gst in india: the way forward

GST IN INDIA: THE WAY FORWARD

Ashok Kumar Pandey Department of Revenue (CBEC) PGPPM 2014-15 1413003

Faculty Mentor: Professor Raja Laxmi Kamath

A Policy Memo submitted in partial fulfillment of the requirements for the completion of the Post Graduate Program in Public Policy and Management

Contents Acknowledgements..……………………………………………………………………………………………………………………….. 3 ExecutiveSummary………………………………………………………………………………………………………………………………… 4 Introduction…………………………………………………………………………………………………………………………………….. 5 The Journey so far

Historic perspective and global experiences ..................................................................................... 7 The First Discussion paper on GST by the EC ..................................................................................... 8 The Thirteenth Finance Commission ............................................................................................... 10 The New 122nd Constitutional Amendment Bill,2014…………………………………………………………………11 The Fourteenth Finance commissionviews………………………………………………………………………………….12 The GST Design and Structure

The GST Council................................................................................................................................ 13 Unified Common Base & Revenue neutral Rates ............................................................................ 14 Interstate trade, Imports & Exports ................................................................................................. 16 Place of Supply ................................................................................................................................. 17 Thresholds, Registration, tax payment and Assessment .................................................................... 18 Case for operational and administrative re-engineering

Common platform for stakeholders – GSTN .................................................................................... 21 Audit and Enforcement mechanism ................................................................................................ 22 Threshold Approach ................................................................................................................................. 23 Joint Audit and Enforcement .................................................................................................................. 23 The status quo approach.......................................................................................................................... 24 A suitable model: Joint Audit and Enforcement office......................................................................... 24

Administrative Structure and Service Cadre .................................................................................... 26 Dispute Resolution under GST ......................................................................................................... 28 Policy Recommendations……………………………………………………………………………………………………… 30

Bibliographic References…………………………………………………………………………………………………………………… 32

GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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Acknowledgements The first set of acknowledgement, indeed unparalleled, goes to the Indian Institute of Management, Bangalore, along with my department and DOPT, for the opportunity offered to undergo the PGPPM programme which has inculcated the academic inquest in a mind much trained to bureaucratic processes. More so, the foreign component of the programme provided vast learning opportunities at Maxwell School of Citizenship, Syracuse University, NY, USA by way of interacting with some of the finest and thought provoking public policy research leaders. The faculties at both places were just wonderful knowledgeable bubbling motivators. I would like to further acknowledge insights gained on the various aspects of the subject topic out of the discussions with Professor Emeritus M. Govind Rao of NIPFP, New Delhi, during an interview granted in December, 2014. Also, Professor Emeritus Larry Schroeder of Maxwell School, SU, has been a great mentor for understanding the global VAT perspective. Among the faculty at IIMB, the guidance received from Professors - Arnab Mukherjee, S. Krishnamurthy, Sridhar, Anil B. Suraj and Ms Rupa Chanda had been a great help in crystalizing the ideas. Beyond academic arena, the suggestions from Sri V. K. Garg (Rtd. Joint Secretary, DoR) and Sri Bipin Sapra (Partner, Indirect Tax Division, EnY) provided varied perspective in relation to policy and industry perspective. Besides, the entire memo could not have culminated to its present form without pragmatic and encouraging suggestions of my faculty mentor Professor (Ms) Raj Laxmi Kamath. Last but not the least to mention is the inspiring company of my family, friends and coursemates, which ignited many cheerful moments cherished in memory and had been a perfect stress buster throughout. In addition, I also deeply acknowledge the warmth and support received from the PGPPM office staff. ***


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Executive Summary The debate on implementation of Goods and Service Tax (GST) in India is going on since early days of present century alongside the blueprint to replace the Sales Tax by near uniform and harmonized Value Added Tax (VAT) at state level. The harmonised GST implementation aims at achieving goal of nationwide common market through an indirect tax system free of cascading and distortions. With the 122nd Constitutional amendment laid in parliament in December, 2014, the ball has been set for rolling the Goods and Service Tax (GST). The constitutional amendment when enacted will signify the first milestone achieved. The GST is inevitable and so is the well thought implementation map. The implementation would require careful designing of institutional framework with aim to win the trust of states on one hand and that of stakeholders on the other befitting the fiscal federalism. The dual-GST model proposed demands that questions on administrative efficiency, cost effective revenue collections, enforcement, audit and compliance costs etc. are addressed well beforehand, as a typical taxpayer would be dealing with two different levels of GST tax administrations. This is also important so that revenue and efficiency gains are not washed off in long run due to systemic deficiencies and hindrances. The Policy Memo attempts to examine certain aspects related to institutional framework and tax administration re-engineering to chart out a possible way forward in the context. This is done by examining possible alternatives and integration points between the two levels of tax administrations in operational, joint audit and enforcement mechanism and also the dispute resolution issues under GST. The major recommendations made include – not providing for exclusions in constitutional amendment but providing for the same under GST legislation by zero rating and/ or additional levy for special goods like ‘sin’ goods; Keeping revenue neutral rate moderate if not low; keeping thresholds higher and uniform across goods and services; single window interface for taxpayers comprising of GST Network (GSTN) and joint audit and enforcement mechanism; service level reforms; and creation of unified national GST tribunals.

--------------------------------Key Words: India, GST, VAT, Indirect Tax, Consumption tax, Tax Reforms, Audit, GST Council.


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Introduction The debate on implementation of Goods and Service Tax (GST) in India is going on since replacing the Sales Tax by Value Added TAX (VAT) at State1 level. The hope is to transform the existing archaic and distortionary indirect system in to a modern efficient tax system fuelling economic growth riding on a barrier free single national market. Hence, the GST is seen as representative candidate of second generation economic and indirect tax reforms in the country. Taking cue from successful implementation of state level VAT replacing the sales tax and a cooperative Centre-State dialogue set through the Empowered Committee (EC) in the process, the Central Government expressed the intent of achieving goal of nationwide common market free of cascading distortions, as far as possible, by implementing harmonized GST across the nation2. The report of the EC (2008, 2009), the First Discussion paper (FDP) released by EC (2009) and recommendations of Thirteenth Finance Commission (ThFC, 2009) are the main guiding documents available in public domain highlighting the proposed GST framework in India. Quite perceivable work in progressive manner had happened until 2011. Then it came to a sudden halt, with almost a U-Turn by certain states, reflecting a trust deficit between Centre and states3. Since, the assignment of taxation powers between the Centre and States is fractured and divided4, the first logical milestone is to overcome this trust deficit and move forward for amending the constitution so as to enshrine relevant provisions empowering the Centre and States to levy GST concurrently on a common base. With the 122nd Constitutional amendment

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The expression ‘State’ is inclusive of Union Territories (UT). India at present has 29 states & 2 UTs.

