Speaking at the 70th annual general meeting (AGM) of the Indian Banks’ Association last week, finance minister Arun Jaitley announced that the enforcement of the Goods and Services Tax (GST) regime has been “going smoother than expected”.
This comes in the backdrop of the ministry he heads having revised the deadline for filing GST for the first month of its operationalisation (that is, last July) twice, to November 10 at present, and exporters claiming that the delayed timeline for receiving ‘transitional credit’ has blocked working capital worth up to Rs 65,000 crore. The finance ministry has repeatedly advised traders in the past to file their taxes in advance to prevent technical errors on the online GST portal closer to the deadline, but has now announced that it is also considering a ‘manual procedure’ to clear the backlog in returns claimed.
A group of ministers convened to look into the matter – after repeatedly being flagged by Empowered Committee (EC) of state ministers on GST – admitted earlier this month that “technical glitches, procedural problems and absence of some forms on the network portal are causing delays in making payments and filing of returns by traders and dealers under the new GST regime.” Meanwhile, it is reported that the Comptroller and Auditor General (CAG) has started assessing the technical capabilities of the GST Network (GSTN). GSTN is the special purpose vehicle (SPV) in charge of developing information technology for the new tax infrastructure and handling its database of citizens’ taxation information on behalf of the Union and state governments.
The emergent reaction among politicians taking issue with the ‘hasty’ implementation of GST glosses over the controversial history of GSTN itself – its genesis and make-up – which now controls the sovereign taxation data of Indian citizens. This is the story so far of GSTN, the peculiar ‘profit-making, but not profit-maximising’ corporation in charge of rolling out India’s most wide-ranging tax reform in recent history.
One Nation, One Tax: Multiple conflicts of interest
A day before the GST was enacted amid much fanfare, noted former bureaucrat E.A.S Sarma brought to light potential conflicts of interest in appointments to the board of directors of the GSTN. As per publicly listed information, six of GSTN’s 13 directors simultaneously hold positions on the boards of multiple private and public corporations as well as consultative roles with private entities and trade bodies. Two such directors are seated on the boards of the Indian subsidiaries of foreign corporations. In a letter to Jaitley, dated June 30, 2017, Sarma questioned the rationale behind their appointments and GSTN’s private shareholding pattern from which they emanated.
Raising the issue in the Rajya Sabha earlier this year, member of parliament Subramanian Swamy of the ruling Bharatiya Janata Party (BJP) had termed GSTN a ‘shady organisation’ due to its contentious ownership structure. A majority of stakes in GSTN is held by private institutional investors. In a letter to Prime Minister Narendra Modi in August last year, Swamy pointed out that taxation was a sovereign function of governments and a decision to ‘outsource such confidential assessment and activity’ would have adverse effects. Moreover, he alleged that GSTN had been granted access to sensitive information without the due security clearance from the Ministry of Home Affairs (MHA), a move that he considered ‘anti-national’ in light of its shareholding structure.
Ten days before GST’s slated launch, Jaitley responded to his critics saying that security clearance for GSTN was a ‘procedural matter’ and that its absence would not withhold the tax’s intended roll-out. The MHA cleared GSTN for security during the week after the new tax became operational, reportedly after the Intelligence Bureau and the National Technical and Research Organisation concluded their assessments of the ‘threat perception to national security from any of the [GSTN’s] stakeholders’.
Such questions over GSTN’s functioning are not new. They have been raised by voices within the government. The Select Committee on the Constitution (122nd Amendment) Bill, 2014 chaired by Bhupender Yadav of the BJP, which included prominent members from both benches of the parliament, had tabled its report in the Upper House on July 22, 2015. The committee noted that the non-government ownership of GSTN was ‘dominated by private banks’ and warned that this was ‘not desirable’, given the crucial role GSTN was to play in India’s emergent taxation system. It recommended that GSTN be replaced by a fully government-owned body.
