The introduction of Goods & Service Tax (GST) has been the centerpiece of the Modi Government’s fiscal reform measures. Finance Minister Arun Jaitley has called it the biggest tax reform since India’s independence.
It certainly has the potential to be that significant simply because a country like India cannot have a more minimalist form of taxation. As is now well known GST through its three variants is expected to subsume thirteen different kinds of indirect taxes & levies which are currently in force under Central and State laws. The taxable event would now only be the single act of supplying a good or service in place of at least 10 different forms of currently taxable events throughout the country.
This in turn will reduce, by that many times, the number of returns a businessman needs to file and the number of assessments he needs to face irrespective of the nature and variety of his business. Secondly, by integrating Central and State indirect taxes, GST would ensure offloading of several levies that are currently incapable of being set-off from the final price because of being de-linked by separate laws.
Subject to the rates of tax, this elimination of ‘the cascading-effect’ could make local manufacture of goods more cost-effective, thereby also increasing the competitiveness of Indian goods in the international market. Also with state-boundaries becoming irrelevant for claiming set-off benefits, companies need not waste efforts in tax-planning regarding the location of their branches, warehouses etc.
Thirdly, it is expected that the rates of tax under GST would be uniform between all goods and services. This is will help prevent disputes regarding classification of goods and services between higher and lower rates of tax. Such disputes are very common in the present scenario. There is some apprehension regarding the 2-year right being granted to the state of origin of goods/ services to levy tax when the basic scheme of GST requires the state of destination to be the sole taxing authority. But overall GST can be a momentous reform.
This huge potential can be easily undone if the GST is not coupled with another major promise made by our Finance Minister–the introduction of a ‘non-adversarial tax regime’.
Taxpayers’ miseries may well increase
In fact, some aspects of GST could well accentuate the miseries of taxpayers if the present problems plaguing our dispute resolution mechanisms continue. For instance, one of the biggest challenges that would have to be resolved in any future GST legislation is the issue of dual control by both Central and State Governments. The jurisdiction to levy GST will have to be clearly bifurcated between the two either on the basis of nature of the goods and services or turnover involved or some other such parameter. This division could be a big bone of contention between the Centre and States.
However, the discussion paper prepared for the Empowered Committee of State Finance Ministers in 2009 suggests that the “Central GST and State GST would be levied simultaneously on every transaction of supply of goods and services … both would be levied on the same prices or value”. The recent Constitutional amendments, which have been passed in the Lok Sabha are meant to grant concurrent powers to the Centre and States to levy GST. If this indeed means concurrent power with respect to the same transactions, then a taxpayer would face the unique ordeal of going through two assessments with respect to a single transaction with the possibility of conflicting opinions between the Central and State assessment authorities regarding the taxability, quantum of tax etc. Many points of legal controversy under existing tax laws like the classification of job works, standard of proof to claim set-offs/ exemptions etc. are likely to continue under the GST regime.
Any new law will have to ensure that a taxpayer is not faced with multiple assessments holding different views on such issues. Otherwise this dual control could seriously compound the miseries caused by the existing adversarial and litigation-centric system of tax administration. Another problem with dispute resolution under GST could be that with supply of goods becoming the sole taxable event, even supplies to one’s own branches through stock-transfer will be subject to GST. Documents/ proof regarding the quantum and nature of such supplies can easily be manipulated internally for tax evasion. With few means of verifying the genuineness of these supplies independently, assessing authorities can indulge in high-handed and presumptive assessments even against genuine dealers.
While this term ‘non-adversarial’ has been used several times as a measure of reforming our tax administration, there has been no attempt to define its precise contours.
Some of the following points could help understand what needs to change in our present set-up to make it less adversarial. Present VAT laws in various States provide as many as five years for authorities to reopen concluded assessments if they suspect wrongdoing. Assessees are often asked clarifications and proof regarding five years old transactions on really short notices. For instance in 2014, Tamil Nadu VAT Authorities wanted Nokia India to produce, within a few weeks, documents proving its entire export turnover for the last five years adding up to more than Rs 24,000 Crores! Failure to comply with such demands are met with adverse tax orders, including huge penalties. The GST, in order to truly achieve what it needs to, must contain more realistic time limits for assessing authorities to reopen concluded assessments.
Secondly present tax laws impose really burdensome pre-conditions to file appeals against assessment orders. The Central Board of Excise and Customs has clarified that no recovery would be made against an assessee who has filed an appeal against an assessment provided he has made the mandatory pre-deposit of 7.5-10% of the tax levied. However, many state VAT laws enable appellate authorities to demand even the entire disputed tax in order to grant stay of recovery. A common recommendation to improve the quality of assessments under Indian taxation is to train assessing officers and provide them with sufficient resources. Unfortunately, there is a limit to the quality of human resources available for government service in this country and it cannot be expected that the standard of assessments under the GST regime will dramatically improve. Therefore, an assessee will have to be given effective and speedy appellate remedies without having to face onerous conditions.
Finally, the Tax Administration Reforms Commission has spent a lot of effort in recommending changes to the manner in which the Government makes revenue forecasts. These recommendations have to be taken seriously while implementing the GST; most importantly it should be made expressly clear that achieving such revenue targets should not form the basis of evaluating the performance of an assessing officer. When an assessing officer believes that his job is only to create revenue for the government, his relationship with an assessee is bound be adversarial. A change in this outlook should be the first step towards creating a ‘non-adversarial tax regime’. In the absence of this, the GST could be a wasted effort.
Adithya Reddy is a Chennai-based lawyer specializing in tax affairs.