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Half-Baked Gst Or No Gst?

Published on Sat, Aug 01,2015 | 13:54, Updated at Wed, Aug 05 at 19:06Source : CNBC-TV18 |   Watch Video :

A well designed GST could boost GDP growth by up to 2 percent. The first discussion paper on GST in India was issued in 2009. It’s 2015 and we have the design for what many experts call a half-baked GST! A dual structure, an additional 1percent levy on inter-state supply of goods, several exclusions and very little time to the 1st April 2016 deadline! Hello & welcome to The Firm. Today, we ask if a half baked GST is worse than no GST at all? And, is the April 2016 deadline a dream? On the show today, CNBC TV18’s Menaka Doshi is joined by Senior Advocate Arvind Datar, tax lawyer V. Lakshmikumaran of Lakshmikumaran & Sridharan and indirect tax expert Rajeev Dimri of BMR.

Doshi: Mr. Datar, you are the angry young man of today’s half-hour movie on goods and services tax (GST) because in your words this reform is not a landmark, it is a landmine. So, before I get into the specifics of GST design, is it your argument that a half-baked GST is worse than no GST at all?

Datar: Absolutely, first of all I don’t think GST is suited for a vast, diverse country like India and worse than a GST is a half-baked GST at least in its present form. It is a completely newly mutilated and mangled form of GST with so many exclusions, so many exceptions and so on and is going to be very difficult to work and the most dangerous part is the constitutional provisions which enable every state to have its own goods and service tax. So, now you are going to have one parliamentary tax for interstate GST and you are going to have as many as 25-26 different GSTs levied by each state and I do not know what is the limitation of each state in making its own laws, going off on a tangent. So, it looks to me very frightening indeed.

Doshi: You have on this very show not many months ago said that we must begin somewhere, an imperfect GST is at least a beginning. Do you still stand by that?

Lakshmikumaran: Of course, what I wanted to say is we never had a perfect taxation system whether it is income tax or customs or excise or service tax. We always had some deviations but I do believe that GST regime will definitely avoid the cascading effect and also will make our export products little more competitive. So, therefore even if we are going to get a so-called imperfect GST, we should welcome it. Over a period of three four year’s time all the wrinkles can be ironed out.

Doshi: Would you stand in the corner of Arvind Datar or in the corner of Mr. Lakshmikumaran?

Dimri: I respect both of them but on this one I will go with Mr. Lakshmikumaran. The way I see it is April 1, 2016 is the beginning of the process of implementing GST, we don’t have to judge it as on that day, so I agree that it is a fragmented system with lots of exclusions but the way I look at it is that it is a process that we are beginning and over a short period of time we will get many of those exclusions back into GST but a Centre- state dual GST will remain but that is no different from the system that we have, so I do believe that the system that is being proposed while may not live up to the global standards but it is a huge improvement from where we are today.

Doshi: Mr Datar, your first point of contention for why this format of GST must not apply to India at all has to do with the point that you have already raised which is the highly complex structure of GST, a dual structure that in your words could lead to what, 28 different state laws?

Datar: Yes, you are going to have 28 different service tax laws and there is a GST council under the constitution whose powers are only recommendatory. Actually if you see Article 246a of the constitution, it says that every state legislature can have a goods and service tax. Now there is nothing in the constitution which prohibits or prevents one state from going off on a different tangent from the other. There is nothing in the law which prohibits a state from granting some exemption here and some exclusions there.

The basic architecture or the basic DNA of a good GST is a complete seamless web of taxation and I personally believe that if GST has to work in India, it has to be a unified GST, we cannot have a central law and 20-30 state laws. So, the dna is completely flawed. If I may use a common expression, the basic structure of this GST format is completely flawed and mind you, Lakshmikumaran said three four years, we don’t have the luxury of experimentation, you are going to completely change the indirect taxes procedure and if something is going to go wrong, it is going to very difficult to correct. So, it is very dangerous in the present format and unless- we have got a history of the states not being disciplined, in terms of value-added tax (VAT) also each state has its own rules. What prevents them from having their own service tax provisions and what about the different VAT provisions, how are you going to manage the interstate movement of goods and so on, what prevents one state from levying one tax, another state from levying another tax?

Doshi: Won’t the central GST law-we haven’t seen any signs of it as yet but whenever it does appear, won’t the Central GST law serve as the model for all the states or do you expect as Mr. Datar says, different states will have different GST laws?

Lakshmikumaran: This question has been discussed with the empowered committee, the consensus reached is to have more or less a model code will be made. As far as the central GST law is concerned, it will be a separate legislation and a model code will be made and in this state governments are going to enact the GST laws of those particular states in line with that particular model code.

