Author: Najib Shah

View | The revenue glass—half empty or half full

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The revenue from the Goods & Services Tax (GST) continues to post impressive growth figures—₹1,64,882 crore was the gross revenue collection for December 2023.

This was a 12% year-on-year growth; the April to December revenue for 2023 being ₹14.97 lakh crore as against ₹13.40 lakh crore in the same period the previous year. The average monthly gross GST collection was ₹1.66 lakh crore in the first nine months of 2023-24.

The robust GST performance did seem to rub off on direct taxes—or given the close cooperation between the Central Board of Indirect Taxes (CBIC) and the Central Board of Direct Taxes (CBDT)—it could be the other way around.

The gross direct taxes collection touched ₹17.18 lakh crore for FY24 up to January 10, 2024. This was a 16.77% YoY growth. Net Corporate Income Tax grew by 12.37% and net personal income tax by 27.26%. This would suggest a better exchange of data between the two Boards leading to better compliance.

And just as one was celebrating this excellent all-round performance from both CBIC and CBDT comes the press release of the Directorate General of GST Intelligence (DGGI). The DGGI has in 2023 detected 6,323 cases involving evasion of duty of ₹.1,98,324 crore representing a 119% (YoY) increase in the detection of cases.

As the press release states, the ‘DGGI unveiled significant GST evasion in diverse sectors like online gaming, casinos, insurance sector, secondment (import of manpower services), fake input tax credit (ITC) among others’. There was also a voluntary payment of ₹28.362 crore; 140 ‘masterminds’ were said to have been arrested.

Yet another press release reveals that special drives were launched by the DGGI and the State/UT undertakings across the country on the issue of non-existent/bogus registrations and issuance of fake invoices without any underlying supply of goods and services.

This drive resulted in the detection of 29,273 bogus firms involved in suspected evasion of ITC of around ₹12,036 crore. The data reveals that the most ITC fraud cases were detected in Maharashtra, followed by Rajasthan, Delhi, Haryana, and Uttar Pradesh. Thus, despite increased technology, data analytics, and risk management technology, it would appear evasion continues unabated.

The CBDT has in, another press release spoken of 8.18 lakh crore Income Tax Returns (ITR) having been filed in 2023-24 up to December 31, 2023. This is 9% more than the ITR’s filed for assessment year 2022-23.

At first glance, this is most impressive. But as the Finance Minister has in a reply to a question in the Lok Sabha mentioned, only 1-2% of the Indian population pays income tax and declares earnings above the non-taxable income.

This was the year 2018-19. Of course, the total population includes a large chunk not liable to pay any income tax, for instance, those below the age of 18 years and those whose income is less than ₹5 lakh. However, the fact remains that only a miniscule percent of the population pays income tax.

As Prof. Arun Kumar points out in an interesting analysis of the ITRs—nearly 68% of the persons who filed returns paid nil tax; then there were several persons who paid TDS but did not file a return. Effectively he points out only 0.68% of the population paid income tax—out of these 0.016% declared an income above ₹1 crore and had a share of 38.6% of the taxable income.

The two Boards have undoubtedly been doing a valiant job in curbing evasion as the detections reveal. Further, steps have been taken to rationalise the tax structure, simplify processes and simplify compliance. There has been a relentless focus on technology, digitisation, data analytics, and the sharing of information across agencies—all these have undoubtedly been showing results.

However, juxtaposing the various data elements ibid, it is evident that there is a serious tax gap in the country or to put it more bluntly, there are far too many persons evading taxes. It is well accepted that what is detected is but a small percentage of what is evaded; and not all of what is detected stands the test of adjudication and appeal.

We are simply not collecting all that we should be getting. India’s tax to GDP ratio which represents the tax revenue concerning the GDP (gross domestic product) is low. The Government’s ability to finance its expenditure is determined by this; a higher ratio indicates a wider fiscal coverage, more revenue, and less dependence on borrowings. India’s tax-to-GDP ratio according to the Union Budget estimates for FY23, was estimated to be 10.7%; the OECD average is in the mid-30s. Obviously, there is a lot of catching up to do.

What then needs to be done? Enforcement can check evasion but never completely stop it; ultimately policy interventions are the answer. Simplification of processes which make it easier to comply should be a regular exercise.

While it is difficult to arrive at an ideal rate of taxation, policymakers should constantly strive to achieve a rate wherein the taxpayer concludes it makes better sense to comply than take the risk of evading. Close interaction with the industry, the ordinary taxpayer and enforcement agencies is a must to understand ground realities.

Technology should constantly be sharpened, and risk parameters built to detect abnormalities and throw red flags. The Boards should invest in recruiting data analytical experts to work closely with the department. There is a serious trust deficit between the taxpayer and the departments-this is a bridge which needs to be crossed one step at a time.

The field formations are key in this process and can make or break the best of policies. So constant training and sensitising the field formations is a must. Far too much time and energy is wasted in litigation—the amnesty schemes which effectively punish the honest taxpayer are never a good option. As the receipt budget shows, too much ‘revenue’ is blocked in litigation. The departments should ensure they seek to collect only what is due.

The citizens need to be aware of the ill effects of evasion—loss of revenue for the government which can otherwise be used in development and social projects, loss of jobs, generation of black money which can be used for nefarious anti-national purposes; they need to be encouraged to pay their taxes and participate in nation building. The PM’s very influential Mann Ki Baat can be an effective vehicle to drive home this message.

