The dual GST model adopted by India is like a joint venture between the Centre and states, where both would levy and collect GST on a common tax base in such a predetermined manner that a taxpayer would have interface broadly with only one of the aforesaid two tax administrations. Success of a joint venture depends heavily on one factor—happiness of both the partners. Keeping this in mind, the Centre has been making a number of compromises. On their demand, essential inputs, like petroleum and its products, were kept outside the ambit of GST; so is alcohol, which is a state subject, although other demerit goods, like tobacco and cigarettes (central subjects), are in. States have also been allowed to vary their GST rates within a band. Most important, the Centre agreed to compensate them fully for first five years in case of loss of revenue.
These compromises impaired the shine of a good GST, but were considered necessary to bring states on board and make them happy. The finance minister was applauded for being flexible. But can the same be said about the recent decisions of the GST Council, for resolution of dual control issues?
The first decision for intra-state supplies by taxpayers below the threshold of Rs 1.5 crore was that states would administer both SGST as well as CGST for 90% of taxpayers, leaving the balance 10% for the Centre. Second, the taxpayer base will be divided 50-50 above the said threshold. Third, even for administering IGST for inter-state supplies, the taxpayer base will be divided in those two ratios. However, there is a rider that if there is a dispute between states over determination of ‘destination state’, as per the laws relating to ‘Place of Supply’, the IGST would be administered by the Centre. In GST regime, the destination state gets the share of state GST.
Another decision has been to cap the audit at 5% of the total taxpayers, based on risk factors. The list will be decided jointly by the Centre and states. The auditees will be shared through a computer-based programme. As for intelligence-based enforcement work, generally anti-evasion, this will be in the domain of both, perhaps on the time-honoured principle of first-strike—whoever strikes first carries on with the entire work in that particular case.
On the first decision of sharing of tax base below the threshold of R1.5 crore, it must be kept in mind that 93% of the existing service tax assesses of the Centre are in this band of less than R1.5 crore, and most cases of evasion have been detected in this band. Also, officers of the Centre, i.e. CBEC, have 23 years of collective experience in administering tax on services, since 1994. On the other hand, states have no experience. Being intangible, taxing services with reference to the place of supply is more complicated than taxing tangibles. Thus, it does not make sense to give a go to the vast experience of the Center’s officers and entrust most of the work to states.
The second decision of sharing the tax base 50-50 for taxpayers above the threshold of R1.5 crore is a fair one and this principle of equal sharing should have been followed for entire tax base.
The third decision regarding similar sharing of tax base with respect to IGST for inter-state supplies violates the provisions of Article 269A read with Act 246A. These provisions make it clear that GST in inter-state supplies ‘shall be levied and collected by the government of India’ and that the taxes collected would be ‘apportioned’ between the Centre and states. Even the law ministry has clarified that IGST can be levied and collected by the Centre alone. The reliance on Article 258, which authorises the President to entrust states with the executive power of the Centre in certain cases for the purpose of cross-empowerment with respect to IGST seems far-fetched. Besides, the rider that in the event of a dispute between two states regarding place of supply, the administering of IGST would vest on the Centre will only make things complicated.
On audit, all GST experts, led by Prof Richard Bird, have maintained that audit is the essence of administering GST. Audit has been decided to be capped at 5% of the tax base. Therefore, effectively, the Centre will have only 5% of 10% of the tax base below the threshold of R1.5 crore, with the Centre’s share of tax base in this band being only 10%. This is grossly unfair. But the decision of sharing of ‘anti-evasion’ work all through the tax base seems fair.
It is evident that CBEC has got an unfair deal with respect to sharing of tax base. Reportedly, the service associations of all the three groups—Groups ‘A’ ‘B’ and ‘C’—have in a joint memorandum demanded reversal of these decisions on sharing. These are the reasons that seem to have nudged the chairman, CBEC, on January 27, to draw FM’s attention to the ‘rising disquiet in the cadre’. The assurances given by FM, and later by the revenue secretary regarding protection of job and promotion prospects, could not remove this ‘disquiet’ as officers feel the arrangement would reduce Centre’s share of work. A future review of staff requirements vis-a-vis workload will indeed make a major dent in the interest of the field officers of CBEC. Further, there was no explanation to justify the 10-90 share between the Centre and states. Therefore, the general impression was that it was done to appease a few states.
As was stated at the beginning, both the partners should remain happy for a joint venture to succeed. The Centre had started well in ensuring that its partner, i.e. the states, remain happy. But the latest series of decisions arising out of unjust appeasement have made the field officers unhappy, thus casting a shadow on the success of this great joint venture. Sharing of the entire tax-base 50-50 seems to be the only answer.
The Financial Express, 31 January 2017