So, therefore there will be lot of harmonization, lot of harmony as far as the laws themselves are concerned and as far as India is concerned, because it is a fundamental structure, both the Centre and the states have to necessarily collect the taxes for their share and therefore for a political decision to be taken at this point of time if they have a dual system like Central GST and State GST which also empowers the state governments also can collect their own taxes but if the laws are going to be harmonized and unified, then I don’t think there is a big issue relating to each state has the freedom to legislate their own way.

The GST council will do the policing and the monitoring and therefore I believe that the legislations of various states on the GST will be harmonized excepting some exception being given for a particular state, a particular commodity they can increase the tax or lower the tax depending on speculative situations, otherwise the movement of the goods and the payment of taxes both by the Centre and the states will get ultimately harmonized.

Doshi: Hark back to the VAT experiment and tell me whether you expect states to stick to the model code, do you expect the GST council to be effective in policing states?

Dimri: I start from a different position that the structure that we have today is fragmented, is flawed; we have number of unique situations in different states. I see that those uniquenesses and those divergences coming down, so if the service tax, excise and VAT is going to collapse in to a two-tier structure, I agree that we don’t have a history of states of being extremely disciplined, so the possibility of certain things happening at a state level cannot be ruled out but that happens today. Today we have far more fragmentation, we have far too many points of compliance, we have far too many points of arbitrages that exists- I see with however shortcomings it has, at least it is a huge improvement over our present system and that is what some of us are looking at is this glass half full or is this glass half empty…
Datar: I wanted to add a point here, please note that the GST council has only recommendatory powers and there is nothing in the 122 amendment which says what will happen if a state refuses to fall in line, there is nothing the council can do if a state refuses to fall in line and what happens is these are the minor variations which completely distort the GST.

Doshi: The second reason why your glass maybe half empty or all empty is the issue of a mutilated GST. So you make the point that the 1 percent levy that has been recommended and the Select Committee has agreed to that 1 percent levy as well as the many exclusions from GST, for instance petroleum products or alcohol or real estate, those contribute to a very mangled mutilated GST structure?

Alcoholic Liquor (for human consumption)
Petroleum (to be subsumed at later date)
Power Sector
Real Estate Transactions
Tobacco (partially)

Datar: Yes absolutely and to add to the problem, suppose some states starts granting exemptions to certain products. The moment the final product is exempt, you will not get the input credit. So you are going to have more and more distortions in the system and what is tragic is one of the major inputs cost is fuel which is used to generate power and you are not going to give input credit for the duty paid on fuel - that is so unfortunate. Electricity duties - you will not give credit and I do not understand why you are excluding the entire real estate sector from GST. There is no explanation for that.

Doshi: You cannot argue that you are in favour of the 1 percent levy and I doubt that you will argue that you are in favour of all these exclusions. So at least at this point you need to concede that this will lead to a mangled GST?

Dimri: Let me state my point and then I will come to whether I agree or otherwise. There is absolutely no justification for this 1 percent. I think the whole country is united on that. Whatever maybe the compulsions - that's bad one. In the manner in which it is currently written, it could apply on so many things like stock transfer etc. I do not know what has been the reported amendment in the constitution amendment bill, as done by the cabinet, so perhaps it may have partly addressed that but as it stands today, as it is available in public domain, there is no justification for 1 percent. So to that extent I fully agree.

On the exclusions part, whether it is real estate, whether it is power sector, whether it is petroleum sector, I think that we need to look at as a process. So if we are going to judge GST on April 1, 2016, yes, it is going to look something completely mangled and without justifications, without all these exclusions do not make any sense and that at least in my mind is the process that we need to walk that the process of implementation of GST is going to take time - three-four-five years.

The way we look at it today, the petroleum sector is not fully integrated into our existing system because credits are restricted under excise for number of things. Real estate is not fully integrated into our present system; power is not integrated into our present system. So these are not new exclusions. I am not justifying it. I hope they were already included but in my mind the assessments perhaps are more optimistic, but my assessment is from the time it gets implemented in three-four years, this will come in. So I do not see these things as making the situation worse than what it is. To me it maybe a small step up but it is a step in the right direction and the hope is that once they get tested, once they get comfortable with the new system, these things will come in. We have had the experience of value added tax (VAT) being implemented across states barring few exceptions by and large for 80-85-90 percent of the products, the system has worked, the discipline has been maintained.