All this and much more has to be done if we are to reach our ambitious targets of becoming a $5 trillion economy in five years or achieving $2 trillion in exports by 2030.

— Najib Shah is Chairman (retired) of the Central Board of Indirect Taxes & Customs. Views expressed are personal.

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View | DRI — A celebration of professionalism

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Directorate of Revenue Intelligence (DRI) is never far away from the news. The outstanding seizures and detections which the DRI makes with clockwork, and efficient regularity ensures that. Or because of orders passed by the courts (the latest being by the Gujarat High Court in late November 2023) questioning the legitimacy of the actions of DRI.

This year has, as per the press releases and details available on DRI’s website seen a mind-boggling range of goods seized. This is reflective both of the extent of smuggling and the incisive intelligence gathering leading to precise interdictions by the organisation.

Thus, there were seizures of gold, that yellow metal which fascinates us and for which there is an incessant demand. Gold smuggling is caste, creed, religion, sex, age, and nationality neutral — and the present duty structure makes gold smuggling an attractive preposition. Gold was sought to be smuggled through almost all the international airports-concealed in, clothing, machines, suitcases, and toilets of aircrafts, in bars and paste form, through land and train.

Agricultural goods like betel nuts and areca nuts, attempted to be smuggled to escape both policy restrictions and duty, were seized- all mis declared or concealed. Fauna, both live (baby peacocks, turtles) and dead (dried turtle skin) and ambergris were seized. Cigarettes another item prone to heavy smuggling-the duty structure and compulsory compliance requirements acting as the incentive, were seized in large numbers.

The latest seizure being at Mundra port in November 2023 of 80.1 lakh sticks from an import container shipped from Phnom Penh port.

The whole range of Narcotics & psychotropic substances ranging from cocaine, mephedrone, ketamine, heroin and ganja attempted to be smuggled saw the DRI thwarting the efforts of smugglers. Manufacturing facilities engaged in the illicit manufacture of psychotropic substances were dismantled. It may be recalled that the DRI had in earlier years some of the highest seizures of methaqualone, heroin, fentanyl, and the precursor, ephedrine.

The DRI’S ambit extends to commercial frauds. To paraphrase the definition as enunciated by the World Customs Organisation (WCO), commercial fraud is any offence against statutory or regulatory provisions which customs are responsible for enforcing. The DRI as the apex intelligence agency to combat customs offences is also at the forefront of curbing commercial fraud. The DRI has carried out investigations, issued notices and through specially designated officers initiated the adjudication process. All these powers have been exercised by DRI under the authority of appropriate notifications issued by the Central Board of Indirect Taxes & Customs (CBIC). These powers have been under challenge bringing DRI back in the news.

The Supreme Court had in a decision (Canon India Pvt Ltd vs Commissioner of Customs AIR 2021 SC 1699) having far-reaching implications, held that ‘in the absence of an entrustment under section 6 of the Customs Act 1962 an officer of DRI will not have jurisdiction to exercise the functions entrusted to Customs officers under the Act’. This in effect meant that notices demanding duty could be issued only by ‘the’ proper officer and not by any officer, which the officer of DRI was held to be. It may be recalled that the question of jurisdiction had first come up in another matter before the Supreme Court in Commissioner of Customs vs Sayed Ali (civil appeal nos. 4294-4295 of 2002). The apex court had held that there must be an assignment of specific functions for customs officers to act as proper officers empowering them to issue show cause notice. Considering the implications, the CBIC issued suitable notifications/ carried out suitable amendments validating all past actions of the officers concerned including that of the DRI. Contrary decisions were passed by the High Courts on the issue of the amendment—the matter is pending appeal in the Supreme Court.

Consequent to the Canon decision, the government filed a review petition in the Supreme Court while also carrying out necessary amendments to widen the scope of ‘proper officer’. The retrospective amendments in effect validated all actions carried out in the past by DRI. Despite this, High Courts have, citing the Canon decision (which has not been stayed) been passing orders—either quashing the notices or restraining the department from passing any consequential orders. The amendments are also under challenge. Thus, the appeals in the Sayed Ali matter, review of the Canon decision and challenge to the amendments carried out consequent to the Canon decision, are all pending in the Supreme Court. The revenue implications are estimated to be more than ₹50,000 crore. As the DRI celebrates its 66th founding day on December 4, these are issues which should weigh heavily on the organisation.

The work of the organisation has been recognised by the Government at the highest level as is evident from the endorsements on the last DRI day. The President in her message recognized DRI as ’an agency that consistently contributes above and beyond its Charter of guarding the economic frontiers of this nation’. The Prime Minister has appreciated the dedication and commitment of DRI and observed that ‘their indefatigable efforts have helped combat financial fraud and defend the economic interests of honest citizens and the nation’.

The Finance Minister has in her message recognised the organisation ‘as one of the premier intelligence and law enforcement agencies of the Government of India.’The DRI can be justifiably proud of its outstanding work. The DRI day on December 4 should be an occasion for the organisation to rededicate itself in the service of the nation. And pursue vigorously the issues pending in the Supreme Court and leave it to the sagacity and wisdom of the honourable court to pass appropriate orders. The DRI is too premier an organisation to be sacrificed at the altar of grammar- the officers of DRI were and have always been proper, elite, customs officers.