It recommended that non-government ownership of GSTN be restricted to public sector banks or financial institutions which oversee the lion’s share of total credit lending in the country due to the sensitive nature of the data relating to Indian businesses to be held in the new repository (Select Committee 2015).
From Committee to Start-up
GSTN is a ‘national information utility’ (NIU) incorporated on March 28, 2013 under Section 8 of the Companies Act, 2013 – the first of five proposed NIUs to inherit India’s taxation and other financial IT ‘services’ along with the Tax Information Network, Expenditure Information Network, National Treasury Management Agency and New Pension System. Aside from managing GST’s IT infrastructure, GSTN provides services directly to tax payers such as registration, returns and payments through a ‘common GST portal’ and back-end services to the tax departments of the Centre and the states on request. GSTN also collaborates with private third-party service providers to create applications for GST-related services and develops utilities for taxpayer profiling and fraud detection.
The organisation is envisaged to function autonomously through a ‘self-sustaining financial model’ for ‘flexibility’ in decision-making and recruitment while central and state governments retain ‘strategic control’ over its operations. Such a model for NIUs had been outlined in the report of the Technology Advisory Group on Unique Projects (TAGUP) submitted on January 31, 2011 to then finance minister Pranab Mukherjee. Constituted during the Manmohan Singh-led United Progressive Alliance coalition’s second term in power in June, 2010, TAGUP was headed by Nandan Nilekani, former CEO of Infosys Limited and then chairperson of the Unique Identification Authority of India (UIDAI).
The Empowered Group on IT Infrastructure for GST was set up a month after TAGUP and similarly headed by Nilekani. It was tasked with chalking out the modalities for setting up the GSTN. Its recommendations were endorsed by the EC on October 14, 2011, signifying the states’ assent. GSTN was announced by the central government as early as April 12, 2012. A non-recurring grant-in-aid of Rs 315 crore from the government would provide for the new corporation’s operational expenditure for a period of three years after its incorporation.
With the operationalisation of GSTN, the TAGUP report of 2011 has come to be a charter for India’s envisioned data gathering and management ecosystem. A glimpse into how confidential data belonging to Indian citizens relating to identity, taxation, pensions and benefits delivery are set to be managed by the state in the coming decades may be found in this document. The authors noted that while the recommendations being made were directly applicable to GSTN and the four NIUs mentioned in the report, it would serve as a framework for ‘complex IT-intensive systems which are increasingly coming to prominence in the craft of Indian public administration’.
NIUs are central to TAGUP’s agenda. A NIU is a non-government, not-for-profit entity registered under the Companies Act, 2013, subject to most obligations of limited companies while using a name and acronym associated with pre-existing government agencies. All profit or income of a NIU is to be utilised for meeting its objectives without paying dividends to shareholders, as outlined in Section 8 of the Act related to organisations set up for a ‘charitable purpose’. With the government being any given NIU’s single paying customer, it may choose to take its business to a separate NIU. However, TAGUP anticipated that governments would be interested in maintaining a NIU’s functionality once established as it would be operating in a natural monopoly created by investing the state’s resources.
NIUs are to be modelled on ‘start-ups’, first undergoing a period of incubation attached to pre-existing entities before attaining ‘long-term institutional capacity’. GSTN was developed as a ‘pilot project’ under the National Securities Depository Limited’s e-Governance Infrastructure wing.
After an initial period of public investment for their establishment and upkeep, NIUs are to maintain their financial autonomy by levying transaction fees for services. A NIU is expected to operate in compliance with the latest industry standards for technology, with the freedom to make lateral hires and design its own promotion, monitoring and incentive structures for employees.
In his public comments, former chairperson Navin Kumar had stated that revenue will accrue to GSTN primarily from transaction fees charged to governments. Fifty percent of such fees will be borne by the Union and the balance by the states in proportion to their taxpayer base. A direct levy on taxpayers charged per transaction as per GSTN’s original proposal had been shot down by the EC. After Kumar’s retirement in August, Ajay Bhushan Pandey, CEO of UIDAI, has been handed additional charge of GSTN.