Doshi: Even if that 1 percent levy, the wording is amended to say that it applies on the interstate supply of goods for a consideration. So stock transfers are excluded even then would you say that the 1 percent levy truly mutilates this GST structure?

Lakshmikumaran: Definitely. On this particular point whichever tax is being paid at a particular state, if it is not given as a credit at the other end, it is mutilation and to that extent I entirely agree with Rajeev. However, having said that all the State Government and the Central Government are approaching this new levy GST with caution. I think Centre is worried about the compensation they pay to the states, states are worried about whether they will lose the money or not.

I as a person feel that there will be revenue buoyancy that the fears of both the Centre and the states are unfounded but they will realise it as they move on. So therefore, as a political decision if they want to do it in the beginning about 1 percent, I am not voting for it. I am in fact against it as Rajeev has said, but if that is going to give comfort to the state to at least start the mechanism, I think we should give them the freedom for one or two years. They will learn that this particular thing is not going to give any dividends and therefore they will ultimately -- in fact there is a promise already that it will be phased out. So therefore that is about 1 percent.

And with regard to the other aspect, with regard to the exclusions as Rajeev has said. As of now petroleum products or alcohol are out of Central Value Added Tax (CENVAT) and also VAT because about 40-45 percent of the revenue of the state and the Centre come from these particular sectors and therefore we have been living with this particular problem for quite some time and if we learn from experience, a revenue buoyancy takes place after four-five years. I think this particular item will also get integrated in a phased manner.

Doshi: I want to add one more point. It seems that the centre has decided to compensate the state for five years. If that is the case and if the centre is going to compensate the state for five years, not may but shall, if the wording doesn't change the Constitutional Amendment bill then should that 1 percent levy still survive?

Lakshmikumaran: 1 percent should go but the centre will now say that the entire burden of compensate in the state are with me now. The 1 percent thing will ultimately to some extent will offset this particular burden on me and therefore Centre will also be smiling behind saying that the 1 percent levy though asked for by the state governments will ultimately help the Centre to not to offset that particular loss to that extent.

Doshi: Are you convinced by what Mr. Lakshmikumaran and Rajeev have to say about this?

Datar: Fortunately on this point all three of us agree that it is an unfortunate step and I am not very sanguine that is going to be phased out. I know the 1990 Gulf surcharge continued for more than 25 years long after the Gulf war was over. So I am not very sure if this one percent is going to be phased out. I would not be surprised if the 1 percent becomes 2 percent at a later point of time. One percent should not have been there at all.

I basically do not buy the argument that today we are living without the excise duty on power or excise duty on diesel not being given for CENVAT credit - that's the present system. If you are going to GST, if you are going to a seamless GST then you should not allow these matters to go out. If you really want to help industry, if you want Gross Domestic Product (GDP) to grow then you should have the courage and the broadmindedness to include everything into one and then only the GST will work.

Doshi: Your final point when it comes to design flaws has to do with the revenue neutral rate and the expectation that it could be very high given that if I remember correctly, the Empowered Committee of state Finance Ministers had suggested 26.7 percent even though the 13th finance commission has suggested a rate as low as 12 percent?

2010 Govt Proposal: Goods 20%, Services 16%
Empowered Committee: 26.7%
13th Finance Commission: 12%
Select Committee: < 20%

Datar: 26.7 percent will be a guaranteed disaster of gigantic proportions. As far as this Revenue Neutral Rate (RNR) is concerned, if it is a rate which applies from business to business, say for example a tyre manufacturer pays 20 percent duty and the tyres are sold to an automobile manufacturer, there is no problem because the automobile company will take the credit of 20 percent duty, for him it is revenue neutral but when you are going to levy 26.5 percent on electrical goods or electronic goods sold in showrooms, or you are going to levy 26.5 percent on soaps and shampoos and so on being sold on super markets, you can bee rest assured that overnight more than 70 percent of all retail transactions will be in cash, people will simply not be willing to pay 26.5 percent duty and believe me it will double the black market economy. That is the biggest danger 26.5 percent or even 18 percent is going to lead to a huge black-market economy at least as far as the retail outlets are concerned.

Doshi: The government seems to suggest that it will keep the Revenue Neutral Rate below 20 percent, is that acceptable to you?

Datar: No, anything more than 12 percent will be dangerous.

Dimri: We all would wish it to be as low as possible and 12 sounds very nice number but if I look at that today most manufactured products with excise duty at 12 percent, and VAT anywhere between 12-14 percent, do have a burden of tax and we are talking about that combined tax being rolled into a GST rate effectively of a certain percent. I just can’t believe that 12 would be good enough, even service tax which is a pure tax is today at 14, so mentally in my mind I am certainly acceptable to a rate which is lower than 20.