— Najib Shah is Chairman (Retired), Central Board of Indirect Taxes & Customs

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View | Vigilance Awareness Week — combating corruption, fostering integrity for national development

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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It is that time of the year when the nation, across government departments and public sector undertakings (PSUs), are directed to observe the Vigilance Awareness Week beginning October 31, which is the birth anniversary of Sardar Vallabhbhai Patel.

It is a sad reflection that we must observe a week to be made aware that corruption is bad and needs to be weeded out. Corruption, unfortunately, is an ugly reality of life in India. Nothing exemplifies this more than the candid statement in the very first line of the mandatory pledge prescribed by the Central Vigilance Commission (CVC) — “I believe that corruption has been one of the major obstacles to the economic, political and social progress of our country”. This year’s theme for the week is, “Say NO to corruption; Commit to the Nation”.

Corruption hurts the country. It eats into its vitals. As per the United Nations Office for Drug Control (UNODC), corruption, bribery, theft, and tax evasion, and other illicit financial flows cost developing countries $1.26 trillion per year. Professor Arun Kumar, who has written extensively about black money in India, has suggested that the extent of the black economy in India is estimated to be 62% of the GDP — generating (ay 2016-17 levels) about Rs 93 lakh crores. This is nothing but a reflection of a lack of integrity and corruption at its most basic level. Thus, it hurts development. A developed country by definition has a high quality of life, a developed economy, high gross domestic product per capita, industrialisation, and advanced technological infrastructure. Another measure of development is the Human Development Index (HDI), which combines both economic and social measures. This criterion defines developed countries as those with a very high HDI rating. 

That is the measure used in  the June 23, 2000, letter issued by the then Chief Vigilance Commissioner, when the concept of a Vigilance Awareness Week was first mooted. The letter mentions the UNDP Report on Human Development, 1999, on South Asia, which states that if the corruption level in India goes down to that of Scandinavian countries, the GDP will grow by 1.5% and FDI will go up by 12%. The letter goes on to say that corruption is anti-national, anti-poor and anti-economic development and that India has been ranked 73 out of 99 countries in the Corruption Perception Index.

It would appear that very little has changed. As per the HDI Report for 2023, India is ranked at 132 out of 191 countries. And as regards the Corruption Perception Index we have fallen to 85, with a score lower than the global average.

It is against this backdrop that we need to frame the theme of this year’s Vigilance Awareness Week. How do we commit ourselves to the nation and weave it with the vexatious question of how we fight corruption? The theme “Say No to corruption”, has built into it the assumption that you can do so because you have integrity. Integrity the dictionary will tell you is adherence to moral and ethical principles. It will tell you it is a state of being whole, entire, undiminished. Every time you do an unethical act you reduce yoursel—-you are lesser than what you were.

How, then, do you develop integrity—in yourself and in others? Education with an emphasis on values is a key requirement. On a larger, macro level, transparency and democracy are vital antidotes to corruption. The preamble to the Right to Information Act, a major weapon against corruption, puts it succinctly, highlighting the need for an informed citizenry and transparency of information as being vital to the functioning of democracy and holding governments and their instruments accountable to the governed. We also should also actively encourage the citizenry to use the Whistleblowers Protection Act. Neither of these are panaceas, but they can make being corrupt a little bit difficult. 

It is imperative that laws are clear and unambiguous. Compliance requirements and procedures should be simplified. The tendency of policymakers to stipulate procedures with conditions which even the law does not envisage has to be curbed. And laws are meaningless unless effectively and uniformly enforced.

Every organisation should assess corruption risks. Risk management with an emphasis on technology, which also facilitates citizens to interact with the management is essential. This presupposes that technology is simple, can be accessed by the ordinary citizen and works. Preventive vigilance, whereby checks are carried out regularly to identify a lack of integrity in processes or individuals, should be the norm.

The road to becoming a corruption-free country is going to be long. And for this to happen, it is important that we do not become cynical and accept a lack of integrity as a given. The goal of development can best be achieved only if we all commit ourselves to the highest standards of integrity. Not just for a week, but all year round in all activities. As the President, in her message to the nation,  said, “The fight against corruption is the collective duty and responsibility of all the citizens of this great nation.” 

— Najib Shah is Chairman (retired) of Central Board of Indirect Taxes & Customs.

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View | Six years of GST: A much-needed, effective tax reform

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Six years ago, on July 1, India introduced a bold and transformational tax reform: the Goods and Services Tax (GST). The GST was a major undertaking, requiring a constitutional amendment and the cooperation of all states. It was a significant step towards creating a unified national market and reducing the cascading effect of taxes.

The GST was launched with much fanfare, and for good reason. It was a major achievement for the Indian government and a testament to the strong political leadership, enormous sagacity, and maturity of all parties concerned.

Six years is too short a period in the life of a fiscal legislation, but even its harshest critic will agree that GST has been a success. It has achieved all that it set out to do — merged and subsumed the multiple taxes and cesses, reduced their cascading impact, gave the country a common economic market, and provided an excellent technology-driven tax system.

Revenue has consistently been doing well. May 2023 saw Rs. 1.57 lakh crore in revenue, clocking a 12 perscent year-on-year growth. This has been a steady trend — showing both better compliance and a spurt in economic activity. Undoubtedly, inflation and high imports have contributed to GST revenue. Yes, there has been criticism. The noise about the need to converge rates, to include petroleum products, continues. Every tax administrator will readily agree, but these are suggestions for which the political establishment is not yet ready.

