt from tax under the Income Tax Act, 1961 by availing benefit provided in the Double Taxation Avoidance Agreements (DTAA) signed between India and their respective countries of residence.

Since the issue involved in such cases is limited, such claims should be decided expeditiously. It has therefore been decided that in all cases of Foreign Institutional Investors seeking treaty benefits under the provisions of respective DTAAs, decision may be taken on such claims within one month from the date such claim is filed.

The officers concerned have been directed accordingly.

Increase in Basic Customs Duty on Imported Steel

THE Government has received representations for imposition of 25% basic customs duty on imported steel to prevent dumping of steel.

As per World Trade organization's (WTO) guidelines import duty can be imposed to the extent of 40%. The bound rate for basic customs duty on iron and steel failing under Chapter 72 is 25% or 40%. In Budget 2015-16, tariff rate of basic customs duty on iron and steel and articles of iron and steel was increased from 10% to 15%. However, no change was made in the existing effective rates of basic customs duty on these goods.

This was stated by Mr. Jayant Sinha, Minister of State in Ministry of Finance in a written reply to a question in the Lok Sabha on Friday .

Declaration of Assets and Liabilities by Babus - Last Date Extended

THE Public Servants (Furnishing of Information and Annual Return of Assets and Liabilities and the Limits for Exemption of Assets in Filing Returns) Amendment Rules, 2014, extended the time limit for filing of revised returns by all public servants from 31st December 2014 to 30th April 2015.

Obviously many government servants have not taken this seriously and have not filed their property returns.

Government has now extended the last date for filing of revised returns by public servants under the rules from 30th April 2015 to 15th October 2015.

With all these extensions, it seems that the Government is certainly not that serious about knowing the assets & liabilities of the babus.

DoPT Office Memorandum No. 407/12/2014-AVD-IV(B)., Dated April 25 2015

Jurisprudentiol- Recent SC Judgements

Central Excise - Valuation - Additional Consideration - Manufacture of music CD on job work- whether the royalty paid by the copyright holder to the music artist, is to be included in the value of the job worker - ‘No' Rules Supreme Court.:

There is a job worker manufacturing music CDs - what he does is copying the music on a blank CD, the blank CD as well as the music is owned and provided by the copyright owner. Suppose for copying a CD, he get one rupee and each CD is sold for 50 rupees by the distributor, what is the value of the CD in the hands of the jobworker, for the purpose of paying excise duty? The general understanding is that it would be the cost of the blank CD and the jobwork charges. But in 2002, the CBEC issued a Circular No. 619/10/2002-CX., dated 19-2-2002 that the value would also include the royalty paid to the singer and also the studio charges for the original recording of the song. If this jobworker is copying a song sung by Lata Mangeshkar 50 years ago, his value for excise duty would, according to the Board would be the cost of the blank CD + the royalty paid to Lata Mangeshkar + the charges paid for studio recording Lata Mangeshkar's song!

This issue reached the Supreme Court in 2004 and was decided last week. Supreme Court held that the royalty paid to the artist is inextricably connected with the music and therefore would be used in connection with the production of the duplicate CDs, yet the use must not merely be in connection with production but must also be in connection with the sale of such duplicate CDs. No part of the royalty can be loaded on to the duplicate CDs produced by the appellant.

Please see KRCD (I) Pvt Ltd Vs Commissioner of Central Excise, Mumbai - 2015-TIOL-88-SC-CX

Central Excise - Section 4 - Valuation - Goods delivered at the premises of the buyer - freight, insurance and unloading charges to be included in value: Supreme Court: This issue frequently crops up before various judicial bodies with routine regularity. It is a basic concept of Excise that transport is not part of manufacture, but somehow down the line, to make that extra buck, Government wants to excise transportation charges also. So concepts like ‘place of removal' were introduced and the concept was made confusing even for judicial forums. But the law is that whatever you write in the law, even by the wildest imagination, transport charges cannot be part of manufacturing, but by including it in the guise measure of taxation, Government tries to collect the tax on something, which is clearly not excisable. Over a period of time this concept acquired respect, legality and validity.

In this latest judgement pertaining to the pre 2000 period, the Supreme Court held that when the sale takes place at a place other than the factory, the transport charges to the other place, usually the buyer's premises have to be included.

In this case, unfortunately, the assessee did not appear and was not represented before the Supreme Court.

Please see Commissioner of Central Excise, Aurangabad Vs Roofit Industries Ltd - 2015-TIOL-87-SC-CX

Until Tomorrow with more DDT

Have a nice day.

Mail your comments to vijaywrite@tiol.in