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The Finance Minister of Union Government of India announced this intent during budget session in 2007-08, proposing April, 2010 as date for GST implementation, which could not be adhered to in absence of final agreement between the Central and State Governments. 3

J.V.M. Sharma and V. Bhaskar (2012) enlisted the issues relating to compensation package, pending payments on account of reduced CST and Centre’s stance holding states responsible for delay in GST implementation, among others, for growing trust deficit between central and state governments. Earlier, M. Govind Rao (2011) had observed - “ThFC’s ‘all or nothing’ approach rules out compromises (between Centre and states) altogether”. 4

The powers under List-I (Union), List-II (States) and List-III (Concurrent) [Article 246] have been clearly delineated in the Constitution of India. Under this arrangement, while Union can tax manufacture (and services) the states cannot, and the retail sale point taxed by states does not fall in union jurisdiction. This division and resultant complex indirect tax system is seen as an obstacle to freedom of trade and commerce across the country granted in the Constitution (Article 301).


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laid in parliament in December, 2014, the ball has been set rolling in this direction. The target date to implement GST envisaged this time is April, 2016. In this backdrop questions about administrative efficiency, cost effective revenue collections, compliance costs, enforcement, audit etc. become important considerations, so that the possible revenue and efficiency gains are not washed off due to systemic deficiencies. Accordingly, here an attempt has been made to examine certain aspects related to institutional framework and tax administration re-engineering to chart out a possible way forward. This is done by examining possible alternatives and integration points, traversing from historic and literary references to indicative pathways in the overall context.


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The Journey so far Historic perspective and global experiences The German Businessman Wilhelm Von Siemens (in 1920s) first described the idea of putting tax on additional value creation, at each stage of its creation, rather than just at the retail sales end. This was first implemented in 1954 as Value Added Tax (VAT) in France. Since then, it has become the most popular tax among governments across the globe and more than 150 countries have implemented VAT on goods and services in some form or other. All OECD countries (Except USA) have implemented VAT and in 2008 VAT represented 18.7% of total tax revenue of OECD countries (Owen, Jeffrey et. al., 2011). The VAT (or GST) is a broad based consumption tax levied at multiple stages of production and distribution (of goods and services) with - crucially - taxes on input credited against taxes on output (ITD5, 2005). Comparing in zoological terms, the VAT can be considered as genius like ‘primates’ over gorilla or chimpanzee, for its upper edge as compared to other taxes (Bird and Gendron, 2007). However, VAT models and dispensations vary in different country contexts, and so vary the experience about revenue gains, efficiency and equity. The notable VAT/ GST systems in the world include Brazil (the first mover after France) having an origin based VAT system but trapped in rate wars among fiscally autonomous states, indicating extreme difficulty in altering initial VAT framework laid (Bird, 2013); Canada, successfully implementing coexisting variations of dual VAT on goods and services (GST-HST and GST- QST models6), demonstrates that with good tax administration VAT/ GST at national and sub-national levels can be feasibly implemented in a federal setup despite of rate and operational variations (Bird, 2013); Australia adopted VAT/ GST model administered by the federal government and interestingly the states pay administration fee to federal government and control of GST is vested with federal government (Perry, V. J. , 2010); New Zealand, the country which coined the 5

The International Tax Dialogue (ITD) is a joint initiative of the European Commission (EC), Inter-American Development Bank (IDB), International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), World Bank Group and Inter-American Center of Tax Administrations (CIAT). 6

GST = Goods and Service tax (Federal); HST = Harmonized sales tax (state level), QST = Quebec state sales tax.


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word ‘GST’ for the first time when it implemented national VAT in 1986-87, uniquely taxes public services alike other services (Merrill, P., et. al., 2010); and most of EU countries, including France and Germany, implement national VAT systems with zero rating of the trade transactions among EU member countries. Why globally the VAT/ GST have become so popular? Looking at various international VAT/ GST implementations the main reasons appear to be – a transparent tax system, wherein every transaction is taxed with credit in subsequent stage until final consumption, generating a clear audit-trail; minimal cascading and distortions; seamless zero rating of exports and it being business and consumer friendly. The studies by OECD economists provide evidence in support and indicate that VAT promotes economic growth and investment. A study of VAT/GST systems in Australia, Canada and New Zealand concludes that in essence the neutrality, price, growth and current account effects observed were in line with ex ante expectations of the impact of the introduction of the GST, revenue was greater than anticipated in all countries and some impact has also occurred in the administrative component of the compliance cost of the GST (Bolton, T. and Dollery, B., 2005). In India, the Central government implemented modified value added tax (MODVAT) in 1986 granting input stage credit for select central excise duties. It was extended to all excisable goods and taxable services in 2004 as Central VAT (CENVAT) allowing input stage central excise duties and service tax credits. Besides this, reforms in state sales tax were also initiated under EC (2005). The state VAT replacing the state sales tax was implemented, during 2005-2008, after firm agreement with states for compensation in case of revenue gains being less than 17.5%. An interesting part of state VAT implementation in India was that none of the state actually demanded compensation, actual gains in revenue being close to 25% (Bird, 2013).

The First Discussion paper on GST by the EC7 After the success of near uniform VAT implemented by states in India coupled with revenue gains and certain degree of fiscal prudence, efforts began towards implementation of GST (on 7

Empowered Committee (EC) of State Finance Ministers, constituted by Government of India, is a registered body since August 17, 2004 under the Societies Registration Act (XXI of 1860).


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value added principle) over a common base (of goods and services) and institutional framework. The objective is to achieve common market across the country and a tax system causing least distortions and cascading. Having earlier successfully steered the state VAT, the EC was given the task to initiate the process. The EC (2009) recommended the basic framework in its report and the First Discussion Paper (FDP) released on GST. The FDP provides a broad view about proposed Dual GST model and certain features. First, it suggested destination based Dual-GST model comprising of Central GST and State GST (CGST & SGCT) for intra-state transactions, while inter-state transactions would be subjected to Integrated GST (IGST), equal to CGST and SGST together and facilitated under a central clearing mechanism. This IGST model is expected to preserve continuity of the VAT chain under GST. Second, this model to be implemented through Central and State GST statutes containing uniform provisions for tax event, charge, classification, valuation, registration, assessment etc. Third, there would be a common base of goods and services for both Centre and states, which means that Centre would be able to tax beyond manufacture up to retail sale point under CGST while enabling states to tax manufacture and services under SGST, thus broadening of base for both. Fourth, it expresses desirability for uniform rate but agrees for two rates, one being standard rate in general and other being a reduced rate for few necessities. Fifth, it is proposed to subsume a number of indirect taxes under central and state jurisdictions8, including entry tax and octroi. Sixth, the threshold of Rs. 10 lakh followed by a composition limit of Rs. 50 lakh to be taxed at floor of ½% across states, beyond which standard GST rates would apply. However, it pegs CGST threshold at Rs. 1.5 crores, which seems asymmetrical in respect of low SGST threshold. Seven, a common GST network (GSTN) is suggested for registration, tax payment, return filing by taxpayer through a single portal, in respect of both CGST and SGST, which may also serve as common platform for information exchange between government authorities. Eight, it suggests for the constitutional amendment, formation of a GST council and dispute resolution mechanism. 8

The central duties and taxes to be subsumed in CGST include Central Excise Duty, Additional Excise Duties, Service Tax, Additional Custom Duty (CVD), Special Customs Duty (SAD), Central Sales Tax, Central Cess/ surcharges, and SGST will subsume State VAT/ Sales Tax, Luxury Tax, Entertainment tax (other than levied by local bodies), Taxes on Lottery, Gambling & advertisement, Purchase Tax, Entry tax/ Octroi, State Cess/ surcharges etc.