This brings us to the wonderful collateral benefits of GST —  the GST Network (GSTN) ), the technology platform that has also played a critical part, and the GST Council, the very embodiment of cooperative federalism.

GSTN has been an unqualified success. It started in a hesitant manner but has rapidly matured. Getting the whole nation on a technology platform is no mean feat, which GSTN has achieved. It has facilitated the taxpayer and the tax administration. It has constantly been at the forefront of making compliance easier — and analytics deeper. It is time that the data available with GSTN is made public. This will facilitate research and ultimately strengthen the hand of the government.

The GST Council provides a platform for debate and discussion. It has brought the states and the Centre closer. It has provided solutions. The council has been a success — and spawned a belief that similar institutions would perhaps be required to address other contentious federal issues, such as water sharing, infrastructure, and healthcare. In its six years, the council has met eight times a year on average — undoubtedly the frequency of the meetings now has sharply reduced. In FY23 for instance, the council met only thrice — given the fact that meetings are also held virtually, this is far too infrequent. It can be argued that most important issues have been sorted and the Council need not meet as often, but this is a fallacious argument.

The 50th session of the council is scheduled to be held on July 11. This brings us to the issues which the  Council has to grapple with. First is the setting up of the long overdue GST Tribunal. It may be recalled that in the last meeting held on February 18, the Council adopted the recommendations of the Group of Ministers (GoM) on the tribunal with certain modifications. A tribunal acts as the second forum of appeal and saves time and money for the taxpayer who. in its absence, will necessarily have to rush to the overburdened courts. A tribunal is urgently required and its contours have yet to be finalised. The rules determining the functioning of the tribunal need to be put in place.

The second issue which has generated debate and discussion, but no conclusion, is the rate and value to be adopted in the cases of casinos, online gaming, and horse racing — 28 percent was recommended on all earnings; the issue of the base value to be adopted however remained unresolved. The 47th GST Council meeting had decided that the issue needs further examination by the GoM constituted for this purpose. The issue needs closure and a decision. Taxation, after all, thrives on certainty.

Incidentally, as many as 35 GoMs have been constituted so far under the directions of the GST Council. The very fact that a GoM was constituted would suggest that the matter was important enough for a closer examination by a smaller, high-level group whose report would help the Council arrive at a decision. However, none of the GoM reports have been placed in the public domain which is unfortunate. It is necessary that this is done so at the earliest — this will help the taxpayer appreciate the challenges and the thinking behind a particular decision.

The last few weeks have seen a spurt in enforcement activity based on an analytic risk-based approach; more than 10,000 cases of fake registrations have been detected with the revenue implication said to be in excess of Rs 25,000 crore. This is a serious matter which should prompt the council to debate if any changes in the rules or law are needed to plug loopholes.

The issue of the inverted duty structure is an ongoing exercise and it is certain that the CBIC would have recommendations to make based on the inputs of the fitment committee. This issue is particularly a matter of concern for the textile sector. A look at the agendas of the previous meetings as available on the GST Council website would suggest that very many items have been left open— no decisions apparently have been taken. It would be advisable to finalise — or close — these agenda points so that no action is called for on the pending agenda items.

The 50th meeting will see some new faces. The very experienced Krishna Byre Gowda, who had closely participated in the early days of the council, will now represent Karnataka. This meeting will also see a new minister representing Tamil Nadu. The absence of the erstwhile eloquent Tamil Nadu Finance Minister will be felt.

The 50th meeting should address much more than the almost mandatory tinkering of rates. The chairperson of the council has to ensure that these long pending issues are resolved.

— Najib Shah is a former chairman of the Central Board of Indirect Taxes & Customs. Opinions expressed herein are personal.

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View | New Foreign Trade Policy has a clear focus on the need for trade facilitation

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Foreign Trade Policy (FTP) 2023, effective from April 1, 2023, has been announced. Unlike the previous FTPs., which had a five-year time frame with periodical revisions, the current FTP is open ended-with the assertion that subsequent revisions “shall be done as and when required and shall not be linked to any date”. The FTP 2023 is predicated on four pillars—incentive to remission, export promotion through collaboration, ease of doing business, and emerging areas.

The emphasis in previous FTPs was on rewarding exporters based on their performance. The reward was in the form of transferable scrips. These could be used for payment of Customs duty. They were also a plethora of exemption schemes. Basically, these permitted duty-free import of goods if used in the manufacture of goods which were exported. There was this constant debate if this was the right way to promote exports.

In 2019, at the World Trade Organization (WTO), the United States challenged the exemptions or reductions in Customs duties and grant of freely transferable scrips as being violative of the provisions of the Agreement on Subsidies & Countervailing Measures (ASCM). This agreement, to which India is a party, in effect does not permit member countries to grant any export subsidy except in certain situations.

Also read: India announces new Foreign Trade Policy 2023

The WTO ruled against India and held that: (i) Export Oriented Units Scheme and Sector-Specific Schemes; (ii) Merchandise Exports from India Scheme (MEIS); (iii) Export Promotion Capital Goods (EPCG) Scheme; (iv) Special Economic Zones (SEZ) Scheme; and (v) Duty-Free Imports for Exporters Scheme (DFIS) are indeed violative of the ASCM. India has appealed against the decision; corrective steps were however initiated.

