Premature GST will drain Central Exchequer; IGST fraught with inherent complexities

DECEME! "#$ %""&

' (shish )umar !aha$ *ormer CEC Mem+er , (d-ocate
*I!ST Discussion Paper on Goods and Ser-ices Tax .GST/ in India$ released +' the
Empowered Committee .EC/ of State *inance Ministers on 0o-em+er 1"$ %""&$ +rings
out the schematic +lueprint of GST with se-eral loose ends2
3ne distincti-e and welcome feature of GST is the concept of Inter4State Goods and
Ser-ices Tax .IGST/$ found missing in the pre-ailing State 5(T2 It is$ no dou+t$ an
impro-ement o-er the current practice of treating inter4state transactions as export or
import for the purpose of granting refund or le-'ing State 5(T sans credit$ as the case
ma' +e$ thus snapping the credit chain the moment the goods cross the state +order2 The
GST template in the Discussion Paper suggests seamless flow of credit throughout the
countr' along the suppl' chain up to the retail stage and has thus addressed one of the
fundamentals of 5(T6GST2 ut to ma7e that concept wor7 satisfactoril'$ other
fundamental requirements needed to +e addressed as well2 This is where the Discussion
Paper is found wanting2 efore we examine the shortcomings$ let us first discuss the
salient features of the IGST model2
*irst of all$ while the threshold of gross annual turno-er of !s 1" lacs$ +oth for goods and
ser-ices$ has +een recommended for all the States and 8nion territories$ the tentati-e
decision is to persist with the current threshold of !s 129 crore for Central GST .CGST/2
Secondl'$ it has +een decided that Centre would le-' IGST which would +e inclusi-e of
State GST.SGST/ and CGST on taxa+le goods and ser-ices$ with appropriate pro-ision
for consignment or stoc7 transfer of goods and ser-ices without pa'ing an' such tax2
Thirdl'$ while pa'ing IGST$ the inter4state seller can utili:e credit of IGST$ CGST and
SGST2 *ourthl'$ the exporting State will transfer the credit of SGST used in pa'ment of
IGST to the Centre for onward transmission to Destination State wherein the importer
will claim credit of IGST while discharging his tax lia+ilit'2 *urther$ it is decided that
export shall +e :ero rated with pro-ision for refund of unutili:ed credit2 *ifth$ the Centre
will wor7 as a clearing house to -erif' the claims and inform the respecti-e go-ernments
to transfer the funds2 ;astl'$ it is stated that the ma<or responsi+ilities of IT infra4
structural requirement will +e shared +' the Central Go-ernment through the use of its
own IT infra4structure facilit'2 The s'nerg' +etween the States IT infra4structure
including TI0=S>S and Central IT infra4structure will also +e addressed2 (ll inter4State
dealers shall +e e4registered and correspondence with them will +e +' e4mail2
Consequentl'$ it was hoped that compliance le-el would impro-e su+stantiall'2
;et us now dwell upon the shortcomings and pitfalls that ha-e +een o-erloo7ed in the
*irst Discussion Paper2
(2 3n the need for uniform threshold limit?
Different threshold limits for SGST and CGST$ as has +een indicated in the *irst
Discussion Paper$ will offer serious challenge to s'nerg' and exchange of data +etween
the Central IT S'stem and those of the States2 esides$ such di-ergence will pose
insurmounta+le difficulties for the Centre while implementing IGST model2 To +e more
precise$ a State assessee for SGST .with an annual turno-er of less than !s 129 lac/ will
also +e a Central assessee for the purpose of IGST onl'$ +ut it will +e depri-ed of input
credit of CGST on account of its turno-er +eing less than the threshold$ thus attracting
limited cascading effect2 esides$ Central Go-ernment is not li7el' to ha-e an' trading or
manufacturing le-el data of such non4assessee which will seriousl' affect e4scrutin' of its
IGST !eturn2 Therefore$ in the interest of efficient wor7ing of the s'stem$ it is important
that the threshold limit in respect of SGST and CGST +ecomes uniform2
2 3n tax lia+ilit' upon stoc74transfer of goods and ser-ices?
