GST Updates ( 25 Nov 2016)

GST got your tongue?

November 25, 2016
GST got your tongue?
Developments on the goods and services tax (GST) front in the last week or so have not been particularly encouraging. First, in the meeting of state finance ministers on November 20, no consensus emerged on the issue of ‘dual control’ of businesses by the Centre and the states.

Second, the GST Council meeting scheduled for November 25 has now been deferred to December 2 and 3, apparently to have time to deliberate on the feedback received by the states on the revised GST draft laws circulated to them earlier this month.

This conflict around ‘dual control’ over taxpayers is inherent in the dual GST structure that has been opted for. While the structure envisages ‘duality’ at each stage, industry — rightly — wants a single authority (either central or state) to deal with them for audit and scrutiny. Resolving this conflict will require innovative thinking and strong political will.

For starters, it might be worthwhile to consider choosing only a small percentage of dealers for audit and scrutiny selected on the basis of their risk profile rather than arriving at a formula to segregate the entire universe of registered taxpayers, which is expected to be around 10 million.

The other option could be to divide on asectoral basis. For example, the service sector having large and pan-India footprints (telecom, banking, insurance, etc) could be administered by the Centre, while retail could be with the states. Whatever be the mode of this split, as long as industry is not required to deal with multiple authorities, it should be acceptable to India Inc.

The more critical step would be the finalisation of GST laws. The initial draft falls short of India Inc’s expectations and it wants a relook at a few fundamental aspects of the laws.

First, there is a growing consensus that rules for the service sector need to be significantly simplified. Even if ademand for a single centralised registration for the sector is not acceptable, the service sector industry would expect flexibility in terms of issuing and receiving invoices at a location of their choice, given that anyway state GST would eventually accrue to the Further, the proposal of applying GST on inter-branch supply of services is also extremely complex to implement. It needs to be reviewed.

The other proposal that requires reconsideration is the principle of vendor invoice matching, in which the buyer doesn’t get the credit of GST paid to vendors unless the latter provides the details on the GST Network (GSTN) system and pays GST. While the mechanism of online reconciliation of the vendor’s records with that of the purchaser would help in expanding the tax net and in shrinking the parallel economy, to penalise the customer for non-compliance of the vendor is seemingly inequitable.

Any large company deals with hundreds of vendors and to ensure their compliances would be extremely difficult. This is particularly the case in the initial period, when the smaller vendors may not be geared up in terms of changes in their IT system and processes. This could also hit the small and medium-sized enterprises (SME) sector hard, as large companies may want to deal with bigger vendors only.

Therefore, till the time industry gears up to dealing with such elaborate reconciliations, appropriate relaxations should be incorporated in the law. Also, in keeping with the commitment to do away with ‘Inspector raj’, the seemingly sweeping powers sought to be given to the tax authorities with respect to penalties, prosecution, etc, need to be rationalised.

Finally, it is important that the thinking while dealing with GST moves from ‘what happens today’ to ‘what should ideally happen’. There are lot of lessons and case studies available from other countries that need to be incorporated in the law. The examples could include allowing GST grouping for affiliate entities, and the utilisation of surplus Central GST against income-tax liability. After all, GST is not an incremental change. It’s a quantum leap in tax reforms.

With demonetisation starts a tectonic shift from vote-buying politics to clientelism

Following the demonetisation move, bank unions have withdrawn their strike for a couple of months till normalcy returns. Many common people are silently exchanging their honestly earned money in banks and post offices.

In stark contrast, most political parties are up in arms, making it about the politics of black money. Demonetisation, however, represents a possible tectonic shift in India’s politics: from the naked politics of votebuying to the subtler one of clientelism. Political parties that wish to remain in contention in the future need to heed this shift. Otherwise, they risk sinking into oblivion.