The pure reward schemes were scrapped and the move towards remission began. This in effect meant that the government would refund taxes paid  on inputs which are used in the manufacture and export of goods. Thus the  Remission of Duties and Taxes on Export Products Scheme (RoDTEP) and the various Production Linked Incentive (PLI) schemes were introduced. These and the very popular, time-tested drawback schemes, which are all WTO compliant, are the way to go forward. The new FTP recognises that . 

Surprisingly though, the DFIS and  EPCG schemes continue to be promoted in the FTP. Basically, these schemes permit the import of duty-free inputs/ capital goods and a host of other related items to be used in the manufacture of goods which have to be exported. They are actual user schemes. The duty benefits are linked to fulfilment of export obligation spread over six years in the case of EPCG. These schemes were introduced in an era when imports were expensive. With rates of duty having come down and the multiplicity of FTAs, it is a debatable point if these schemes are still required. Monitoring this schemes, given the long gestation period, is always a challenge. Most of the violations in the FTP are because of these schemes—either the goods are disposed of or the export obligations are not met. We should phase out these schemes—more so when the appeal is pending.

Also read: Foreign Trade Policy 2023 Highlights: $2 tn export target definitely achievable by 2023, says FIEO’s Ajay Sahai

Export promotion through collaboration is a welcome recognition of the need to make states also realise that exports are good for their development too. The FTP stresses on the need to “galvanise districts of the country to become export hubs by identifying products and services with export potential”. Four  more Towns of Export Excellence have been added to  the existing 39. 

The FTP has a clear focus on the need for trade facilitation. There is recognition that if the infrastructure is available, manufacturing and production will take place. Greater faith is being reposed on exporters through automated IT systems with risk management for various approvals in the new FTP. The government also stresses on the need for reducing litigation and fostering trust-based relationships to help alleviate the issues faced by exporters. A special one-time amnesty scheme is being introduced under the FTP 2023 to address default on export obligations. 

The emerging areas identified in the FTP are a focus on e-commerce exports. There is a recognition that distinct policy interventions different from traditional offline trade would be required. Undoubtedly, e-commerce export potential is huge with estimates of $200 billion to $300 billion by 2030. The FTP speaks of a  roadmap for establishing e-commerce hubs and related elements such as payment reconciliation, book-keeping, returns policy, and export entitlements. Merchanting trade, which involves shipment of goods from one foreign country to another foreign country without touching Indian ports involving an Indian intermediary, will now be possible. 

Also read: India’s foreign trade policy aims to make rupee stronger — here’s how it may work

Exporters do not operate in a vacuum. All stakeholders have a role to play. Customs should continue their drive to ensure smooth clearances and timely disbursement of drawback. Domestic infrastructure should be strengthened. Exporters should focus on quality, timely delivery and after-sales service . It is only then that the India brand will be strengthened. Our embassies abroad have an important role to play in ensuring that exporters get access to  markets. Ultimately, the overall trade balance, which presently is more than $100 billion, must be narrowed. That will be the test for India’s exporters.

— The author is chairman (retired) of the Central Board of Indirect Taxes & Customs. Views expressed herein are personal.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

View | The 48th GST Council meeting was a disappointing affair

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The long awaited, much delayed 48the GST council meeting held on December 17 was a disappointing affair. This was a meeting held after a gap of more than five months, and there were a lot of expectations riding on it. The meeting itself was a truncated affair with just eight out of the 15 items in the agenda being taken up for discussion. There was no correction of the inverted duty structure, an exercise which also leads to rationalisation of rates. There was no attempt either to move towards the much-debated convergence of rates.

Having said that, there were some decisions of note.

There was the perfunctory tampering of rates — reduction in husk and ethyl alcohol suppled for blending purpose for instance — but no increase of rates on any commodities. A clarification was also issued on the needless dispute about what constitutes a sports utility vehicle (SUV) and the applicability of 22% cess on such SUVs.

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Decriminalisation under GST has been mentioned in the press release as a trade facilitation decision taken. The threshold limit of tax evaded for launching prosecution has been increased from Rs 1 crore to Rs 2 crore for the twelve specified offences liable for prosecution currently under the law, except in the case of issuance of invoice without supply. There has also been a welcome relaxation in provisions relating to compounding of offences, an alternate dispute remedy solution.

The offences of obstruction, preventing an officer from discharging his duties, and tampering of evidence or failure to supply information which currently can lead to initiation of prosecution and possible mandatory imprisonment ranging from 6 months to a year and up to three years will no longer be considered grave enough for the department to launch prosecution. They were included in the CGST Act to empower the officers in the discharge of their functions. Prospective offenders need not get emboldened — these three situations are considered as offences under the IPC which can be invoked.

The decision to facilitate intra-state supply by unregistered micro enterprises and composition taxpayers to use the e-commerce platforms was taken in the 47th Council meeting in June 2022. The Council has approved the amendments and notifications required to operationalize the proposal — to be implemented from October 2023. Given the importance of micro enterprises and the fact this was a long pending request, the proposed date of implementation is surprising to put it mildly.