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The Thirteenth Finance Commission recommendations The Thirteenth Finance Commission (ThFC) recommendations on GST follow broad contours of EC recommendations. It suggested a Model Dual-GST based on uniform Revenue Neutral Rate (RnR). In respect of possible revenue gains from implementing GST in India, The ThFC referred the National Council of Applied Economic Research (NACER) report (2009) estimates of overall gains to national GDP within the range of 0.9 to 1.7 percent over 2008-09 GDP i.e. more than Rs. 43 thousand crores on conservative side. The ThFC indicated uniform RnR to be 12 percent, after deliberating various estimates based on ‘Some Index’, Income tax data, National Income accounts, consumption data and revenue method based on revenue foregone. Rao, Kavita (2010) had logically examined all of these estimates to argue and show that after due adjustments these very estimates would indicate average RnR in the range of 12.10–14.71% in case of two rates and in the range of 8.23- 9.34% in case of single rate. Thus, the RnR adopted need not be a rate uniformly binding all, but should be a floor rate with some flexibility. Moreover, the ThFC, mandated to assess the impact of GST, traversed beyond and comprehensively detailed the GST modalities to the extent of suggesting a ‘grand bargain’ design for ‘flawless’ uniform GST implementation and compensating states only in the event of their express compliance. This instantly became the bone of contention halting the reform process. The possibility of the process getting stalled due to ThFC’s IMF type “one size fits all” reform approach, even though introduction of GST would be a win-win strategy for both centre and states, was well anticipated by M. Govinda Rao (2011). He observed that resumption of GST reform required recognition and sensitivity to the views of states and showcasing cooperative federalism. Besides this, concerns relating to fiscal autonomy of states, anticipated revenue loss (more so by producer states and states with lower consumption and service base), pending resolution of compensation package and due payments on account of CST rate reduction etc. resulted in rigid stance of states in negotiation process. These apprehensions proved themselves, as there could not be any concrete progress further and the earlier 115th Constitution Amendment Bill (CAB) of 2011 on GST lapsed. Nonetheless, the Model GST outlined in EC’s FDP has been successful in opening a meaningful debate and GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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deliberations on GST with a historic opportunity to revisit not only the Centre-State fiscal relationship and autonomy issues but also questions on true fiscal federalism in India, including third tier of local governance.

The New 122nd Constitutional Amendment Bill, 2014 The original assignment in the Constitution of India has divided taxation powers between Centre and State, as divulged earlier, imposes a complex system of taxing the production, distribution and consumption with high distortions and cascading. As stated before to reform and replace it with a value addition and destination based GST, the first thing needed is empowering the Central and State governments to levy such a tax concurrently over a common base. The 122nd Constitutional Amendment Bill9 (CAB) aims to introduce enabling provisions for the destination based GST for both Union and States and provide necessary omission and commissions in other related provisions to sync in, including the provision for subsuming the existing tax item entries which become redundant on adopting GST. Thus, the Parliament and State legislatures are to be conferred with concurrent power to legislate on GST under new Article 246A. Further, it provides for GST Council as all empowered policy body; proposes to dispense the concept of ‘declared goods of special importance’; interstate trade is subject to the levy of IGST alongwith transitional provision for origin based additional levy of 1% for period of 2 years; Keeping all goods and services, except for alcohol for human consumption, under GST; Petroleum being proposed under GST but to be kept outside GST till such date and time GST Council recommends for levy of GST on it; and finally a five years compensation guarantee to states for losses, if any, on implementation of GST. On comparing, the change in weighted vote formula in GST council (1/3rd weight for centre and 2/3rd for states) and absence of any provision for a dispute resolution authority can be visibly noticed in 122nd CAB over 115th CAB. These issues had persistently caused frictions in Centre-State negotiations. The inclusion of petroleum sector, though zero rated initially, is a positive outcome in the present CAB. However, like in case of defined time limits for compensation and origin based additional levy, the time span (ideally 2-3 years) for inclusion of petroleum sector in regular GST 9

The 122nd Constitutional Amendment Bill (CAB) was laid in Lok Sabha on 19-December-2014.


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framework can also be provided for in CAB itself. Further, excluding tobacco from GST is difficult to understand, as a better way would have been to include it under GST and also simultaneously subject it with additional tax levy in addition to GST standard rate, without any credits for additional levy. Such a treatment can be extended to all type of ‘Sin Goods’ including alcohol for human consumption. Similarly, environmentally sensitive e.g. polluting production can be subjected to additional green tax. Same logic may hold true for electricity, which is one of the most common input for trade and industry. Thus, correct stand would be not to define any excluded class of goods in the CAB, but make provision to levy additional tax or zero rating, thereby addressing revenue concerns while keeping the GST value chain intact and all inclusive.

The Fourteenth Finance commission views The report of Fourteenth Finance commission (FFC) 10, has expressed hope that the final GST design would have all the characteristics of a good tax system such as broad base, low rate, minimum rate differentiation, low compliance cost and reduced distortions to the economy, and that the application of technology in tax administration would result in higher revenue gain. It has further observed that there are several challenges and many unresolved issues and in the absence of clarity on the design of GST and the final rate structure, they are unable to estimate revenue implications and quantify the amount of compensation in case of revenue loss to the States due to the introduction of GST. The FFC opines that the Union may have to initially bear an additional fiscal burden arising due to the GST compensation, which should be treated as an investment which is certain to yield substantial gains to the nation in the medium and long run. The FFC has recommended increasing the share of states in the divisible pool of the central revenue from 32% to 42%, which is a very sizeable increase in financial devolution11. By accepting this recommendation coupled with the release of pending compensation on account of CST rate reduction the Central Government has signalled States to bridge the trust gap and come forward for GST implementation, which is likely to have a positive impact. 10

Refer para 13.25 - 13.27 of the Fourteenth Finance Commission of India Report, December, 2014.

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14th Finance Commission: States' share in taxes to go up to 42%; 25 February 2015; PTI, New Delhi [http://www.dnaindia.com/money/report-centre-accepts-14th-finance-commission-report-states-share-in-taxesup-42-2063767]


