IRS lobby says state clause on GST will open floodgates of litigation

Indian Revenue Service (IRS) officials engaged in indirect tax collection are seeing red in the GST model proposed by certain states demanding exclusive control of state administration for collection of taxes for business with turnover under Rs 1.5 crore.

The demand of a state has been vehemently opposed by the IRS officers, who believe that if the proposal is accepted it will be highly detrimental for the country's economy. "If states have their say then it would lead to loss of revenue, higher fiscal deficit and higher inflationary pressure," says a senior IRS official.

Highly placed sources in the Finance Ministry said officials have been giving their representations against the West Bengal demand. They are saying if Centre yields to the demand of tax collection under Rs 1.5 crore by the state governments, then it would open floodgates of litigation.

Asim Dasgupta, the chairman of Empowered Committee (consisting of state finance ministers) had proposed that tax collection below Rs 1.5 crore turnover business should be vested with the states only.
Only 40 per cent IRS officers are posted in customs, while remaining 60 per cent are engaged in indirect tax collection. So if the states have their say, the tax collection will be done by the state administration. This would obviously be having an impact on IRS cadre and even may lead to the re-organisation of the cadre. Actually this change is a matter of worry for the cadre. However, most of their contentions are reasonable and require a serious thought.

The present GST model is based on destination or consumer state taxation unlike the earlier model of taxation of goods and services in the state of origin. The proposed model of GST aims for the first time collecting taxes from the persons who are not the resident of state in which they would be taxed. The new proposed taxation regime involves various issues.

ISSUES IN ADMINISTRATION OF PROPOSED GST: OVER ASSESSEES HAVING ANNUAL TURNOVER UNDER 1.5 CRORE

DEMANDS OF SOME STATES - Taxpayers with turnover under Rs 1.5 crore to be under the exclusive control of state administration for collection of CGST, SGST and IGST along with audit and enforcement function.

ARGUMENTS PRESENTED BY THE STATES IN THEIR FAVOR - (i) Dual control will lead to higher difficulties for the small tax-payers due to higher compliance cost in the view of dealing with two administrations thereby impacting their competiveness and going against the principle of 'Ease of doing Business'. (ii) Small dealers are habitual of dealing with state administration and shall ensure hassle free transition in the GST regime. (iii) States have wider administrative presence and hence are better equipped to deal with small tax-payers.

ARGUMENTS OF IRS OFFICERS

(i) Who is a small tax-payer: At present the categorization of small tax-payers is being drawn on the basis of the exemption provided to manufacturers or SSIs under Central Excise Law for assesses below Rs. 1.5 crore. However, for service tax the same is limited to a service provider with turnover of upto Rs. 10 lakhs. Therefore, the GST law synergises different laws and proposes an exemption threshold limit of Rs. 25 lakh, precisely to take into consideration the concerns of the small tax-payers. In addition to this, for tax-payers with turnover from Rs 25 lakhs to Rs.75 lakhs, a compounding scheme is proposed wherein the tax-payers will be allowed to maintain simplified records. Therefore, the above two measures cover a bulk of the small and marginal tax-payers. The current interpretation of the states stretches the definition of small tax-payers too far and leads to an absurd scenario where 90 per cent of Indian businesses are being categorized as small tax-payer and the same appears to be more of a self-serving approach rather than a policy stance.

(ii) Central tax administration is dealing with both small and large tax-payers both for goods and services: The exemption limit for service tax is only Rs. 10 lakhs and in Excise, many SSIs don't avail the benefit of exemption for the purpose of availing Cenvat Credit facility. Most of Centre' assesses are Service Tax assesses in the turnover range of Rs 10 lakhs- Rs 1.5 crores, which have been exclusively dealt by centre till now. Further, Centre also has jurisdiction over first & second stage dealers. CBEC has established and put in place non-intrusive tax administration based on well researched and sound risk parameters aimed at all categories of tax payers. Compliance mechanisms have been restricted to audit and enforcement. Both are well established and accepted by taxpayers including those from 10 lakhs to 1.5 crores.
Rest all issues are to be handled by the System i.e., GSTN. The contention that dual control will be against ease of doing business is thus an unsubstantiated argument which needs to be rejected outright. Thus, the issue of dual reporting leading to burden is not justifiable.