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Refund, which was restricted only to registered persons, will now be available to unregistered persons also in specified cases. It has also been clarified that there will be no GST on third-country exports, in bond sale or high seas sales applied for the period from July 1, 2017, February 1, 2019, retrospectively ‚ with no refund unfortunately for the taxpayer who had paid.

Measures for streamlining compliance have also been announced. These include running a pilot in Gujarat for biometric based Aadhaar authentication and risk-based physical verification — essential to confirming that the taxpayer is in existence at the given address. Similarly, an OTP-based verification is to be conducted at the time of registration — “trust but verify” obviously is the mantra. Given the large number cases of detection of fraudulent invoices, this is a necessary step. The circulars/notifications to give effect to the recommendations will throw light on the exact nature of the changes and impact they would have.

The elephant(s) in the room — finalising, the modalities of a much-needed GST Tribunal and, the issue of levy on online gaming, were not even discussed in this meeting. The other important item on the agenda, the issue of levying GST on industries suspected to be evasion-prone, based on production capacity, also did not come up for discussion.

The issue of setting up a GST Tribunal is of critical importance. With the law having been in force for more than five years, it is essential that a tribunal to hear appeals is available. The absence of such a tribunal has meant that aggrieved taxpayers must necessarily go to the courts for relief. This is expensive-apart from burdening the courts. A Group of Ministers (GoM) set up to examine the issue has submitted its report. The report was not even discussed.

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The issue of online gaming has been hanging now for a long time. In the meantime, because of the confusion, cases are being booked, notices issued and litigation increasing. The GoM constituted to examine the issue could not arrive at any consensus and has tossed the ball back to the Council. This is unfortunate and perhaps reflective of the confusion caused by the intense lobbying in the media by the online industry. There are obviously going to be multiple points of view . A decision is needed.

The  other issue is the proposal of levying GST in respect of evasion-prone industries on the basis of the production capacity of the machines installed .GST is a destination based tax on consumption of goods and services. Only value addition is taxed with set-off available for taxes paid at the earlier stages of production. Conceptually the proposal to tax based on production capacity will militate against this fundamental premise of GST. One will have to wait for the contours of the proposed levy.

GST has settled down well — revenue has consistently been above Rs.1.4 lakh crores for the entire financial year. Compliance has obviously improved thanks to better data analytics and better awareness. Every fiscal law will always have scope for improvement . The GST Council has been doing well in seeking to improve facilitation and compliance. The GST Council should meet at regular periodicity — this is essential . This would help in bridging the trust deficit  of the states, the key partners in the successful implementation of the levy .

— Najib Shah is a former chairman of the Central Board of Indirect Taxes & Customs. The views expressed in this article are his own.

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View | The Vande Bharat GST Express!

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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GST appears to be functioning like the modern ultra-fast Vande Bharat express. A Vande Bharat express going at full throttle. GST revenue for the month of November 2022 exceeded the Rs 1.4 lakh crore mark for the ninth month in a row. The revenue touched Rs 1,45,867 crore with the IGST element continuing to be the highest. At Rs 77,103 crore this is nearly 53 percent of the total GST revenue.

The import component of IGST at Rs 38,635 crore is more than the import component of IGST generated in the previous month. This is also an indication of high imports and the consequential trade deficit.

The revenue performance must be juxtaposed with the Index of Industrial Production (IIP) data released by the Ministry of Statistics & Programme Implementation (MoSPI) on the last day of November.

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The IIP grew by 1.5 percent in the second quarter of 2022-23 over the corresponding period of last year. Manufacturing and mining dragged the overall performance down. The manufacturing sector grew by 1.4 percent as against 8.6 percent in the corresponding period last year. The performance of the mining sector dropped by 1 percent as compared to a growth of   17.15 in the same period last year.

Gross Domestic Product consequently got impacted. Further, inflation and poor exports too took a toll on GDP growth. It may be recalled that GDP had grown by 8.4 percent in the second quarter of 2021-22 and 13.5 percent in the first quarter of 2022-23.

GDP over various economic parameters is measured in terms of Gross Value Addition (GVA). The GVA both in manufacturing and mining fell to minus 4.3 percent and minus 2.8 percent respectively. The overall GDP growth consequently got impacted -it dipped to 6.3 percent.

Having said that the GDP growth across other major economies has been poor. USA, UK, France, Germany, Japan have witnessed GDP growth ranging from 0.6 percent to 1.1 percent. Inflation has troubled most of the global economies.

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The scenario has been similar in India too. The retail price inflation eased to 6.77 percent in October 2022, down from September’s high of 7.41 percent. It however is still above the RBI’s tolerance levels.

Obviously, the GST revenue has maintained robust levels on the back of good manufacturing performance. The manufacturing PMI index compiled by S&P Global rose to 55.7 in November- up from October’s 55.3. This is the seventeenth continuous month of expansion in manufacturing production in India. This is despite depression in global demand .

November witnessed strong auto sales. Passenger vehicles, farm equipment and tractors, two wheelers including electric two wheelers all did well. The month also saw petrol and diesel sales grow by double digit. The railway freight figures also saw record movement of goods. Air passenger traffic as also hotel occupancy has seen growth-to almost pre-pandemic levels. 

The services PMI index also rose in November to 56.4, up from the October figure of 55.1. A combination of factors were said to be at play-both favourable demand and strong advertising driving the growth in services.

In this robust growth scenario we have to take cognizance of very many other factors.