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The GST Design and Structure The GST Council The GST framework envisages a supreme policy body, the GST Council (GSTC), under the new Article 279A of the Constitution. It would comprise of the Union Finance Minister (Also Chairman of the GSTC), the Central Minister of State (Revenue) and the State Finance Ministers. The quorum of GSTC shall be ½ of its members and a decision would require majority of at least ¾ of the weighted votes of the members present and voting. The one third vote weightage of Centre, as against the two third weightage of that of States, of total vote casted taken together may appear tilted towards the Centre but it does not create an absolute veto in hands of the Centre. The GSTC decisions would relate to recommend - taxes to be subsumed under GST; the tax rate including floor rate, bands and special rates for specified periods during natural calamities or disasters; threshold limits, exemption to goods and services or inclusion thereof; model GST law framework; principles relating to levy and apportionment of integrated GST and place of supply; and any other matter related to GST. Besides, the GSTC will recommend a date for bringing the petroleum sector products under GST net. It is also provided that while discharging the functions conferred, the GSTC ‘shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services’. This mechanism is expected to ensure some degree of harmonization on varied aspects of GST and create a level playing field in the course of GST implementation. However, considering that the disputes arising out of recommendations made by GSTC cannot be ruled out as such, the Article also provides that the GSTC ‘may decide about the modalities to resolve disputes arising out of its recommendation’. Thus, the separate dispute resolution authority, as was conceived earlier in 115th CAB, has been dropped and GSTC is now mandated to deal this aspect of dispute resolution. It is yet to be seen if GSTC will also serve as a forum for dispute settlement between Centre and states also or there would be a separate resolution authority. The review of such disputes by GSTC itself may not be a good idea and an independent dispute resolution setup would be a better option ensuring neutral awards. GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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Unified Common Base & Revenue Neutral Rates After the constitutional amendment is carried out, the two essential decision points to embody the GST would be in relation to (i) assessment of base and (ii) the Revenue neutral Rate (RnR)12 with reference to the base. It is well established that for a broad tax base RnR is likely to be lower, while a smaller tax base would pull up the rate. Similar is the relationship with exemptions, as more exemptions would lead to higher rates and vice versa. Also, in case of multiple rates the lower or exempted rates would result in setting of a higher standard rate to match the given revenue scenario (Bird and Gendron, 2007). The tax base, for both Centre and states, will fairly expand and broaden after implementation of GST, since CGST would enter the retail arena and the SGST would be applicable to manufacture and services. Ideally speaking, this expanded base should suffice for revenue neutrality under GST even at existing average tax rates. An attempt has been made by Rao and Chakraborty (2010) to assess the additional base of GST for certain services based on input output tables, Prowess database and service tax collection, which is estimated (for 2007-08 data) at Rs. 2,59,119 crores. Further, after arriving the share of considered States (in total value added in service sector of the country) they had worked out the RnR between 15.51 – 9.35% in case of a comprehensive base on two rates basis, with an exception of Goa at RnR of 3.80%. We may recall that the ThFC indicated 12% RnR and it incidentally corresponds to the median of Central and State VAT rates. Surprisingly, in November 2014 the GST sub-committee has proposed a revenue neutral rate of 26.68% (CGST 12.77% & SGST 13.91%) before the Empowered Committee. One reason for it could be exclusion (by zero rating in GST) of petroleum sector during initial transition, besides alcohol and electricity sectors kept aside. This implies a broken value chain at very inception with a huge cascading still remaining causing a pull-up pressure on the RnR to be adopted (Rao & Mukherjee, 2014). In any case, if the ThFC observations of 12% RnR were considered being lower, the 26.68% rate proposed by the GST sub-committee is unacceptably high. Such high rate 12

The Revenue neutral Rate (RnR), essentially, is the tax rate which generates the revenue equal to previous collection level after this new rate is applied to the given tax base. GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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does not appear attractive on efficiency and compliance grounds and may lead to an evasion prone inefficient GST regime. It is noteworthy that India stands at the lower end of spectrum in respect of public expenditure on local governance, which is 1.7% of its GDP as compared to OECD-13.8%, China-10.8% and Brazil- 6.5% (Oommen, 2010). In the context, it is relevant to note that the GST is going to subsume a number of taxes (other than on property and entertainment) levied by local governments (Municipalities/ Panchayats). This clearly shows the need of significant enhancement in devolution of funds to the local bodies. This can be achieved by specifying a 12% component in GST rate dedicated to fund local bodies to enliven the spirit of true fiscal federalism and ensuring fiscal empowerment of local bodies. Presently a reference for optimal RnR has been made by EC to NIPFP, and final call will be taken when GSTC is formed after enactment of the CAB. Moreover, the precise settling of RnR would demand a precise tax base assessment. This may become possible at some point over the time after GST implementation. Hence, whatever be the RnR adopted to begin with, a course correction for GST rate optimization based on real transaction data of GST revenue and base would be necessary. It would, therefore, be advisable (a) not to adopt very high RnR and keep it at least moderate if not low; (b) to carry out the course correction exercise, based on actual GST data, immediately after the first year of implementation with annual follow-ups; (c) the 1% origin based additional tax should not be extended beyond two years in any guise; (d) formal inclusion of petroleum sector by removal of zero rating under GST should be done at the earliest; and (e) not to define any excluded class of goods (tobacco, alcohol, electricity etc.) in the CAB, but make adequate provisioning to levy additional tax over and above standard GST rate in such cases. These measures are necessary for efficiency and equity reasons, as fiscal success of GST reforms would improve market efficiencies and resultant equities.


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Interstate trade, Imports & Exports At present the intrastate sale attracts the VAT applicable in the subject state, while the interstate sale is subject to Central Sales Tax (CST)13 at the rate of two percent. Under the proposed Article 269A(1) vide 122nd CAB, the interstate supply of goods and services is subject to levy of IGST, equal to sum of CGST and SGST. It will be collected by the Central government and shall be appropriated to the destination state under a central clearing mechanism. This Indian IGST is conceptually a unique model which has not been tried elsewhere, and the entire world would be watchful of our final operational model. The advantage of IGST include uninterrupted input tax credit (ITC) chain, no refund claims on exporting state, self-monitoring since ITC claim is raised by the buyer and its suitability for both B2B (no exempted branch transfers) and B2C interstate transactions. However, funds transfer on settlement of IGST between Centre and States would require some cross verification and reconciliation system in respect of ITC claims, which should be paced to sync with the periodic cycle of payment of dues on this account. This would require uniform registration, e-payment of tax and common return for CGST, SGST & IGST of same periodicity and supported by a robust IT system. In respect of Imports, the Basic Customs Duty (BCD) shall remain and applicable to all the imports. The additional duties of customs (ADC) and also special additional duty (SAD) will get subsumed under GST. In addition to the BCD, the IGST (i.e. CGST and SGST) will be levied on imported articles, since imports into India are deemed to be supply in course of interstate trade. The ICT of the IGST paid will be available for inputs imported. The CGST part would go to the Centre and SGST part would be settled in favour of the destination state against the IGST paid on imports. The import of services will attract GST on reverse charge basis in the hands of the importer- consumer. Under GST the exports of goods and services will be zero rated so that no taxes are exported. The present system of duty drawback on export only remits back the input duty incident of BCD and CENVAT and not the State VAT, purchase tax etc. However, with zero rating in GST, the duty drawback would limit to BCD only and credits for GST paid in entire value

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The CST is a tax levied and appropriated by originating state on interstate sale of the goods under the Central Sales Tax Act, 1956, enacted subsequent to sixth amendment to the Constitution of India in 1956. GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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chain would become eligible and available upon export. This would certainly enhance the competitiveness of exports from India and help rationalise export incentives.