(iii) The indirect tax administration of the central government is spread across the length and breadth of this country with a cadre strength of nearly 80,000 employees across all cadres. Further, the central government is administering the service tax law for over two decades and has developed significant professional expertise in its implementation. The manner in which the service tax law has been implemented by Center has been widely appreciated. It is possible that the lack of knowledge and procedure in service tax, and cases of works contract where the states domain over land would continue, may lead to significant confusion in implementation of law. The guidance by an experienced tax administration would be a significant boost in smooth transition to GST.

(iv) The fears of dual control and harassment issues are unfounded as GST will be an IT- based tax assessment. Moreover, even today, assesses deal with Central Excise, Service Tax, VAT, Octroi, Entertainment Tax and numerous other state govt tax agencies separately. Currently, small assesses have to deal with 5 or 6 indirect tax agencies, but under the dual control regime, they would have to deal with just 2- Central GST & State GST Department and file only one return with GSTN.

(v) For small assessees, various documentation and other requirements can be minimized. They would have to file only quarterly returns and compounding schemes that are also envisaged for all assesses having turnover less than Rs 75 lakh.

It should also be appreciated that once a single authority is mandated to administer tax collection from a set of taxpayers, similar facility will be needed to be extended to all taxpayers. In the event, it would need to be decided if Centre is willing to forgo its indirect tax collection altogether. In any case, as highlighted above, the tax payers will be needed to deal with Cental tax collection administration for export related issues and IGST related problems. However, if a decision is taken that small tax payers will need to be necessarily administered by states, then Centre must be mandated to exclusively collect taxes from all assesses having a turnover of more than Rs 1.5 crores, assesses undertaking exports and having interstate transactions, while states collect taxes from assesses having turnover less than Rs 1.5 crores.

THIS SINGLE PROPOSAL CAN WEAKEN THE UNION GOVERNMENT FOREVER

IRS officers say India is a federal polity where the constitution has provided for a balanced scheme of fiscal federalism, under which both the Centre and states are provided their specific role. The Centre has been provided with wider fiscal authority under the constitutional scheme in order to undertake its responsibilities of defense, development of the nation and providing transport and communication facilities. The various Finance Commissions have been increasing the devolution of funds to states on the basis of various criteria, and the same is likely to continue in future. The Centre is also expected to play a balancing role among the states and ensure fiscal responsibility on part of the states. For carrying out these functions effectively the Central government requires robust finances and an effective tax administration. It would be fallacious to presume that the tax administration has little role to play in tax collection, and thus it would be irrelevant which agency collects the tax. It needs to be appreciated that a close knit and interactive tax administration yields better revenue collection than disparate organizations reporting to different authorities.

The Government is aware that the indirect taxes are contributing the lion's share of tax revenues currently. With the addition of state Vat and other taxes likely to be subsumed in GST, the ratio of total indirect tax collection would be nearly 70 per cent of all tax collection, and a percent of all Government Revenue. It further needs to be appreciated that with the credits being allowed across Board, the tax evasion is likely to shift to the end point, that is, the small trader, and the inter-state movement of goods. For reference, it is relevant to point out that in EU, when GST was being implemented from 2006-11, there was massive evasion of duties known as the "Carousel Fraud"(or the "Missing trader" fraud) where there was a GST evasion of 200 million Euros. This fraud was possible as the different member states of EU could not cross check data which was being submitted to other states. Similarly, if more than 80 per cent of all assesses are kept beyond the control of the Central Government, there could be such scams as the states would only be concerned about their assesses and would not be able to monitor linked transactions happening in other states being conducted with the purpose of tax evasion.

This proposal strikes at the very root of federal fabric of our Constitution. The Centre has been constitutionally ordained to levy and collect a major portion of Indirect taxes in the country in areas which are pan-Indian in their reach and have international ramifications. Divesting the Union Government of this important role and function, even by a Constitutional amendment or a statute and procedural arrangement will be against the basic structure of the Constitution.
This single proposal can weaken the Union Government. When centre will have no effective control over the administration of over 70-80 per cent of its assessees, how can it possibly meet FRBM targets, invest in the defence and development of the country and also guarantee compensation of taxation losses (if any) to the states. A strong centre is needed to keep India together and forge our national growth forward. Centre anyways has Defence, Finance and External Affairs as its main responsibilities and pillars of strength.

Though, currently the revenue contribution of such tax-payers may be less, but, it is this category of tax-payers who hold the maximum potential in terms of growth in revenue and tax buoyancy due to the fact that tax exemptions will need to be gradually phased out. There will also be possibility of significant under-reporting. Therefore, the contribution in tax revenue from this class of tax-payers at present may only be a small proportion of the actual potential, and letting go of such assesses by the Centre may not be advisable.

