Note: This article was first published on March 30, 2017 and is being republished today in light of the nation-wide roll-out of GST. Many of the issues raised in this piece still stand.
The Goods and Services Tax (GST) framework operates on a handful of key principles. The Centre will levy and collect the Central GST. States will levy and collect the State GST on supply of goods and services within a state. The Centre will levy the Integrated GST (IGST) on inter-state supply of goods and services, and apportion the state’s share of tax to the state where the good or service is consumed. The 2016 Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST.
What are some issues that are yet to be considered?
Multiple GST tax rate structure [Clauses 9 and 10, Central GST Bill, 2017]
The Central GST Bill, 2017 allows the central government to notify rates at which CGST will be levied, subject to a cap of 20%. Further, businesses with turnover less than Rs 50 lakhs may choose to pay tax at a flat rate notified by the government (known as composition levy), which will be capped at 2.5%. This may lead to a few potential problems which are discussed below.
No Parliamentary approval needed for CGST rates?
The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament. Under the Constitution, the power to levy taxes is vested in Parliament and state legislatures. Though the proposal to set the rates through delegated legislation meets this requirement, the question is whether it is appropriate to do so without prior parliamentary scrutiny and approval.
The Constitution does not allow a tax to be levied or collected except by authority of law. Currently, most laws which levy taxes such as income tax, and service tax specify tax rates in the principal law, and any changes in these rates requires the approval of Parliament. While, laws such as the Central Excise Tariff Act, 1985 allow government to notify a change in tax rates only in case of an emergency, these changes are subject to the tax rate, and certain restrictions and caps specified in the 1985 Act.
Against the idea of the GST?
The Central GST Bill, 2017 provides for the centre to notify CGST rates, allowing for a multiple tax rate structure. The goods and services to be taxed at different rates will also be notified by the government. It may be argued that such a structure may be against the idea of a levying GST at a single rate on all goods and services.
In December 2015, the Expert Committee on the Revenue Neutral Rate for GST had suggested a three rate structure for GST. However, while making this recommendation, the committee had noted that 90% of the countries which have adopted GST, have opted for a single rate structure, which allows for easier tax administration. The 13th Finance Commission (2009) had recommended that GST should be levied at a single rate of 12%. It had added that goods and services such as education, health, and public services should be exempt from this tax.
While a multiple tax structure may allow for controlling the impact of GST on prices of essential items, classifying goods and services under different slabs may be a complex exercise. Currently, goods and services may be taxed at different rates across states owing to geographic, economic and cultural reasons. For example, coconut oil is taxed in Kerala at 5%, while in Uttar Pradesh, it is taxed at 12.5%., Therefore, taxing each good and service at a particular rate will be a complex exercise as they cannot simply be moved to the nearest slab rate. A second disadvantage of a multiple rate structure is that it could lead to disputes on classification of goods and services. .
GST on services consumed across multiple states [Sections 2(14), 2(15), 12, Integrated GST Bill, 2017]
Currently, services are taxed by the centre, and therefore the state where they are finally supplied and consumed does not matter for levying service tax. Under GST, states will also have the power to tax services, along with the centre. This means that states will levy SGST in case of intra-state supply of services, while the centre will levy IGST in case of inter-state supply of services and apportion a share of the revenue to the state which is the recipient of the service.
The general rule to determine the location of the recipient is his location or address on record; there are specific rules for various services such as telecom, property, transportation, etc. This means that while a service may be consumed across multiple states, the tax revenue would be attributed to the state where the recipient is registered or his office is located. This could lead to higher tax attributed to states that have more registered offices.
For example, a company A located in Mumbai advertises its products in the Patna edition of a newspaper, which has its registered office in Delhi. In this case, one may argue that the service is being finally consumed in Bihar. However, as the recipient of services is in Mumbai, the tax would accrue to Maharashtra.
Anti-profiteering authority [Section 171, Central GST Bill, 2017]
The Central GST Bill allows the central government to set up an anti-profiteering authority by law, or designate an existing authority to carry out the functions. The authority will be responsible for ensuring that the reduction of tax rates on account of implementation of GST results in a commensurate reduction in prices. It may be argued that this may allow the government to monitor and control prices of all goods and services, which may interfere with the idea of these prices being determined based on their demand and supply in the market.
Note that the price a good or service is dependent on a combination of factors, which include: (i) cost of inputs, (ii) technology used for production, (iii) tax rate, (iv) demand and supply of product, (v) consumer preferences and seasonal variations, (vi) competition in the market, and (vii) distribution channels. Since costs associated with these factors keep fluctuating, it may be difficult to determine if a reduction in tax rates has reflected in a commensurate decrease in price of goods or services. One concern could be that a company or a group of companies could collude together to rig prices; however, the Competition Commission of India has the jurisdiction to examine such cases and impose penalties.
Sharing of un-utilised money?
The rationale behind sharing un-utilised money in the GST Compensation Fund with the Centre and among states being different from Finance Commission formula is unclear [Section 10, GST (Compensation to States) Bill, 2017].
The Constitution (101st) Amendment Act, 2016 requires the centre to compensate states for any revenue loss due to implementation of GST for a five-year period. To compensate states, an additional cess on certain goods and services will be levied under GST. However, at the end of the five-year period, the unutilised funds received by levying the cess will be shared equally between by centre and states; the share of states will be apportioned in the ratio of their SGST collections in the last year of transition.
This tax is collected from consumers by the central government and the question is how to apportion it among the Centre and each state. In case of direct taxes (and other central taxes such as customs duty), the formula is based on the recommendations of the Finance Commission. Such formula is used for dividing the funds collected through CGST and the centre’s share of IGST too. The apportionment of excess funds collected through the compensation cess differs from such formula.