Place of Supply The 122nd CAB empowers the Parliament to frame appropriate law and regulations to determine the place of supply of goods or services or both in the course of interstate transactions vide proposed Article 269A(2) to be inserted in the Constitution. The determination of place of supply and thus the point of taxation is of paramount importance in a destination based tax setup. The proposed definition of goods includes all materials, commodities, and articles, while anything which is not goods is service. In case of goods (tangibles) determining the place of supply is easier as the supply is the physical supply. The real challenge lies in determining the place of supply for service (intangibles). For example, what could be the place of supply for an online antivirus scan, downloading music file or online video watching – may be the place where the computer or e-gadget (which is a tangible equipment) associated with service delivery is located (as long as stationary). However, In case of mobility and during the course of delivery of a value added service across state borders- the questions like - Where would be the place of supply? Which rate should apply? How to apportion the value? etc. would emerge. The e-commerce further adds anonymity to mobility and poses even more complex scenario. The list of examples is non-exhaustive and so are challenges in determining place of supply especially in case of composite set of goods and services. Nonetheless, there are some general guiding principles, as also considered by EC, for determination of place of supply. These include -(a) in case of goods- the place of delivery; (b) in case of services- (i) for B2B- the recipient location, (ii) for B2C- the provider location, (iii) in relation to immovable property- the location of property, (iv) for performing services- the place of performance etc. The litigation in respect to place of provisioning in Service Tax and VAT at present relates more to composite goods and service. Presently, the services or goods alone are not privy to place issues and related litigations, as they fall in specified jurisdictions of state (location) or all India


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(provision) respectively. However, with both CGST and SGST jurisdictions becoming applicable upon GST implementation, the determination of place will become far more important. Place of supply rules would be critical in determining the place (and the state) where GST becomes payable, more so, for sectors like e-commerce, telecom, internet services, financial services, electronic media, freight and transport, service establishments having locations in multiple jurisdictions etc., due to reasons of anonymity and mobility. If these rules do evolve well to determine the place and differentiating the intrastate and interstate supplies with reference to our country contextual needs and international best practice scenarios, a lot of litigation can be avoided.

Thresholds, Registration, tax payment and Assessment The GST system represents a continuous flow of point to point tax collection on value add over previous tax point and availing credit for tax paid on previous point. This is the essence of the value chain under GST, which generates cross reference and auditable transaction trails. Hence, to avail credit the business dealer need to participate in this value chain at his option, subject to specified threshold limits for exemption and composition applicable and availed. The essential parameters for a reasonable GST system would include (i) simple, clear and stable law and procedures, (ii) Good taxpayer services, (iii) Reasonable audits, (iv) Effective enforcement with strict penalties, and (v) Good periodic review of the system. Besides, factors of trust levels and taxpayer’s moral are also important (E. Brill et. al., 2001). The taxpayer’s perspective would prefer the single tax agency and uniform institutional framework. On the other hand limitation of being under federal setup need to be appreciated and it may not be totally impractical to live with two set of authorities, as is in case of dual GST in India. However, to achieve the goal of common national market under GST, it would require harmonization, coordination and some degree of integration among the two and a single window interface for taxpayer services and facilitation must evolve out of this. To have an efficient and cost effective GST system, it should be capable of running itself. A selfassessment and self-monitoring credit type design can ensure this. In India the CENVAT, Service


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Tax and State VAT systems are generally following the philosophy of self-assessment. Another important issue is about threshold limits and exemptions. Lesser exemptions with higher threshold limits are optimiser for the tax system in terms of revenue collections, efficiency and costs. The FDP talks of fewer exemption (exemption list to be decided later by GSTC) which is a positive stance, but the confusion about different threshold limits for goods than that of services or for CGST than that of SGST is an area of concern. The proposals are to keep exempted thresholds at Rs. 10 lakh/year and composition threshold (taxed at flat ½% rate with no credits) at Rs. 50 lakh/ year for SGST. The CGST threshold is proposed at Rs. 1.5 crores/ year as it exists under CENVAT. More surprisingly the threshold for services, for both CGST and SGST, is proposed at Rs. 10 Lakh/ year. Compliance issues are likely to escalate in such an arrangement, rendering GST reforms back tracing than forward moving. Economic sense would advocate uniform and relatively high threshold across the system for efficiency and compliance reasons. Considering these aspects, S. Cnossen (2013) in his study had suggested a possible threshold of Rs. 40- 50 lakh under GST in India. Further, need to participate in GST value chain to avail credit, in its natural course would result in credit chain driven systemic formal inclusions of taxpayers, including those entering from informal economy. It is irrespective of the fact that they may otherwise fall under a given threshold. Thus, a broad based GST system will encourage the small and marginal businesses to opt for participating in the credit generating value chain even at a high threshold. Accordingly, it is to say that threshold can be raised reasonably so that the system performs efficiently and the administrative resources are better focussed on the prized big fish catch. In Indian context, more important than the threshold limit is the issue of it being uniform across the GST system. We must avoid different thresholds for goods and services or for type of GST i.e. CGST and SGST, even if it requires raising the composition threshold limit and rate to adjust revenue at a uniform and reasonably high threshold. In this light, the exempted threshold turnover of Rs. 20 lakh/ year and a composition threshold between Rs. 20 to 100 lakh (0.20 – 1.0 crore) at a non-creditable optional composition rate up to 1% can be considered, applicable uniformly across the GST system countrywide irrespective of SGST or CGST and goods or


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services. This will augment tax base by bringing down the present CENVAT threshold from Rs. 1.5 crore to Rs. 1.0 crore. It can actually spur the growth in small business sector, since being contained within exemption limit or creating multiple small units to continue availing exemption will not be seemingly viable. The marginal businesses would still be benefited under Rs. 1.0 crore composition thresholds. As argued before, even at high thresholds, credit chain driven taxpayers will opt to enter the formal GST setup adding to revenue base and collection. In the self- assessment based system the taxpayer himself registers, assesses the tax, deposits the same after adjusting the input credits and files periodic returns. For this to happen smoothly, the GST system must provide a single interface in respect of Central, State and Integrated GST for taxpayer, as part of taxpayer services. It should facilitate common single registration, common single challan for tax payment, common single return and common credit (ITC) ledger view and refund processing. This all should seamlessly happen on a central online e-filing and epayment platform with available credit (ITC) ledger populated in real time. The integrity of the system of self-assessment should be ensured by random selective audits; risk management based periodic review and enforcement, as a good tax system should reward compliant taxpayers and punish non-compliance effectively. Also, the unutilized credit refund process need to be faster and trustworthy yet vigilant. This can be achieved by invoice level data mining and cross matching. These aspects should be part of active consideration under GST Network (GSTN).


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Case for operational and administrative re-engineering Common platform for stakeholders – GSTN GSTN is the crucial base IT system for GST roll out and timely settlement of IGST. The GSTN, conceived as a special purpose vehicle (SPV), is a not for profit, non-Government, private limited company14 incorporated under the Companies Act. Despite of incorporation as a private body the strategic control of GSTN is vested with the Government. The Company has been set up primarily to provide IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST). The modules and assets developed in the process of GST pilot project done by the CBEC and NSDL has been taken over by GSTN for developing an integrated common portal system to serve taxpayers and existing Central and State tax administrations. The GSTN will operate on selfsustaining basis and levy user charges from taxpayers, the Central and State Government tax authorities. It will probably be the largest integrated tax network agency of its own kind to cater millions of taxpayers, multitudes IGST and ICT settlements and user interface to various tax authorities and stakeholders in a federal setup. The GSTN objectives envisage- (i) setting up of a common portal for all GST related transactions; (ii) Common online facility for registration, making tax payments and filing of returns; (iii) GSTN will pass the data about registration, tax payment and returns to both Central and State tax departments; (iv) GSTN to follow cafeteria services model and develop backend modules and tools for assessment, Refunds, Audit, enforcement, taxpayer’s profiling and risk analysis etc. for use by respective tax authorities; and (v) GSTN to develop and provide various other need based services. What a taxpayer should expect from GSTN? First and foremost aspiration would be to have a single interface with all different tax administrations for registration, tax payment and return filing, which is simple yet efficient in handling; Further, the online ITC accounting and refund 14