In Cash or in Kind

‘Vote buying’ and ‘voter clientelism’ are common phenomena. Both are ways through which political parties influence voters to vote for them. During the 2014 Lok Sabha election, the Election Commission seized over 100 kg of heroin, 50 kg of opium and thousands of litres of illicit alcohol in Punjab. Similarly, media reported agents of political parties coming to neighbourhoods in the wee hours of the morning with rice sacks filled with cash. These are examples of “vote buying”.

Clientelism, on the other hand, does not involve distribution of cash or its use to provide voters with goodies. It involves providing benefits such as ajob in a public sector undertaking if the particular candidate gets elected and becomes a minister in the government. Widespread hiring in Indian Railways and the indiscriminate introduction of passenger trains in Biharand Bengal under the stewardships of several railway ministers represent examples of crude clientelism.

Clientelism represents a complicated social undertaking that depends on a dense network of interactions between the politicians and their vote banks. The politicians must be sure that the voters they deliver benefits to will vote as promised during polls. The voters, on their part, must be sure that when they return a politician to power, he will deliver the promised benefits.

Research in economics and political science shows that while clientelism works particularly well for incumbents, vote-buying is more effective for challengers. Note that clientelism induces ‘bought’ voters to vote for the ‘buying’ candidate because the former can receive the agreed upon benefit of a job or a bank branch in their village only if the particular candidate is elected. Clearly, incumbents are in a better position to offer credible clientelistic proposals. They hold the public sector resources and allocations before polls.

In contrast, vote-buying is a necessary but sufficient condition for winning elections. Voters, particularly in the lower economic strata of society, expect to be paid in order to consider voting for the party that makes such a payment. If they do not get such a payment from party A, they will definitely not vote for party A’s candidate.

Therefore, both party A and party B would have to pay the voter to remain in contention. So, the voter will receive cash or kind from both parties A and B and then decide whom to vote for. If party A gives more cash than party B, then party A stands a better chance.

Because the incumbent political party can practise clientelism — which, importantly, does not require the use of black money — while challengers have to indulge in vote-buying — which does require using large amounts of unaccountable money — most political parties are upset at the latest demonetisation move.

Bribe Market Matures

In fact, this framework explains the demonetisation move itself. The BJP under Narendra Modi was voted to power by an increasingly aspirational class of voters who were tired of corruption, especially during the UPA rule. So, demonetisation represents aclientelistic quid pro quo, although asubtle one, by the BJP to fulfil these aspirations of its voter base.

The good news, however, is that this clientelistic move signifies the coming together — and coming of age — of a voter group that is tired of corruption. This shift from the naked politics of vote-buying to the subtle politics of clientelism is a natural progression that occurs as countries mature both economically and politically.

For instance, even in the US, the world’s most prosperous democracy, the election of Donald Trump as president represents the success of a clientelistic proposal to protect domestic manufacturing jobs from being taken away by globalisation and immigration. Similarly, clientelistic proposals characterise politics in several other advanced economies.

This shift from vote-buying to clientelism presents an important lesson for political parties. Because the aspirational class that is tired of corruption comprises primarily younger voters, the influence of this voter group will only increase over time. In contrast, the group of voters that does not detest the status quo comprises primarily older voters who have grown accustomed to the old ways of politics in the country. This group will progressively shrink. Source - [25-11-2016]

GST stalemate: Why Centre can’t expect cooperation after concealing data from states

November 25, 2016
GST stalemate: Why Centre can’t expect cooperation after concealing data from states

The crucial meeting of the GST council that was to happen on 25 November has been cancelled. No new date had been finalised, as of 24 November. Prior to the postponement, the GST negotiations between the state finance ministers and the Union government had hit a roadblock after it was exposed that the Union government had been allegedly concealing true data from the state finance ministers during a large part of the negotiations . The present stalemate is around the issue of jurisdiction on the service taxpayers in the under Rs 1.5 crore revenue category. That the Union government has presented misleading data to state finance ministers that hugely under represents the actual taxpayer base size is a prettyserious affair. It’s not surprising that it didn’t make big letter headlines given how the Delhi-based think-tanks anda segment of the business media is cheering for the Union government’s side in the GST negotiations. This sort of thing should have ended the GST negotiations altogether, but the state governments have greater faith in cooperative federalism than the Union government had.