India’s jobless rate as per the Centre for Monitoring Indian Economy  (CMIE) rose to a 3 month high of 8 percent. The urban rate being 8.96 percent and the rural rate 7.21 percent. We should not lose sight of the fact that on the GVA side five sectors including agriculture,  electricity, gas, water supply and other utility services and constructions posted sequential contraction. Expenditure has slowed down.

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If the projected growth target has to be achieved it is essential that push from government expenditure has to be much more.  Fiscal deficit has been growing. The forex reserves have been falling -though still providing comfortable import cover. Our exports have been underperforming. They are significant contributors to the GDP and need to achieve the ambitious targets if there has to be growth in the GDP.

GST revenue has been a consistently high performer. Its positive impact has also rubbed off on the direct taxes side. This would suggest that compliance is improving. The combination of technology facilitating data analytics, effective enforcement action and close coordination between the various wings of the Government of India have been acting as deterrents.

The much-delayed GST Council meeting is scheduled to be held in the third week of December. It is incumbent that areas of concern of the States get addressed. The long-delayed decision on online gaming needs to be resolved. A final decision on the even longer delayed decision regarding the contours of the GST Tribunal needs to be finalized. The exercise of reviewing exemptions should continue.

CEA Anantha Nageswaran has expressed confidence that the recovery is on track, and we should clock between 6.8 percent to 7 percent growth this year. CARE Ratings have also projected a GDP growth of 6.8-7 percent for FY 23. Despite the headwinds and global uncertainty, it is indeed possible that we achieve this growth.

To carry the Vande Bharat analogy further, Vande Bharat express is presently running at speeds of 130-150 kmph as against its capability of easily touching 180 kmph. However, their speed is limited because of the condition of the tracks which are not capable of supporting such high speeds. GST too can achieve much higher revenues. It is essential that the necessary eco-system is constantly upgraded.

— Najib Shah is a former chairman of the Central Board of Indirect Taxes & Customs. The views expressed in this article are his own.

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View | The paradoxical economic situation

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Charles Dickens the great 19th-century novelist could have very well been saying about the present condition of the Indian economy when he said ‘It was the best of times, it was the worst of times —‘. Such are the paradoxes which the Indian economy is faced with now, that it will require a very brave economist to make any predictions.

Revenue, both of indirect and direct taxes has been robust. The GST revenue till the month ending September was nearly Rs 9 lakh crore. Monthly revenue crossed the Rs. 1.4 lakh crore mark consistently for seven months in a row. Typically, revenue for the last few months of the fiscal tends to be robust. The indications are that the revenue for the month of October would also cross the Rs.1.4 lakh mark.

The gross direct tax collections have grown by 30 percent in the first half of FY 23. It touched Rs.8.36 lakh crore. This is despite both the manufacturing and services PMI showing a deceleration in September. Manufacturing was down to 55.1 from 56.2 and services were down to 54.3 from 57.2.

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However, both the Boards of Indirect and Direct taxes have in their press releases accompanying the revenue data suggested that this is an indication of the revival of economic activity as also the result of the stable policies of the government and plugging of tax leakages.

September also saw India being declared as the fifth largest economy surpassing the UK. We should not lose sight of the fact however that India’s per capita income is in the region of USD 2500 as against USD 47,000 in the UK. The IMF has projected that India would be the third biggest by 2030.

While auto sales and E-way bills would suggest an improvement, the consumption patterns are surprisingly muted. The RBI consumer confidence survey shows an improvement in consumer sentiment towards essential spending-but no such positive sentiment towards non-essential spending.

Investments seem to be on the up. The IIP capital goods have surpassed pre-pandemic levels. Capital goods imports have shown growth. There have also been rising levels of capacity utilization. This ought to have an impact on employment. However, the CMIE data shows that the unemployment rate is moving towards 8 percent after falling to 6.4 percent. The Rozgar Yojana scheme presently on is a good step forward.

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Retail inflation has breached the 7 percent mark. Wholesale inflation dropped to its lowest level-perhaps the difference is attributable to the different methods of calculating the CPI and WPI inflation basket. Essential global commodity prices have been reduced. This even as inflation is plaguing all global economies.

The IMF has projected a  steep drop in global trade volumes to an estimated 4.35 in 2022. Three of the world’s largest economies -the US, EU and China are facing a drop in growth. The IMF has trimmed its 2023 forecast to 2.7 percent and warned of USD 4 trillion loss in global economic output between now and 2026. The US is in a technical recession. China’s economy has slowed down sharply-a combination of the property crises and the zero-COVID policy. So, there are opportunities for India to exploit.

However, India’s exports to US and EU fell to their lowest levels in the last 6 months. Forex reserves have depleted to USD 532.9 billion. RBI’s forex intervention, foreign fund outflows and the strengthening of the US dollar have all contributed to this situation. Current reserves cover imports for about 8.8 months-the lowest since Feb 2015. Foreign portfolio inventors pulled out USD 1.2 billion in October- this follows inflows of USD 7.1 billion in August. The deficit in both the current account and trade is growing alarmingly.

There is no letup in the Russia-Ukraine war-if at all it seems to be getting worse. Supply bottlenecks continue to be challenging. Global commodity prices have weakened, and the FAO food price index has also declined thanks to the sharp decrease in vegetable oil prices. This must be juxtaposed with the sharp increase in natural gas prices and the energy crunch which Europe is likely to face.