The Government of India owns 24.5%, all States, UTs and EC together own another 24.5% and various nongovernment financial institutions own remaining 51% stake in the GSTN, incorporated on March 28, 2013 as a Section 25 (not for profit), non-Government, private limited company. [http://www.gstn.org/] GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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processing (besides tax payment) should be possible. Under such a system assessment, refund and appeal orders should get timely uploaded against the taxpayer user account. For tax administrations the GSTN can assist in assessment, invoice data matching, settlement of credits, generating random audit schedules, plugging evasion by data mining and risk analysis, exchange of information between tax authorities and encouraging overall transparency. Another important task before GSTN would be integration with Customs ICES system for payment, verification and destination based settlement of IGST paid on imports and cross verification of exports zero rating. In addition, the GSTN can play significant role in tax research, best practice development and deployment, training and awareness building. GSTN, the backbone of integrated and harmonised GST, is the most important milestone, next to the CAB, in reforming the archaic Indian indirect tax system. If GSTN derails or underperforms, it would be a great setback to entire process. Therefore, it is very important that the GSTN meets the stated objectives and provides a simple yet rich user experience to all stakeholders.

Audit and Enforcement mechanism The Tax administration needs to be efficient, cost effective, vigilant and transparent to generate high yields. For effective enforcement under self-assessment model, the selective random periodic audits are the most effective way to ensure systemic integrity and compliance levels. Due to adoption of Dual GST model, there exists a possibility that the taxpayers are subjected to multiple audits under different tax authorities at different levels. Multiple exposures and interfaces with tax administration may lead to harassment of taxpayer instead of facilitation. Same would be true for multiple enforcement agencies cracking the tax evasion. It seems that the audit of a taxpayer would fall before central authority for CGST / IGST and state authority for SGST as of now. In existing setup the manufacturers mostly deal with Central (CENVAT) authority, while the retail dealer is answerable to the State (VAT) authority. However, under Dual GST if an audit is opened by one of the authorities (say the State), it would also be subject to audit by other authority (say the Centre) as at any point of transaction both the component would be levied together, and no


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transaction as such would be free of either CGST or SGST (even IGST has both components). This will force the taxpayer to double-jeopardy and escalated compliance costs. From a taxpayer’s perspective single agency is always preferable. However, since the conscious decision of implementing Dual GST has been embarked upon, let us see which integration points between the two tax authorities can be saviour for taxpayer? Threshold Approach On the basis of per employee revenue collection15 the Central board of Customs and Excise (CBEC) is found more efficient than the state tax administrations (Praveen Kishore, 2012). In such a scenario the organisational capacities would also differ. Therefore, one option is to consider France like system, where the National Directorate of Verification looks into transections above 300 million Francs and all transactions below this limit are verified by Regional Directorates (Purohit, 2010). In such case, States may be given the power to audit and investigate (for both CGST and SGST) up to a prescribed turnover limit (say Rs. 10 crore or 10 times the composition threshold) and beyond this limit the Centre may conduct audits and investigations. The findings can be shared between the governments to initiate independent action as per respective laws. In this kind of transaction threshold limit based Audit scheme the taxpayer is subjected to single audit agency (an incentive), until found guilty when he may need to answer both authorities separately (a disincentive for non-compliance). However, states may object the preposition and perceive it as Central supremacy and intrusion to their fiscal autonomy. Joint Audit and Enforcement The other, and perhaps better, option in Indian federal context may be a ‘Joint Audit and Enforcement model', wherein both Centre and State GST tax administrations participate in a joint setup using central agency infrastructure. The CBEC has recently (2014) created Audit Commissionerates under cadre restructuring and capacity building exercise. These audit Commissionerate can be remodelled as the Nodal Single Window Joint Agency for Audit and Enforcement under GST. Provisions can be made for intake of tax officials from concerned 15

Per employee tax collection under CBEC was Rs. 39.98 crore (2008-09) which is 10 to 20 times more than that of states, ranging Rs.4.84 crore in Gujrat to Rs.1.81 crore in Madhya Pradesh in the same period.


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state(s) on deputation to create Joint setup for providing single window interface to the taxpayer in audit and enforcement matters. Quite similar single window interface known as the Large Tax Payers Unit (LTU)16 is already being operated by Central Board of Excise and Customs (CBEC) and Central Board of Direct Taxes (CBDT) for accredited large taxpayers. The status quo approach If none of above two options seem workable, and independent jurisdictions for audit (instead of Joint Audit) are only considered, the rules of the audit and enforcement in terms of how, where, who, when etc. should be clearly laid in harmonised GST legislation. Provisions in law must be then made to avoid a possible overlap between the two tax administrations. Otherwise, the intelligence based inquests running independently would not only create conflicting interest and goals between the different government tax authorities but would also subject the taxpayer to greater harassment coupled with higher transaction and compliance costs. Therefore, it would be worthwhile to ensure that if one agency had started audit/ enforcement action, other agency should only seek outcome information and not duplicate audit or enforcement efforts. The key in such a set up would be earnest information sharing between multiple authorities, which in itself is a challenge. Possibly, if such intelligence and information sharing can also be integrated and coordinated developing specific GSTN module, it may be helpful to some extent. A suitable model: Joint Audit and Enforcement office In proposed dual GST under federal setup of India, as the taxpayer exhausted under multiple interfaces can turn non-compliant, a joint mechanism may perhaps prove as an effective integration point, facilitating the user with single interface and ensuring better revenue prospects in a complementary environment encouraging tax compliance. To achieve this, the recently created Audit Commissionerates (under CBEC) can be remodelled into Independent Joint Audit and Enforcement Offices, drawing officers from both central and state GST tax administrations on fix tenor deputation. These joint offices can be called ‘Regional GST Audit and Enforcement Office’. The working strength can be fixed depending on number of tax assesse, tax 16

The LTU is a self-contained tax office under the Department of Revenue acting as single window clearance point in all matters relating to Central Excise, Service Tax and Income/ Corporate Tax. [http://www.ltu.gov.in/] GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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base, revenue collection and geographical area and a larger state may have more than one regional office as well. These units, headed by the Commissioner (Joint Secretary level officer) from the professional IRS pool, should be kept independent of executive field functions of respective tax administrations. The Executive wing of respective tax administrations should look after routine registration, tax payment, return filing, input credit and refund settlements. The Joint Audit and Enforcement Office role should be limited to audit and intelligence based investigations relating to noncompliance for both CGST and SGST. The finding of these offices may culminate in formal adjudication and realisation of tax demands, interest and penalties by the respective statutory executive field offices. The whole process should be managed through a specific GSTN module having interfaces for the joint audit and enforcement office, the jurisdictional executive field offices and the taxpayer in question, as illustrated.