Now that this is out in the open, Arun Jaitley is finding it difficult to defend the Union’s claims on a tax base that he earlier took for granted, given the allegedly misleading information that was fed by the Union government officials to the state finance ministers. Now, those “gains” by the Union government, based on allegedly previously concealed information, is suddenly up for negotiation and grabs. The future of this negotiation will decide a very crucial issue of federalism in the Indian Union – would the states retain any serious amount of revenue autonomy at all or will they become total beggars seeking alms in the court of the New Delhi Empire.

Let us understand the implications of this alleged concealment of data. The crucial issue is, who will control the service tax base for entities under the Rs 1.5 crore annual revenue threshold. This is not a theoretical argument but one that is premised on numbers – the most crucial among which is the actual size of this under Rs 1.5 crore revenue service tax payer base. In the initial meeting of the GST council, service taxpayer data supplied by the Union government to the state finance ministers showed a service taxpayer base of 11 lakh.

Negotiations thus happened on the basis of this number, which the state finance ministers in good faith believed to be true. One does not expect that in a crucial forum like the GST council, the Union government would be concealing real information and feed allegedly misleading information. Based on that 11 lakh number and its estimated revenue corpus, the states were magnanimous to the Union and decided to let the Union government retain control of the under Rs 1.5 crore annual revenue service tax base. Everything changed turned out that this 11 lakh number that was supplied by the Union government to the state finance ministers was deemed to be misleading by them.

New data available with the state finance ministers suggest that the actual service taxpayer base with below Rs 1.5 crore annual revenue is almost 31 lakh! That is almost 3 times the number that the Union government fed the state finance ministers earlier. Chairman of the empowered group of state finance ministers, West Bengal’s Finance Minister Amit Mitra has directly accused the Union government of concealing service taxpayer information from the states. A three-times increase in tax payer base has very different revenue implications. On the basis of that, a majority of the states have now proposed that for the under Rs 1.5 crore revenue class, state governments will have full control of both goods and service taxes, while for the over Rs 1.5 crore slab, there will be dual control and revenue sharing between the States and the Union.

Any entity whose bluff has been called out so directly would be embarrassed and would respond directly to the serious allegations that have been raised. Not, so the Union government. It has refused to agree to the formula proposed by a majority of the states, including Kerala, Bengal, Tamil Nadu, Bihar, Delhi, Odisha and others. Thus the stalemate continues. It is unfortunate when a 31 percent vote share government has the power to hold at ransom the united political decision of a majority of state governments. That is a fundamental flaw in the federal structure of the Indian Union.

In the 4 November meeting of the GST council, the state finance ministers wanted updated data on assesses of service tax, excise and VAT. Without giving updated data to state finance ministers on such crucial matters, what is the point of a GST council meeting? Was the Union government thinking that the GST council will be a tea-drinking, rubber-stamp club for New Delhi’s decisions? After the state finance ministers raised a cry based on the new data on service taxpayer base, the Union government tried to counter that by calling for a “re-opening” of the settled decision.

The goods and services issues are not equivalent. The service taxpayer base issue was “settled” earlier based on false date. Updated data that shows the actual base to be nearly 3 times larger than what the Union government’s earlier allegedly misleading numbers showed has resulted in this justified calls for negotiations from a majority of the states. There has been no such corresponding allegation of concealment from the states about the goods taxpayer base.

The Union government has retained the right to impose cess at will. Thus, it has a rate elastic source of revenue. The state governments, on the other hand, after GST proposals, have not been left with any elastic source of revenue. Thus, Union will generate its own revenue in response to what it deems as an emergency. The states will have to go with a begging bowl to Delhi in a similar situation. This is unjust and a blow to the powers and dignity of the states.

