The GST Bills are far from perfect and several provisions could call for amendments over the coming two years or so, according to former finance minister P Chidambaram. A rush to roll out the new tax regime from July 1 could be detrimental and fitment of items holds the key to the success of the new tax regime, he said in an interview.
Q: You have called it an imperfect bill. What are the imperfections that you refer to?
A: Well, the key imperfections are one, the multiplicity of rates; two, the compliance provisions; three, lack of clarity in some provisions and I’ll give you couple of examples for lack of clarity. The first example is what happens if the turnover goes above Rs 1.5 crore in one year and then falls below Rs 1.5 crore the next year and then after 2-3 years, again goes above Rs 1.5 crore? Second example of lack of clarity is how is a compoundable offence also made a non-bailable offence. These are two examples for lack of clarity.
Number four is the fitment. The whole thing will unravel if the fitments are done unwisely or with greed in your heart. If all the states get together and say that we must extract more tax and the entire fitment is skewed in favour of higher rate, then I think the whole thing will unravel. Then, section 171 deals allegedly with anti-profiteering, it’s actually a suspect provision from the constitutional point of view and I think it’s open to abuse.
Q: The logic of keeping key inputs such as electricity, petroleum outside GST. Would that count as an aberration?
A: It’s a very unsatisfactory compromise. They have kept out 40 per cent of the GDP. I can understand the states being zealous about taxing alcohol, but I can’t see why the central government could not persuade the states to include electricity, real estate and petroleum products.
Q: There’s an assurance of 14 per cent growth in revenue (for states). Would that put pressure on number of items being bracketed more in the 28 per cent category?
A: The states and the Centre have assumed that there will be a 14 per cent increase but how did they arrive at that. Why did they arrive at a 14 per cent increase is also not clear. In normal circumstances, we should be happy even if there’s a 12 per cent increase in revenue for whatever reason. Having apparently agreed that there must be a 14 per cent increase, if that is going to drive the fitment, the chances are that many items will be fitted into the higher rate… We’ll have to wait and see how they fit it.
Q: What’s the issue in having an anti-profiteering provision?
A: Firstly, the section is worded in a manner that if there is a reduction in the tax rate, there shall be a commensurate reduction in the price but tax is only a factor that determines price. There could be a reduction in the tax rate but simultaneously there could be an increase in the raw material cost, there could be a rise in electricity cost, there could be a rise in various other factors that go to make up a price. So, this is open to abuse because the tax official will simply issue notice like he has issued notices to 18 lakh assessees in income tax and say you are indulging in anti-profiteering. There is no definition of anti-profiteering, they are going to set up an authority, that authority will devise its own procedure. It’s clearly open to abuse. The second aspect is that if there’s profiteering, there are other regulators and institutions which deal with profiteering. There’s a consumer forum and there’s Competition Commission (of India). So why should power be given to a tax official to decide something that a market should decide. As far as the tax law is concerned, it’s only purpose is to levy a tax and collect a tax. Why should it go beyond that and ask questions which do not fall within the purview of the tax book. For example, you levy an income tax, do you ask a doctor, how many patients do you treat free? You levy income tax, do you ask a businessman, what part of his income is he setting aside for charity. That is not the purpose of the tax law, nor can it be within the province of the tax official.
Q: That’s a larger trend. Even in the Finance Bill they have given a certain amount of discretionary power to taxmen for certain actions…
A: This government is a ‘tax and spend’ government. It’s quite clear and therefore, they think that if they confer extraordinary powers upon the tax official, he/she will get more revenue. What they forget is, if you confer extraordinary powers upon a tax official, it is also more open to abuse.
Q: The GST Council has changed the definition of agriculturist and the Finance Minister has clarified that it’s only for registration purpose and not for taxation purpose.
A: Section (in law) doesn’t say so. In fact, there are problems. Firstly, if an agriculturist engages in non-farm activity, is he liable to register. There are ancillary activity on a farm or in an agriculturist holding, which are non-farm activities. Examples are selling eggs, selling milk which your goat and cow yield, is he bound to register if he sells egg or milk? The other aspect is, look at the definition of taxable turnover, taxable supplies. It includes exempt supplies. So, supplies, that is, goods and services, which are otherwise not taxable is included for determining taxable turnover. That is what it appears to be on the plain language of the section. So, I may cross the threshold of Rs 20 lakh but the bulk of my turnover could be coming from exempted supplies, yet I have to register. So, the attempt has been to cast the net very wide, and then if some people are to be left out, then to leave them out. Which is think is a very wrong approach. The approach should be to cast the net only on those who you intend to tax, not cast the net on those who you intend not to tax. All this is enlarging the discretion of the tax official and I am not in favour of enlarging the discretion of the tax official. Tax laws must become more and more precise, more and more well-defined, so that the area of discretion is extremely limited.