Joint Audit and Enforcement Office (Region wise) Deputation

SGST FIELD ADMINISTRATION

Deputation Single Audit & Enforcement Interface

CGST FIELD ADMINISTRATION

TAX PAYER

Single interface for Registration, Tax payment, Returns, Credits & refund GSTN Services

GSTN Services

GST Network (GSTN) Illustration: The Integration points under Joint Audit and Enforcement Model


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The deputation strengths in the joint mechanism can be 60:40 (or any other agreed ratio) respectively for centre and state officials. Every audit/ enforcement team may have at least one tax official each from centre and state. The audit schedules can be generated on random basis from GSTN employing data mining and risk analysis techniques. The Directorate General (Audit) under CBEC may act as nodal agency for high level administrative coordination and deputations in respect of such joint setup. The officers from both CGST and SGST being on board, the statutory and jurisdictional conflicts would generally be avoided and the taxpayer will face only one (joint) interface. The cases of non-compliance detected in audit may be allowed to be settled automatically through GSTN on payment of tax due, applicable interest and specified percentage penalty on tax amount. This Joint audit & enforcement model can act as a system complementary to the GSTN, and the concept of joint office may even be extended to include the jurisdictional executive field office functions in line of already operational LTU model, to facilitate single window interface for both Central and State GST at same place.

Administrative Structure and Service Cadre Analysis of the central and state indirect tax administrative structure reveals that under CBEC the line (field) departments are organised in matrix form (territorial x functional x taxpayer) and are staffed by permanent government employees and manned by professional permanent bureaucrats of Indian Revenue Service17 (IRS). The state tax departments, headed by professional permanent bureaucrats of Indian Administrative Services (IAS), are comparatively smaller and have simpler (territorial x functional) structure generally staffed by State Civil Service officials (Praveen Kishore, 2012). This means that while the apex management in case of centre is in hands of well-trained tax professionals or specialists, in case of states the senior manager is a generalist bureaucrat. This creates a difference in management strategy, goals and practices 17

There are two distinct Central Group ‘A’ services known as IRS within Union Ministry of Finance, Department of Revenue. One is under Central Board of Direct Taxes (CBDT) administering Income Tax and known as IRS (IT), while the other is under Central Board of Customs and Excise (CBEC) administering Customs and CENVAT and known as IRS (CCE). Prior to creation of separate boards for direct and indirect taxes, these were under single Central Revenue Board, hence the common name i.e. Indian Revenue Service (IRS).


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across the varied set of state level tax administration vis-à-vis central administration. Creating harmonised synergies among such a varied set of administrations is itself a big challenge. The second Administrative Reform Commission had also expressed the need for functional specialization of different branches of ‘services,’ advocating ‘domain’ specialization approach for this (GOI, 2009c). The question before us is- while creating a single common market through harmonised GST across the nation; can we also seize the opportunity to create a harmonised, integrated and professional services structure with domain expertise for efficiency gains under GST? There are a few possible scenarios. First feasible option to consider is creation of an integrated All Indian Revenue Service based on state cadre principle, to create a senior management pool with domain expertise in tax matters. This all India cadre can be structured under the Union and State Finance Ministries, in the same way as is under Ministries of Home for Indian Police Service (IPS) and Ministries of Forest for Indian Forest Service (IFS). Under such a state cadre based arrangement the entire jurisdictional Central Excise, Service Tax and the State VAT administrative infrastructure can be aligned and merged under an integrated GST administration with enhanced overall capacity. Under this cadre based system within a particular state jurisdiction, the Revenue functions on behalf of both state and centre (and also in respect of both direct and indirect taxes) can be discharged by IRS officers in the state cadre together with the officers of state tax service cadre merged to it. The process of such integration will increase administrative efficiency and imbibe professional work culture by infusing domain expertise and such integrated administration would manage the GST in a diligent and professional way. The state to centre deputation of the IRS cadre officers can handle the remaining central functions including Customs and apex taxation policy under unified Central Board of Direct and Indirect Taxes18. The other option for administrative integration to create joint administrative setup (GST-Joint Units in line of LTUs) emerges out of the concept of joint audit and enforcement mechanism

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Recently, The Tax Administration Reform Commission (TARC) [2014] has recommended for abolition of the post of Secretary (Revenue) and merging of the two boards, CBDT and CBEC, to form Central Board of Direct and Indirect Taxes (CBDIT). [http://articles.economictimes.indiatimes.com/2014-06-16/news/50624130_1_taxadministration-reform-commission-tarc-cbec] GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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discussed before. The objective of such integration is to create a pool of professional expertise existing within both the Central and State level administrations and bring them together for focussed delivery to plug the leakage of revenue and enhance overall efficiencies as well as yields. This can serve as a vital and viable integration point in GST administration until the goal under general administrative reforms to unify Indirect and Direct Tax Boards along with creation of a state cadre based professional Indian Revenue Service is actually realised.

Dispute Resolution under GST One more area of concern is the modalities of dispute resolution under GST. Two types of disputes are likely to arise, first between States and the Centre, and second between the taxpayers and tax administrations. In respect of the first, the modalities are to be decided by GSTC to be formed after enactment of the 122nd CAB. As observed earlier, if GSTC keeps the dispute resolution within its own ambit, the council will sit on its own judgement which is not ideal. A resolution for review does not have same meaning as the dispute resolution. The hope is that the Council mandates for some neutral mechanism independent of the council while deciding on modalities for dispute resolution. In relation to second type, i.e. dispute between tax administration and the taxpayer, the appeals are made before the tax tribunals. At present the appellate mechanism for CENVAT cases is vested in the Customs Excise and Service Tax Tribunal (CESTAT), while in case of States the appeals lie before the State Trade Tax/ VAT Tribunals. As of now the CENVAT and state VAT are two distinct taxes, so these Tribunals function in their specific domains. However, after rollout of the GST ‘Who will adjudicate what’ will be an important question to be decided. The GST can be symbolically compared to the two parallel rails of a railway tract, one being CGST and other being SGST running parallel. In fact, at any point of transaction in the GST value chain (including the inter-state trade) both component would be levied together, and no transaction in general can be said to be free of either CGST or SGST. Hence any dispute arising would essentially involve both of these and the respective tax administrations in the same loop. Where the petition of aggrieved taxpayer would fall then?


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One simplified argument can be that if the case has arisen out of state office the case would be tried by the State Tribunal; else it falls before the Central Tribunal. It is clear that in every case both the components i.e. CGST and SGST will occur by default. How the Tribunal of State would adjudicate the CGST or IGST not under state jurisdiction or how the Central Tribunal will deal with the SGST which is beyond the domain of central tax authority? Can part adjudications be done twice for same case? Also, the Original Adjudicating authority, both at State or Centre level, is no exception, as these questions will arise before them first hand. The answer probably lies in merger of the State and Central Tribunals and utilise the additional capacity generated to fast track disposal of cases. Also, the merged Tribunal setup, which can be renamed as National Customs and GST Tribunal (NCGSTT), should be enabled to take up and decide the pending cases of previous CENVAT and VAT era besides GST cases.