Private third-party operators termed ‘GST Suvidha Providers’ (GSPs) will be allowed to access GSTN’s taxation database and charge users independently. Thirty four operators had been certified by May, 2017 with over 160 others having evinced interest. Thirty nine more GSPs, including major accountancy firms such as PricewaterhouseCoopers, Ernst and Young and Tata Consultancy Services have been approved since. GSTN’s standalone tax return application will compete with such third-party operators. This is, perhaps, in line with what TAGUP referred to as an ‘open architecture’ environment consisting of NIUs and other private stakeholders.
TAGUP stipulated that total private ownership of NIUs should be at least 51% of shares, with no single stakeholder owning more than 25%. Notably, it recommended that corporations having a ‘direct’ conflict of interest, such as IT companies, should not be permitted to own shares in NIUs.
Fifty one percent of GSTN’s ownership is held by private interests and the rest by the public on a principle of parity – one half by the Centre and the other by state governments (including Goa, NCT of Delhi and Puducherry) collectively. Private players to stake interest include HDFC (10%), HDFC Bank (10%), ICICI Bank (10%), NSE Strategic Investment Corporation (10%) and LIC Housing Finance (11%). The government remains GSTN’s single largest shareholder, owning 24.5%, while state governments jointly control another 24.5%, bringing total public ownership to 49%. Its authorised capital at the time of incorporation stood at Rs 10 crore of which Rs 4.90 crore was publicly financed. Private investors were granted ownership with investments worth Rs 1 crore to Rs 1.10 crore each. No further investment has been borne on the part of private equity holders since. Notably, all private equity holders of GSTN being key private players in the Indian financial services sector are themselves taxable under the new GST regime.
As per its website, ‘strategic control’ over GSTN is retained by Indian governments through six directors (three by the states and three by the Centre) appointed to its proposed 14-member board along with a chairperson mutually approved through consultations. Of the rest, three directors are appointed by private equity holders, three appointed independently among ‘persons of eminence’ and a CEO chosen through an ‘open selection process’. The chairperson has the casting vote in case of a deadlock. One seat on GSTN’s board of directors remains vacant at present.
The terms of agreement between GSTN and the central and state governments is stated to have incorporated certain provisions regarding ‘specific matters of strategic importance’ which cannot be decided upon without an affirmative vote from government-appointed directors. Further provisions are to be incorporated in service delivery agreements. Certain issues are to be decided through special resolutions requiring three-fourth approval by the board, granting the governments an effective veto. Officers on deputation from the central and state governments are also expected to play a role in exercising ‘strategic control’.
In September 2015, GSTN awarded a contract reportedly worth Rs 1,380 crore to Infosys Limited to build and maintain its IT structure for the new indirect tax regime. The total cost of the project over five years was pegged at Rs 2,800 crore. Development was scheduled to begin from October 1, 2015.
Two years later, GSTN’s deal with Infosys came under scrutiny when the Central Bureau of Excise and Customs (CBEC) issued summons for GSTN to appear before it on February 22, 2017. CBEC reviewed GSTN’s receipts of funds from the central government between 2012-13 and 2015-16, as well as details of the contract it awarded to Infosys. In this period the government had released Rs 143.96 crore of its Rs 315 crore grant-in-aid to GSTN, of which the corporation had already spent Rs 62.11 crore. As per officials, the outstanding amount had been returned. The NIU’s total assets stood at Rs 143 crore with revenues at Rs 16.3 crore on March 31, 2016. The government had not exempted GSTN from paying service tax. Consequently, the corporation had been filing returns on some of its services even before the new tax regime had come into effect. The question tax officials were probing was whether GSTN had been liable to pay further tax on its services.