The *irst Discussion Paper suggests that there should +e separate pro-isions for stoc7
transfer of goods and ser-ices$ meaning there+' that such stoc7 transfer should +e free of
IGST .or an' GST for that matter/$ as otherwise there was no need for separate
pro-isions2 This would +e fraught with intricacies2 The question that would logicall' arise
is who will +e responsi+le for crediting SGST collected in the exporting State to the
Destination State2 Surel' not the Centre if no IGST is le-ied2 If it is the exporting State
which will +e required to credit the amount directl' to the Destination State$ a separate
procedure is to +e contemplated in respect of consignment6stoc7 transfer onl'2 This will
add to complication inasmuch the IT programme pertaining to inter4State transactions is
supposed to +e de-eloped +' the Centre and not the States2 esides$ inter4State stoc7
transfer in the a+sence of e4trac7ing ma' end up +' snapping the credit chain so far as
SGST is concerned2 5iewed in perspecti-e$ it is$ therefore$ ad-isa+le that stoc7 transfer
should also +e su+<ected to GST on deemed -alue$ a concept well 7nown in indirect
taxation2
C2 3n utili:ation of IGST$ CGST and SGST credit?
To ena+le e4scrutin' of credit utili:ation$ the !eturn format of the assessee ought to
pro-ide for separate column for each categor' of tax paid$ -i:2 IGST$ CGST and SGST
and each categor' of input credit a-ailed of .with opening and closing credit +alances/2
E-en though Centre is not responsi+le for collection of SGST$ data pertaining to SGST
will +e rele-ant for e4scrutin' of IGST at a macro le-el2 Since inter4State trade is
common place$ a consolidated !eturn for central GST .inclusi-e of IGST and SGST/ is
ad-isa+le rather than going for separate IGST !eturn2
D2 3n transfer of SGST credit to the Centre and refund of unutili:ed credit against
exports?
It ta7es a+out two 'ears$ if not longer$ for an exporter to get 5(T refund arising from the
export of goods to another State2 There is no reason for optimism that SGST credit to the
Centre in a case of inter4State trade will materiali:e in a shorter period$ particularl' when
-erification process at the end of the exporting State will +e far more complex2 The
following illustration will elucidate the a+o-e proposition2
Illustration?
= .manufacturer of t'res/ in State ( recei-es his inputs from States $ C and D and sells
his finished product .t're/ to > .car manufacturer/ in States E and * on pa'ment of IGST
after a-ailing of credit of IGST$ CGST and SGST2 > transfers the cars to @ .dealer/ in
State G on pa'ment of IGST after a-ailing of credit of IGST$ CGST and SGST2 The cars
are e-entuall' sold to consumers in State G2
In this illustration$ SGST credit will ha-e to +e transferred in the first instance +' States
$ C and D to the Centre for transmission to State ($ and then +' State ( to the Centre for
States E and *$ and thereafter States E and * to the Centre for State G2 Since there is no
mechanism 'et to e4capture transaction le-el details$ it would +e extremel' difficult for
the exporting States to -erif' facts from the aggregated data captured from the !eturn and
to satisf' itself that the SGST credit utili:ed +' the exporter was in fact deposited to its
Treasur'2 Secondl'$ if ( is 'et to recei-e SGST credit from $ C or D in full -ia the
Centre$ ( will ha-e its <ustification to withhold the pa'ment to the Centre for States E and
*2 Thirdl'$ the fear that once the SGST credit is transferred to the Centre$ it would not +e
possi+le for the exporting State to get +ac7 the amount e-en if in-estigation pro-es that
the credit was fraudulentl' a-ailed would deter the latter from transfering SGST credit to
the Centre with thorough scrutin' and -erification2
In the e-ent of understanda+le dela' in the transfer of SGST credit to the Centre from the
exporting State$ which ma' go +e'ond two 'ears$ there are onl' following two
possi+ilities2 Either the Destination State will star-e of re-enue or the Central Exchequer
will +ear the cost$ ha-ing underta7en to meet the re-enue deficienc' of a State after GST
has +een introduced2 3n a rough +ut reasona+le estimate$ a+out &"A of the transfera+le
SGST credit is li7el' to remain outstanding in the first two 'ears$ and if the Centre is to
+ear the +runt of it$ the 8nion *inance Minister should +e prepared to accept sharp
depletion of re-enue on account of s'stemic failure2
(s regards refund of unutili:ed credit of SGST against exports out of India$ the *irst
Discussion Paper does not throw an' light2 It is$ howe-er$ not difficult to foresee
insurmounta+le difficulties for exporters to o+tain such refund for want of clarit' as to
which State will +e responsi+le for granting refund in a case where IGST has +een le-ied
+ut goods ha-e not +een consumed in the Destination State for reason of its export out of
the countr'2
E2 3n the Centre wor7ing as a Clearing Bouse?