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Policy Recommendations The indirect tax reform by implementing modern GST is inevitable and overdue in Indian context. The journey of implementing GST is arduous and long, yet the mission can be accomplished if questions on administrative efficiency, cost effective revenue collections, enforcement, audit and compliance costs etc. are addressed well beforehand. A series of lessons from in-house VAT implementation and examples around the world should enable us to develop a GST system which should be reliable model for others to follow, especially where the federal setup is prevalent. This would need a careful trade-off between federal aspirations and efficiency issues for building trust among the various stake holders. This is also important so that revenue and efficiency gains are not washed off in long run due to systemic deficiencies and hindrances. The major recommendations are highlighted below: I.

The constitutional amendment (CAB) should not have details of any exclusion (be it the tobacco, alcohol, electricity or anything else) so that difficult path of another constitutional amendment can be avoided, should the need arises in future to include such items.

II.

Let exclusions in transitory phase be made through the GST Council and legislation- by zero rating certain items (as proposed for petroleum products) or imposing additional tax over the standard GST rate (at special non creditable rate) for sin goods, environmentally sensitive goods, precious goods etc. Such items can be brought in mainstream GST, in a gradual committed manner, when GST matures and revenues stabilise.

III.

The debate on revenue neutral rate (RnR) seems to be taking extreme turns, creating a fear of evasion prone GST system on offer in the event of very high rates prescribed. This may bring more harm than gains. Hence, RnR must be set at moderate levels, if not low. Also, the RnR adopted need not be a rate uniformly binding but can be a floor rate with some flexibility band.

IV.

The exemption and composition thresholds should be kept reasonably high, say 20 lakh and 100 lakh respectively. These thresholds should be uniform for goods and services across the GST framework.


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V.

To address the need of significant enhancement in devolution of funds to the local bodies, a 1- 2% dedicated component in GST rate may be inbuilt to fund local bodies for ensuring fiscal empowerment of local bodies.

VI.

Much of the success of GST will depend on how the GSTN evolves and how many processes, beyond registration, tax payment and return filing, are integrated online. To begin the Input credit settlement and refund for unutilised credit must flow through GSTN with e-payment directly to taxpayer’s bank account.

VII.

The GSTN should be employed in in data mining, risk profiling and management, random audit schedule generation and real time information exchange between authorities.

VIII.

The prospects of two alienated tax administration not in sync is likely to result in duplicity of efforts and multiplicity of interfaces. Hence, equally important is the business reengineering of tax departments, which would require creating integrated core functionalities to facilitate the taxpayer with single window interface by extensive use of the GSTN.

IX.

For audit and enforcement complementary to single user interface, the region wise Joint Audit and Enforcement Offices, with full GSTN process support and drawing capacities from both Central and State tax administrations, should be considered as the most vital integration point.

X.

Preferably, the Central and State GST departments should be integrated under a state cadre based All India Revenue Service spanning over Union and State Finance Ministries. This will help in infusing professional expertise of desired uniform standards in the GST administration across the country.

XI.

The integrated and unified National GST Tribunals, subsuming State Tribunals, should be created.

Besides, the procedure of original and appellate adjudication should be

thoughtfully laid to resolve the issues relating to CGST and SGST overlap in the process. XII.

Annual/ periodic reviews based on actual GST transaction data should be undertaken for course correction and rate optimisation after GST implementation. In addition, the release of GST tax data through open government portals to support academic research initiatives must be embraced. ***


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Bibliographic References (In chronological order) 1. Hall, Robert T., and Alvin Rabushka, (1995), The Flat Tax, 2nd ed. Standard, Calif.: Hoover Institution Press. 2. M. Govind Rao and Tapas K. Sen (1996), Fiscal Federalism in India, Macmillan India Ltd., New Delhi. 3. Mikesell, J. L. (1998). Changing the federal tax philosophy: A national value-added tax or retail sales tax? Public Budgeting and Finance, 18(2), 53-68. 4. Ebrill, L; M. Keen; J.-P. Bodin and V. Summers (2001),The Modern VAT, Washington D.C.: International Monetary Fund. 5. Bolton, T. and Dollery, B. (2005), An Empirical Note on the Comparative Macroeconomic Effects of the GST in Australia, Canada and New Zealand. Economic Papers: A journal of applied economics and policy, 24: 50–60. 6. Richard M. Bird and Pierre-Pascal Gendron (2007), The VAT in Developing and Transitional Countries, Cambridge University Press, New York. 7. Report of the Empowered Committee, India (2009) 8. The First Discussion Paper on GST released by the Empowered Committee, India (2009) 9. The Report of Thirteenth Finance Commission, India (2009) Ch.5. 10. M. Govind Rao (2009), Goods and Service Tax: some Progress towards Clarity, Economic and Political Weekly, Dec 19, 2009, Vol. XLIV No. 51, p 8-11. 11. India, GOI (2009c) 12. Perry, V. J. (2010). International experience in implementing VATs in federal jurisdictions: A summary. Tax Law Review, 63(3), 623-638. 13. Merrill, P., Grinberg, I., Mellor, N., Pallot, M., & Prow, G. R. (2010), Session 5: VAT-practical considerations and lessons learned. Taxes, 88(6), 65-72. 14. Rao, Kavita and Chakraborty, Pinaki (2010), Goods and Service Tax in India: An Assessment of the Base, Economic and Political Weekly, Jan 2, 2010, Vol. XLV No. 1, p 49-54. 15. Mahesh C. Purohit (2010), Issues in the Introduction of Goods and Service Tax, Economic and Political Weekly, Jan 30, 2010, Vol. XLV No. 5, p 12-15. 16. Rao, Kavita (2010), Goods and service Tax: The 13th Finance Commission and the Way Forward, Economic and Political Weekly, Nov 27, 2010, Vol. XLV No. 48, p 71-77. 17. Owen, Jeffrey; Battiau, Piet and Charlet, Alain (2011) VAT Next Half Century: Towards a Single Rate System; The OECD Observer: First Quarter 2011, 284, Proquest Central, p 20. 18. M. Govind Rao (2011), Goods and Service Tax: A Gorilla, Chimpanzee or a Genus like ‘Primates’? Economic and Political Weekly, Feb 12, 2011, Vol. XLVI No. 7, p 43-48. 19. Praveen Kishore, (2012), Administering Goods and Service Tax in India: Reforming the Institutional Architecture and Redesigning Revenue Agencies, Economic and Political Weekly, Apr 28, 2012, Vol. XLVII No. 17, p 84-91. GST in India: The Way Forward – Ashok Kumar Pandey. PGPPM 2014-14, IIMB.

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20. J. V. M. Sharma and V. Bhaskar (2012), A Roadmap for implementing the Goods and Service Tax, Economic and Political Weekly, Aug 4, 2012, Vol. XLVII No. 31, p 68-75. 21. Sijbren Cnossen (2013), Preparing the way for a modern GST in India, Int. Tax Finance (2013)20:715723, Springer. 22. Richard M. Bird (2013) Decentralizing Value Added Taxes in Federations and Common Markets, Bulletin for International Taxation, December 2013, pp 665-672. 23. Rao, Kavita and Mukherjee, S. (2014), Exploring policy options to include petroleum, natural gas and electricity under the Goods and Service Tax regime in India, NIPFP Working Paper No. 2014-136, National Institute of Public Finance and Policy, New Delhi. 24. Fourteenth Finance Commission Report, (Dec., 2014) http://finmin.nic.in/14fincomm/14fcreng.pdf.


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