Q: Does CAG have powers to audit GSTN completely?
A: CAG’s powers come from the Constitution, the CAG Act. So, strictly speaking, it’s not necessary to mention in every tax law that the CAG will levy the accounts of the accounts of the state government and the central government. But, if the CAG has raised this question formally, I don’t know, with the government, it’s the duty of the government to formally clarify to the CAG that by virtue of its powers under the Constitution and the CAG Act, he will have a right to audit the entire GST, including the GSTN. It’s the duty of the government to clarify it.
Q: Despite being a non-government company, does CAG have complete auditing powers over GSTN?
A: It has under the Constitution. At the request of either the government or at the request of the CAG, it can apply to another body.
Q: Some states like J&K are asking for a September 1 rollout of GST.
A: I have serious doubts about this deadline of July 1. In fact, number one, I think it’s impractical and number two, it’s undesirable. The reasons why it appears impractical are known. The council itself is going to look at the rule towards the end of may. And the fitments will have to be made public and there will be some amount of protests against the fitment. Eventually, they will have to be brought back to Parliament. The rules and the rates have to be brought back to Parliament and Parliament has a right to amend them. But I think this exercise should not be rushed. This should take place after a full debate in public domain. So I think July 1 is impractical… and undesirable. We are moving towards a completely new regime, of which many people are not familiar.
Yes, thanks to Cenvat, Modvat and now Vat, assessees who were under the central government for excise and assessees who were under the state government for sales tax are now familiar of the concept of an input tax credit. But it has never been applied on an all-India basis and the bulk of the assessees would be assessees of Vat who are simply not familiar when a law of this kind is applied universally to all goods and all services.
Compliance provisions are extremely complicated. Filing procedures are entirely electronic. And I think people should be given enough time to adjust. The second aspect is that the GSTN has to be proved in a trial. The finance minister spoke of 30 billion invoices a day… If that number if right, it is a humongous number… Is the GSTN capable of processing all that without glitches? I think the GSTN should be allowed to run it on a trial basis for a month or two before you actually launch GST. I personally think October 1, the second half of the financial year, is the correct date.
Q. Would the constitutional amendment not lapse on September 16?
A: No, nothing will lapse… The Act will be notified. The tax will apply from October 1.
Q. Isn’t the July 1 deadline, if it were to happen, heavily loaded against the small and medium businesses?
A. The bigger guys can employ talent and skills to quickly get on to GST. Businesses in the tier-II and tier-III towns who only have a local accountant to handle their accounts and who are not yet completely familiar with electronic filing, I think puts a huge burden upon them. And they will make mistakes. My further worry is when they make mistakes, the tax official descends on them and starts issuing notices and there will be a huge backlash against the trading community and the business community. That leads to the other aspect — that this law must be applied with a benign hand. At least for 3-5 years. If it is applied with a harsh and heavy hand, again there will be a backlash. So my advice would be to push back the date to October 1, instruct your officers to apply it with a benign hand and show forbearance to small mistakes until people fully get used to the idea of a GST.
Q. The GSTN not going through a trial run, is there a chance that there could be potential inter-state disputes?
A: Yes, there will be… In fact, it is the inter-state disputes and the state-centre disputes that concern me. See, a dispute between tax collector and taxpayer will be resolved by the usual assessment, appeal, revision, tribunal proceeding. But disputes between the centre and state or state and state… there is no machinery yet. The constitutional amendment provides for a machinery, but that machinery is not yet set up. So if disputes arise very early after GST is introduced, where is the machinery to resolve it?
Q: Do you think that amendments would have to be moved to the GST bills?
A: I have no doubt in my mind that within the next two years, several provisions will call for amendments and will be amended.
Q: Does the BJP deserve credit for pushing GST through?
A: They deserve credit for running the last lap of the race, but this baton has been handed over from government to government. So the one to breast the tape by running the last lap is not the only one who has run the relay.
Q: The multiplicity of the rates, doesn’t that distort the original idea of GST bringing about a unified tax regime?
A: That’s precisely why I called it an imperfect bill. But it can be made less imperfect if you put 70 per cent of the goods and 70 per cent of the services in the rate of 18 per cent. And if you manage to push 90 per cent of the goods and 90 per cent of the services in the modal rate of 18 per cent, it becomes even less imperfect. So the fitment is the key.