Need to take fresh look at problematic aspects of GST

The government deserves credit for its insistence on getting the GST Bill passed in both the Houses of Parliament over a period of time. This may appear quixotic as the BJP, while in the Opposition, was opposed to the GST. However, we should take comfort in the fact that stranger things have happened in Lutyens Delhi.

The government has conceded quite some ground to the Opposition by removing the controversial 1% inter-state levy and providing an explicit undertaking to the states that they would be compensated for losses for a period of five years.

State governments would have supreme powers over dealers with a turnover of less than Rs 1.50 crore while tax gold mines such as alcohol would continue to be taxed by the states.

The decision to scrap the 1% inter-state levy has to be welcomed. However, the cause for worry should be that such a tax was even contemplated in the first place. This tax was against all principles of an ideal GST. It appears that the persons who are drafting the GST law are looking upon it as just another indirect tax instead of a game-changer that it is supposed to be. Proposing the levy and scrapping it later sends out a signal that the government is worried on the revenue from GST rather than the benefits that can accrue if it is implemented properly.

This becomes all the more important considering the fact that the government has made a clear promise to compensate the states for any losses they may incur on account of GST for a period of five years. The impact of this compensation on the fiscal deficit needs to be thought of. A prolonged period of low GST revenues could force the government to reintroduce this tax. 

The success of any ideal GST law is based on seamless availability of input tax credit. Section 16 of the model GST law is titled ‘Manner of taking input tax credit’. Once the law is operational, it could well be altered to ‘Manner of not taking input tax credit’. This is because, of the 16 sub-sections in this section, the first three use the sentence “subject to such conditions and restrictions as may be prescribed”.

We know from experience that the moment such sentences find their way in a section, the lawmakers are tempted to find a way to use it by imposing some condition or restriction or the other.

A new law such as the GST should not find inspiration from the past for the purpose of imposing restrictions. Restrictions, if any, should be based on the structure of the new law. The fourth sub-section mandates that credit should be taken within one year from the date of issue of tax invoice relating to such supply. Sub-section 9 of Section 16 imposes further restrictions on credit. No credit would be given to motor vehicles, except when certain conditions are met.

The provision that credit would not be provided to goods and/or services provided in relation to food, outdoor catering, beauty treatment, health services, cosmetic surgery, club membership, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation when such goods and/or services are used primarily for personal use or consumption of any employee is a word-for-word reproduction from the existing Cenvat Credit Rules.

There are other restrictions imposed in the execution of a works contract and construction of immovable property. Sub-section 9 concludes with a flourish — credit would not be provided to goods and/or services used for private or personal use.  

In later sections, there are other unpleasant provisions such as denial or reversal of credit if the counterparty has not met their obligations or payment of taxes.  It is unfortunate that in a critical area such as input tax credit, lawmakers have taken the convenient route of aping existing laws instead of thinking afresh. There are a number of other drafting issues in the model GST law including in the definitions of export and supply.

One nation, multiple taxes

With three types of GST (CGST, SGST and IGST) and the state governments having power over critical tax generators and entities whose turnover is less than Rs 1.5 crore, the “One Nation, One Tax” slogan that is being bandied about is just a slogan.  
There is a school of thought that the dogged pursuit of GST by the present government is to salvage some brownie points since not everything is going its way at present. 

The GST in its present form is diluted and does not meet many of the requirements of a model GST law. Even if it (the enabling bill) does get introduced, it would suffer from all the inadequacies that a tax, which is based on political premises rather than economic factors, suffers. A significant amount of time, money and resources have been spent on GST ever since it was thought of 16 years ago by then government of A B Vajpayee.

The introduction of GST has always had two aspects – the political aspect and the administrative aspect. Now that the political aspect is done and dusted (hopefully), the government should get the administrative aspect right.

A panel of experts (non-political) should take a fresh look at all problematic aspects of the model GST law and suggest changes when it is introduced in November. If this isn’t done, we would end up with “One Nation, Multiple taxes, Maximum Confusion”.

The expectations in the build up to GST are as high as the expectations from the Rajnikanth starrer Kabali were. Fans of mega star are hoping that his next movie will not disappoint like Kabali did. Advocates of GST are hoping that the next version of the model GST law removes all the inconsistencies in the present one. As always, we live in hope.

(The writer is a Bengaluru-based tax expert)