Also, the upper slab of luxury goods, which represents a whopping 25 percent of the total indirect tax base, has been forcibly kept low on Union government’s insistence since it wants to add cess over it, which it does not have to share with the states. Thus, Union already wants to deprive states from their legitimate revenue claims in the top-most tier. Either states should also have the power to impose cess or the highest slab has to be revised upwards significantly to squeeze the space for Union cess. Otherwise this becomes another way where states will be deprived of their rightful revenue.

One hopes that the BJP will not be so shameless to introduce the GST bill as a money bill and silence the Opposition in Rajya Sabha. This too after getting immense cooperation extended by most of the opposition in spite of many reservations and concerns about GST that the opposition had voiced during the parliamentary GST debate. The states, by agreeing to GST, have given up exclusive revenue powers. By dangling deadlines and roll out dates and its pressure tactics via big corporate controlled industry bodies, the Union will try to force the state into a dishonourable and damaging settlement.

It is up to the states to stand up to this blackmail coming from same Union government that has allegedly misled state governments by giving wrong information during crucial GST council meeting. This is about the future federalism in the Indian Union and preservation of the basic structure of the Constitution of India. If the state governments do not have exclusive control over any part of the tax-payer base, it will mean that the federal structure of the Indian Union will be damaged permanently. Any union government that misleads state government by concealing revenue data does not have any moral or ethical right to claim jurisdiction over the revenue sources situated in states. Source – [25-11-2016]

Companies may be forced to pass on benefits to consumers under GST

November 25, 2016
Companies may be forced to pass on benefits to consumers under GST
India Inc will have to pass on any benefits derived from the proposed Goods and Services Tax (GST) to consumers in the form of reduced prices or face penal provisions, according to the draft law, which has proposed an anti-profiteering clause.

An authority would be created or empowered under GST law to ensure that companies do not pocket gains in lieu of input tax credits or lower rates, according to the draft law circulated to state governments.

“The central government may by law constitute an authority, or entrust an existing authority constituted under any law, to examine whether input tax credits availed by any registered taxable person or the reduction in the price on account of any reduction in the tax rate have actually resulted in a commensurate reduction in price of the said goods and or services supplied by him,” the draft says.

The authority will be empowered to impose penalties. ET had reported on such a provision in its September 19 edition.

The draft law will be taken up for consideration at a meeting of the GST Council scheduled on December 2-3.

The meeting was postponed from November 25 after state governments sought changes to the draft and the council will take it up after officials thrash out those issues.

The provision is drawn from the Malaysian GST framework, rolled out in 2015, that provided for a separate anti-profiteering law to ensure that companies and traders do not get undue benefits from the sudden lowering of the tax rate and make consumers suffer price shocks. Malaysian tax authorities keep a check on sudden spikes in profit reported in quarterly earnings after the GST roll out.

The centre and the states have been keen to ensure that the benefits from seamless input credits and removal of levies under the new indirect tax regime is passed on to consumers.

The GST structure has four rates – 5%, 12%, 18% and 28%. The effective tax incidence will fall when producers get seamless input tax credit and the cascading of taxes is removed. Many consumer durables could see the effective tax decline by a few percentage points.

There has been some apprehension among policymakers about companies absorbing the tax benefits and not passing them on to consumers.

The empowered committee of state finance ministers had raised this issue at a meeting with the industry on GST some time ago. Companies and industries have been known to pocket tax advantages.
“It was seen when VAT was introduced… It is observed when tax cuts are introduced in the official. Companies usually raise prices before the budget and then reduce it marginally if a tax is cut, without passing on the actual benefit to consumers. Some experts are not enthused by the idea.

“While the idea is to protect the consumers, considering the practical challenges on implementation, it might be counterproductive. It could lead to complex paperwork and unwarranted litigation. The experience in Malaysia on a similar provision has also not been encouraging,” said   Source – [25-11-2016]

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