'THIS PROPOSAL CAN RUIN THE FUNCTIONING OF AN EFFICIENT GST'-

The IRS officers say move towards GST is aimed at simplifying the tax structure, widening the tax base, reducing tax-evasion and incentivizing the honest tax payers. It is supposed to be a win-win situation for all the stakeholders viz the Tax Payers, Central and state government. The proposal for having divided control over the assessees with all assessee having revenue less than Rs 1.5 crores being monitored only by state govt hits at the very root and premise of having GST. It will lead to rampant tax evasion, confusion and chaos amongst assesses due to different interpretations of issues by states, no effective control and eventually it will lead to revenue loss for the nation.

The most important problem which would be faced by the administration of assessee having a turnover of less than Rs. 1.5 crores by individual states would be the procedures required to be faced by the assesses doing interstate supply or who also export their goods and services. In these cases they would have to settle the credit change through IGST, which has to be administered by the Centre only. Similarly, the issues relating to rebate of export and refund of terminal excise duty etc. will have to be continued with Centre only. For example, in a hypothetical situation where an assessee has supplied goods and services to another state and there is an issue of transfer of credit, the following situation may arise:-

The supplying state refuses to honour the dispute regarding supply of goods and services or an interstate basis. In such a case, while the credit may be denied by the receiving state, the refund of duty paid may not be given to the supplier by the originating State.

A fraud like the carousel fraud is a distinct possibility particularly if there is a lack of coordination between various State Authorities. Centre needs to have access and control over all the assesses to prevent such a fraud. A stronger coordination between Customs Authorities and GST Administrations may be required which may be possible only through the Centre.

It is therefore felt that the Centre should have exclusive control at least over assesses having interstate supplies, or having export out of India. Dual control over other assesses having a turn of less than Rs. 1.5 Crores may be considered to keep the spirit of Constitution mandating a strong Center in a Union of States intact.

Some of the issues that may come up in the proposed model, where all assesses below Rs 1.5 crore turnover are kept exclusively with the states, are:
It shall lead to mushrooming of a large number of proprietorship concerns by the tax-payers in order to remain below the threshold turnover or under-report their turnover to remain out of dual tax administration, thereby incentivizing the dishonest tax-payer.

In EU, when GST was being implemented from 2006-11, there was massive evasion of duties known as the "Carousel Fraud"(or the "Missing trader" fraud) where there was a GST evasion of 200 million Euros. This fraud was possible as the different member states of EU could not cross check data which was being submitted to other states. Similarly, if 80 per cent of all assesses are kept beyond the control of the Central Government, there could be such scams as the states would only be concerned about their assesses and would not be able to monitor linked transactions happening in other states being conducted with the purpose of tax evasion.

The fate of tax-payers at the cusp of the threshold limit shall always hang in the balance with turnover being a dynamic variable. Each year the turnover may increase or decrease leading to a scenario where the tax-payers continue to shuffle among the two administrations leading to uncertainty and compliance issues for the taxpayer.

It is also essential to understand that tax administration of large tax-payers cannot be held immune from the administration of small tax-payers because of convergence in businesses-large and small being part of the same supply chain. Further, implications of administrative decisions on one category shall have precedent value and therefore determine many judicial pronouncements in the case of the other.

Seamless flow of tax credit is the essence of GST, with the potential to remove cascading. However, is requires a robust administrative mechanism to carry out the necessary verification of availment and utilization of credit to prevent tax frauds. In the proposed model the States would not be able to do verification of the credit availed of, as they do not have pan India jurisdiction. Further, there will be no verification by Central tax authorities for the credit passed on by the small tax-payers to large tax-payers.

Presently, all Service Tax assessees are only handled by central officers. The Service Tax revenue exceeds 2,00,000 crore today as against the very humble beginnings in 1994 as a result of incessant efforts of the Central government in widening the tax base. In this process of constant evolution of this highly complex law, CBEC has developed unparalleled expertise over it. Thus, the central officers are more than suited to continue to handle and administer this ever evolving law in the interests of maximum revenue generation as well providing hand holding to the state governments in this complex field. Handing over the majority of the assessees exclusively to the states, who have no experience in handling Service Tax, will lead to utter chaos and confusion. GST introduction in Malaysia in 2015 has lead to utter chaos and similar scenario may unveil in India if this proposal is implemented.