The Clearing Bouse concept to administer inter4State GST was earlier conceptuali:ed and
proposed for implementation in mem+er countries in 1&&"s +' the European Commission
.EC/ following origin principle2 ut it was e-entuall' gi-en up owing to a+sence of an
effecti-e IT s'stem in mem+er countries to capture transaction le-el data in real time2
Chen internal fiscal frontier in the E8 countries was remo-ed in the earl' 1&&"s$ the
European Commission proposed that each countr' le-' tax on exports to other mem+er
States$ and the importing mem+er then allow full credit for that tax against its own 5(T2
8nder a Clearing Bouse arrangement$ the importing countr' would then reim+urse the
exporting countr' for that credit2 Consequentl'$ re-enue in each countr' would +e exactl'
the same as under @ero rating exports2 The GST model proposed +' the Empowered
Committed in the *irst Discussion Paper is +ased on destination principle and that
explains wh' the transfer of credit will +e in the re-erse direction$ i2e2 from the exporting
countr' to the importing countr'2
e that as it ma'$ an effecti-e IT s'stem to capture transaction le-el data was recogni:ed
+' European Commission as sine qua non for effecti-e implementation of +orderless
GST s'stem2 There is no -alid reason wh' should thin7 otherwise in respect of IGST2 It
is pertinent to mention in this regard that on the !ecommendation of !amanan Su+4
Committee$ the Empowered Committee of the *inance Ministr' headed +' Dr2
Parthasarath' Shome recommended de-elopment of an electronic self4regulated in-oice
capturing module for credit accounting$ which$ howe-er$ could not +e implemented for
administrati-e and technical reasons2 It is time to re4-isit and to put into effect the said
recommendations in the interest of successful implementation of GST in India2 If GST is
introduced +efore IT s'stem to capture transaction le-el data is in place$ there is e-er'
possi+ilit' of gross a+use of the s'stem +' some unscrupulous traders$ there+' raising the
price of compliance too high to +e competiti-e2
*2 3n su+stantial impro-ement of compliance le-el owing to IT infra4structure?
!ealisticall'$ neither the Centre nor the States ha-e an IT infra4structure in place$ which
is capa+le of meeting GST requirements of credit accounting and doing e4scrutin' of the
!eturns filed2 The existing (utomated Central Excise and Ser-ice Taxes .(CES/ Module
is a little more than demateriali:ed !eturn with aggregated data that would +e quite
inadequate to address the issue of inter4State credit accounting or to detect credit fraud2 It
has ta7en nearl' D 'ears to commission (CES2 3+-iousl' (CES needs to +e replaced +'
a much more effecti-e IT credit4accounting GST module which would capture
transaction le-el data$ if not in real time$ at least off line2 Chat is needed is a realistic
pro<ection of time for de-elopment of the said IT s'stem with wide area networ7 and
appropriate ser-er +ac74up and the introduction of GST ma' +e deferred till then unless
we are desperate to introduce a half4+a7ed taxation s'stem to in-ite chaos2
Incidentall'$ the experience of GST compliant countries$ e-en with their strong IT infra4
structure$ is not at all encouraging$ so far as tax e-asion is concerned2 3n a modest
estimate$ the 8) loses annuall' o-er 1" +illion sterling pounds of 5(T through Missing
Trader and carousel frauds while other E8 countries collecti-el' lose a+out 1"" +illion
Euros annuall' on same account2 In Canada$ since the inception of GST in 1&&1 till
March %""E$ a+out F"" indi-iduals and +usinesses ha-e +een con-icted of GST fraud2 3n
a modest estimate$ tax e-asion in India ma' wor7 out to D"A of the total CE05(T
collected +' the Centre and considera+l' higher in States2 Gi-en the a+o-e +ac7ground
of lac7 of effecti-e IT infra4structure and the ad-erse experiences of Cestern countries
and India as well regarding le-el of tax compliance$ we do not find an' ground for
optimism that GST per se will su+stantiall' impro-e compliance le-el2 3n the contrar'$ a
lax s'stem ma' +e enough to sap the growth and -italit' of compliant Indian industries
and +usinesses2