Generally around the world if one were to take a rough and ready average, it is 19 percent and therefore can we imagine India to be in one step becoming one of the lowest tax countries in the world, I would love to see that day but should I hope for it? Maybe not, so 12 to me sounds extremely low but I certainly think that anything higher than 20, there will be a risk of backlash from the taxpaying public and that has all bad consequences..

Doshi: So, what do you think is the ideal GST rate? Would it be around 20? The rate at which GST will work?

Lakshmikumaran: Anything more than 20 will go to be a disaster; anything less than 20 is workable.

Doshi: I have one more question with regard to the rate, would you argue that the rate ought to be included in the constitutional amendment bill?

Lakshmikumaran: Constitution is basically guiding the powers to the states and the Centre to legislate. To have rigidity in the constitution, to fix a particular rate there is not acceptable because if anything has to be changed, you have to go for a constitutional amendment bill especially involving the Centre and the state again to the majority here and also the majority in other states etc., that will call for lot more complications.

Datar: You raise an important point, whether there should be a cap in the constitution or not? There is a mechanism through Article 252 where we must have a national cap because what is going to happen is you may have 16 percent rate or a 17 percent rate but in the constitutional architecture as it is now, nothing prevents one state from levying an additional GST or a GST surcharge like we have additional VAT, additional tax and so on. So, that also could distort the system, so there must be a cap of how much tax can be levied in any form and secondly I still feel anything more than 14-15 percent will be very dangerous, it will lead to a lot of evasion at the retail sector- I am not so worried about the manufacturing position and the organized industry, I am only worried about the sales at the retail level.

The other thing which we have not discussed is who are the people governed by GST? Are you going to keep the exemption limit at Rs 10 lakh, are you going to keep it at Rs 50 lakh, we don’t know, that is another major problem.

Doshi: And that is equally important point as all the design flaws because not only do we have no sign of the GST laws, we have no draft law out there to even think about or ponder over. The administration revamp that is required for something like GST is humongous, we know that only now the bids are going out for and IT network for GST, the implementation challenges are humongous. Are we at all going to ready on April 1, 2016? Even if one were to accept the design flaws, do you think that there is enough time to actually meet that deadline?

Dimri: That is the most challenging part; of course we have this political process that is currently underway but let us assume that we are past that process and that is when the rest of the executive comes in. To beat the April 1 deadline, there has to be huge amount of work that has to be done by the government and by the Industry. A superfast effort will have to be put in to make sure that we have an effective implementation of GST from the government and for the companies.

Doshi: How nervous are your corporate clients? Would you suggest that the deadline be pushed, is it feasible to have GST implementation in the middle of a financial year or must it be pushed to the next financial year? What do you make of the fact that the process in itself seems fairly compromised and tight right now?

Lakshmikumaran: My conversation with my clients indicate that April, 2016 is really a dream, it is going to be a tremendous task for them, in fact if they have to amend and modify the ERP system, that itself is going to be a problem and if they do and if there are some bugs and if the legislature is not properly taken care of, then it can lead to faulty returns and faulty payments which can result in penalties and prosecutions. So, they are very worried about that but at the same time they don’t want this to be postponed till April, 2017, probably many of them will be happy of it is done by sometime in October 2016.

Doshi: But is it feasible to introduce GST in the middle of a financial year?

Lakshmikumaran: Why not, there is no problem at all.

Doshi: The promise of GST is an up to 2 percent boost to GDP growth; will this GST design give us that kind of GDP growth boost?

Dimri: I think yes but let’s not assume it to be within the first six months of the GST introduction, it is going to take two-three years but yes I do believe it will streamline a lot of things and bring parallel trade into the mainstream, so yes I do believe so.

Doshi: Will this GST design give us that 2 percent promised boost to GDP?

Lakshmikumaran: I entirely agree with Rajiv, within about two-three year’s time we can see the results.

Doshi: Mr.Datar, are you still the angry young man of GST?

Datar: I have really never understood how do you get this figure of 2 percent GST, on what basis are you saying that the GDP will grow by 2 percent? I have not heard of any tax laws making the GDP grow by 2 percent and…

Doshi: Up to 2 percent, the estimates are 0.3-1.9 or something like that, up to 2 percent, a big GDP boost let’s put it that way?

Datar: The effect on the GDP will be negative if it goes in this mutilated, mangled form. Like Victor Hugo said, ‘You can’t stop a good idea whose time has come,’ the GST is a bad idea whose time should never come for India, that is my view.

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