In 2016, GSTN had approached private lenders to service its contract with Infosys and meet operational expenses till the time it developed its own source of revenue after GST came into effect. A five-year term loan of Rs 550 crore from IDFC Bank was announced on January 12, 2017 with the government agreeing to serve as guarantor despite pushback from the finance ministry initially. IDFC was selected among 26 banks bidding to offer the loan. Interestingly, as per publicly available information, additional director Anand Sinha of GSTN had been appointed to the board of IDFC Bank a month before its bid was accepted.
A separate loan of Rs 250 crore was raised as ‘working capital’ by GSTN, bringing its total borrowing to Rs 800 crore. Interest payments would be borne by the public exchequer till the corporation developed its own source of income. At the time, GST was scheduled to come into effect from April 1, 2017.
‘If the April 1 deadline is missed, it may pose a problem for the [GSTN’s] functioning. Until the roll-out happens, we will not have revenue flow,’ said an unnamed GSTN official speaking to Business Standard at the time. GST’s introduction went on to be delayed by three months.
In June, 2016, the department of expenditure (DoE), finance ministry, had called for a ‘holistic examination’ of GSTN’s operations citing the substantial administrative expenses it had incurred while employing around 45 workers. Ministry officials widely quoted in the media at the time pointed out that the Central Board of Direct Taxes and CBEC under the department of revenue, finance ministry, were carrying out several tax-related programmes at a significantly lower cost. Assessees already registered on CBEC’s Automation of Central Excise and Service Tax (ACES) portal would have to migrate to GSTN. ACES had been developed by Wipro Infotech on behalf of CBEC over three years and implemented in December, 2008, one of the largest public IT projects at the time with a proposed outlay of Rs 1,133 crore. DoE also expressed dissatisfaction with the corporation’s pace of work and finance ministry officials were of the opinion that GSTN’s responsibilities would be better served by government agencies.
Similar views were echoed by the Association of Indian Revenue Services (IRS) Officers (Customs and Central Excise) in a letter to the prime minister on February 21, 2017. It urged that GSTN’s chairperson and CEO be recruited from the IRS or that it be placed under the CBEC given its lack of ‘experience in implementing any IT project or domain knowledge in Indirect Tax laws’. The GST Council (hereafter, the Council) and GSTN were acting without adequate provisions for parliamentary oversight in the bid to rush ahead with implementing GST, the IRS officers believed.
The new NIU’s accountability to constitutional bodies had become a bone of contention between the CAG and the Council. The Centre and the states had unanimously rejected the constitutional auditor’s proposed amendment to the ‘Model GST Law’ after discussions in the Council on December 11, 2016.
The draft legislation circulated by the Council in November 2016, which went on to become the Central Goods and Services Tax Act, 2017, stipulated under Section 65 that ‘information, records and returns furnished under the Act, required for conduct of audit’ be provided for the CAG to dispense its responsibilities. The CAG urged that Section 65 be modified to further include ‘any information’ stipulated under sections 16 and 18 of the Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971. This would shield the auditor from legal challenges to its information requests from assessees. CAG’s submission was refuted by the Council stating that such matters were beyond the purview of taxation laws and covered under the CAG Act, 1971. Backing this claim, Jaitley alluded to the Income Tax Act, 1996, which makes no separate mention of the CAG’s authority. Commentators on GST have pointed out that the CAG and the income tax department have constantly remained ‘at loggerheads’ as a result of the 1996 amendment act’s shortcomings.
The four Acts related to the GST were passed by the Rajya Sabha without amendments on April 6, 2017.
Like Aadhaar, Like GST
GSTN has refused to reveal the company’s finances beyond March 31, 2016 on the ground that it is a private entity protected from the CAG under the Companies Act with none of its expenses having been passed on to the government beyond financial year 2015-16. However, CAG officials contend that the government still retains ‘strategic control’ over GSTN, making it liable to CAG’s oversight under Sections 139 and 143 of the Companies Act, 2013.