All service tax legal literature is in English and pan Indian Asseeses (such as those in Banking, Insurance and Telecom) have to go then in different local language, it will take years to convert legal language with understanding. Translation may give different meaning and interpretation.

Also, the transparent and rule bound working ethos of Central Government has resulted in least harassment of their assessee base and least political interference in discharging of their duty by the officers as compared to state government.
Rule based Working culture, Sevottam, RFD, common official language, better office atmosphere for asseesees, ease of doing business, quick registrations are only available at Central Tax administration specially for small assesee. If the Union Govt wishes to take Make in India forward by ease of doing business, then having more than 70-80 per cent assessees outside its control will certainly not help the cause.

THE WAY FORWARD

As per the IRS officers it is evident that the reasoning advanced by states is flawed and shall not only defeat the purpose of GST but lead to a scenario whereby the fiscal destiny of the Center shall be entirely in the hands of the states. Therefore in the interest of taxpayers, finances and efficiency, following options must be explored:

Dual jurisdiction of both Centre and States should continue over the entire value chain. The rigors of dual control have already been mitigated under the provisions of model GST law for the small tax-payers and administrative arrangements can be designed in the interest of small tax-payers.

States' concerns for small taxpayers are based on the ground that the small taxpayers are dealing only with one tax administration in the present taxation regime. The same logic also applies to service providers who are presently under the exclusive jurisdiction of Centre. In fact, many Service Tax assesses such as those in banking & insurance who only had to take 1 registration across the nation may now have to take more than 300-400 registrations (One each in the name of their different constituent units & in all the states in which they are functioning)

OTHER CRITICAL ISSUES WHICH DESERVE SCRUTINY-

Dispute Resolution

Exclusive adjudication power in case of all assessees to be with the centre: One of the important canons of taxation is uniformity, predictability and consistency in administration of taxation laws. At present, this is being achieved by a unified cadre of Central officers who administer the Indirect taxes uniformly across the country under a same administrative set up, policy and procedures. This is more important in the light of the fact that different states have different governments who might formulate different GST laws, different policies and different procedures for administration of state GST, which would typically lead to a situation where in an identical transaction of supply of goods/services, different decisions and postures would be adopted by different states, leading to utter confusion, chaos and harassment for the trade. In many issues of interpretation of Place of Supply, the states may get biased as the interpretation would have a clear ramification of which state would get the SGST portion, effectively hampering judicious adjudication of disputes. On the other hand, Centre can act as an impartial actor, as its interests are not affected by such interpretation. Therefore, all the adjudications where issues related to interpretation of interstate supplies are involved, should be exclusively vested with the Central Government.

Also, IRS officers, being under a unified command and operating under uniform procedures and setup, would provide a sense of uniformity and consistency in the interpretational issues as well as adjudication matters across the country and would go a very long way in the Ease of doing Business.

Policy making in GST COUNCIL

The TRU of CBEC is performing the task of policy formulation, issuance of notifications, circulars, clarifications in respect of references received on complex interpretational issues of taxation laws including references on International Treaties since over 40 years now and has therefore gained unparalleled technical expertise and experience in the complex issues arising out of the administration of Indirect taxes. Therefore, TRU is a natural choice to be remodeled as the 'GST Council Secretariat' to function as the exclusive agency performing the tasks of policy formulation and providing backend administrative support in the GST Council in all the issues pertaining to the levy, collection and administration of Indirect Taxation in the country. Some posts may be kept open for deputation from state's tax administration to make it representative of the concerns of the Centre as well as States.

GST Network

Under the proposed GST Network setup, it is being created as a private body where professionals etc from corporate sector are being employed to handle the most sensitive financial data of all the existing Customs, Excise, Service Tax and VAT assessees. The need for utmost secrecy and integrity in the management of this data in the interest of financial stability and independence of the country as a whole cannot be overemphasized. Therefore, it is of utmost importance that the office of DG Systems under CBEC which is currently handling the entire database and information pertaining to the entire Central Indirect Tax assessees should be transformed into GST Network with some posts kept open for deputation from state's tax administration. It is a very precarious situation for the very existence of the country that such sensitive and sovereign function of collection and safe keeping of such sensitive financial data is left entirely at the mercy of private individuals. DG Systems under CBEC is already successfully handling all this database and information without any leakage and hassle for more than three decades now.

IRS lobby is now waiting for the Empowered Committee meeting supposed to be held next month. Sources say they would request Centre to make a strong representation against the demand of West Bengal Government.
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