CAG officials speaking to journalist Josy Joseph under anonymity remarked that the auditors were not interested in GSTN’s books as much as in accessing its centralised database of indirect taxes collected at multiple points in the state and central level. Without such access, it would be ‘a complicated and almost impossible task’ to audit GST payments and returns or certify the states’ shares of GST.
On this point, GSTN has maintained that though it hosts the information on its servers, it does so in a ‘fiduciary capacity’ for the central and various state governments. However, CAG officials argue that the body is empowered by law to audit receipts in the Consolidated Fund of India and its functioning will be significantly impeded without being allowed to ‘observe the entire trail of transactions’. “[Integrated GST (IGST)] assessment errors by state government officers would go outside the oversight of CAG and [the Public Accounts Committee (PAC)]. CAG and PAC submit reports to the parliament, to which the CBEC tax administration is answerable. However, such oversight collapses once the powers under IGST is delegated to the states and effectively leads to grant of power without any accountability,” explained IRS officers writing to Modi. Moreover, it may be pointed out that access to information hosted on GSTN’s servers is regularly provided to GSPs.
Public officials experienced in matters related to taxation have repeatedly raised these concerns since GSTN’s inception. Back in 2011, when CBEC was brought in on discussions underway to formulate a privately-held SPV for implementing GST, Sheila Sangwan, then Member (Budget and Computerisation), CBEC had pointed out that her department was already involved in outsourcing tax profiling projects to third-party vendors, and there was little reason for GSTN to be set up to do the same. A successful pilot programme called ‘Tax 360’ had already been tested by CBEC in 2011 where registration, returns and payments of central excise, service tax, customs, income tax and commercial tax in Maharashtra was linked, leading to detection of tax evasion amounting to an estimated Rs 500 crore. A process to outsource taxation data management directly to private entities on such a massive scale, as was being proposed though GSTN, lacked international precedent. Alternatively, she had proposed, a government-owned SPV could be created through legislation to allow it greater operational and financial autonomy.
The government-controlled body could outsource IT requirements, as such bodies were already in the habit of doing, but would not cede public oversight over the dissemination of citizens’ confidential data.
Writing in the Times of India in April last year, TAGUP chief Nandan Nilekani asked the question, ‘should GST wait for the law?’ He believed that the answer was ‘an emphatic No [sic]’. Drawing parallels to the progression of Aadhaar from executive action to legislation, Nilekani’s op-ed titled ‘Like Aadhaar, Like GST’ argued that getting GSTN up and running through CBEC would play the role of a catalyst in getting the states to opt in to GST, an issue which had split the Upper House during its last session.
On June 19, 2017, with the Central Goods and Services Tax Act, 2017 now in place, the finance ministry mandated taxpayers to enrol themselves with GSTN with effect from June 22, 2017, pursuant to Sections 22 and 24 of the new law. Citizens paying central excise, service tax, state sales tax, value added tax (VAT), entry tax, luxury tax or entertainment tax (unless otherwise specified) above Rs 20 lakh were notified through modifications in CBEC rules to register themselves on GSTN’s common portal in order to migrate to the GST regime. A valid Permanent Account Number (PAN) would be necessary to register (except for non-residents) while citizens could opt to use a digital signature certificate or link their Aadhaar numbers with their GST identification number to complete the verification process.
The long drawn process to transfer taxpayer information and related documents to GSTN was thus complete. As of June 29, 2017, within a week of the finance ministry’s notification and a day before GST’s launch, then chairperson Navin Kumar informed PTI that close to 68 lakh assessees of the 88.91 lakh mandated had already signed up with GSTN.
The massive tax data repository – its functions or its safeguards – has not been mentioned in a single Act of the parliament. It is however – as GSTN’s high functionaries assure us –ISO 27001 certified.
Sourya Majumder is an independent researcher. The author is grateful to Abhishek Shaw and Paranjoy Guha Thakurta for their comments on an earlier draft.