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The Global Hunger Index ranked India 107 out of 121 countries. The parameters used were child wasting, stunting, malnutrition, and mortality. India has questioned the methodology. The fact remains that the parameters used were common for all countries.

India has also fallen in the global development index to 132. The World Inequality Report would suggest that India is among the most unequal economies. The World Multidimensional Poverty Index reveals that 415 million people exited poverty between 2005-96 and 2019-20. And just as we celebrate this bit of news comes the other statistic that the world’s largest number of poor are in India.

Exports need to pick up. A lot of hope is being laid on the FTA. The India-UK FTA targeted to be completed by Diwali fell a victim to the political turmoil there. Hopefully, with Rishi Sunak having assumed the charge the process will move forward.

All in all, there are challenging times ahead. We would need to stay focused and do what we must do. Ensure Capex improvement, drive the Production Linked Incentive (PLI), the National Infrastructure Pipeline, and PM Gati Shakti Plan – in short, do the things we can control. And hope the global headwinds settle down.

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View | India’s implementation of its trade facilitation agreement is a cause for celebration

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India has recently notified the World Trade Organization (WTO) of the complete implementation of its Trade Facilitation Agreement (TFA) commitments. This is a significant milestone that did not get the recognition it deserves.

Time is money goes the adage. Nothing exemplifies this more than in trade- especially international trade. Delays, be it because of, cumbersome documentation, lack of technology, clearance of goods, or lack of accurate information could mean an order being cancelled, vessels being missed and loss of money and reputation.

WTO had recognised the importance of ensuring the issue gets addressed. The Singapore Ministerial Conference in 1996 initiated the process of ‘undertaking exploratory and analytical work on the simplification of trade procedures. After several years of exploratory work, the negotiations on trade facilitation commenced in July 2004.

The aim was to improve specifically a few Articles of the GATT 1994 agreement. Articles V (dealing with Freedom of Transit for vessels and other means of transport through the territory of a contracting party) Article VIII (relating to fees and formalities connected with importation and exportation) and Article X (dealing with publication and Administration of Trade Regulations).

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The WTO was conscious also of the huge disparities between the needs of developed countries, developing countries, and less developed countries. It recognised that it was essential to have a meeting ground between these disparate economies. A negotiation group was constituted which began work, which culminated ultimately in the historic ninth WTO Ministerial Conference in Bali in December 2013.

The centerpiece of the Bali Package as it came to be known as the Agreement on Trade Facilitation or the Trade Facilitation Agreement (TFA). The TFA consists of 24 Articles covering the whole gamut of measures aimed at expediting the movement, release and clearance of goods including goods in transit. It aimed at harmonization of processes and standards across borders, putting in place automation, and ensuring the availability of information in the public space.

Every member country was tasked to categorize the provisions of the TFA into Category A, B, and C. Category A provisions related to developed countries that would implement its commitments immediately when the TFA came into force. Category B provisions which would be implemented within 5 years or earlier of the TFA coming into force. Category C provisions where a country would require technical assistance for acquiring implementation capacity and capacity building.

India had ratified the TFA in April 2016. The TFA was to come into force when two-thirds of the WTO members completed their domestic ratification procedures and accepted the TFA. This threshold was reached in February 2017 with 110 counties ratifying the TFA.

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Given the fact that import and export involve multiple ministries ranging from commerce to railways to shipping to roads to civil aviation, India also set up a National Committee on Trade Facilitation (NCTF) headed by the Cabinet Secretary. The aim was to bring on board all the stakeholders so that a concerted action plan could be formulated to meet its TFA commitments. What the National Committee also effectively did was sensitise all the departments of India’s TFA commitments. It helped also foster a culture of facilitation.

Given the fact that Indian Customs was already largely compliant with the TFA requirements, India was in a happy position of being able to notify that 72 percent of the TFA provisions as Category A -those that had been implemented. The remaining 28 percent were categorized as Category B which were to be implemented within 5 years-that is by 2022. This is a significant milestone that has now been reached.

The process of implementing the TFA provisions commenced immediately after India had ratified the TFA. There was a clear recognition that trade facilitation is a key enabler of a country’s economic development. It fell in line with the Make in India initiative. All the measures put in place meant that results were soon visible on the ground.

The now-discredited Doing Business report of the World Bank saw India’s rankings dramatically improve from 130 in 2016 to 63 in 2019. The Global Survey on Digital and Sustainable Trade Facilitation saw India’s implementation score improve from 69 percent to 80 percent. OECD’s trade facilitation indicator saw a 15 percent improvement in the overall average score.

The Central Board of Indirect Taxes & Customs (CBIC) carries out regular Time Release (TRS) Studies which as the name suggest seek to measure the time taken for the release of cargo -into the country in case of imports and for movement out of the country in the case of exports. The latest TRS released in February 2022 provides proof if one was needed of significant improvement in trade facilitation. It covers trade from seaports, Inland container depots, air cargoes and land customs stations.

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Trade facilitation is a continuous process. All departments involved must ensure that there is a mechanism to constantly review the implementation and carry out improvements. Simultaneously, it is essential that trade also ensures due compliance. Trade and Industry will be expected to ensure honest and correct declarations and to provide feedback to the department on possible areas of improvement. Every major customs house has regular trade facilitation meetings which give an opportunity to the trade to interact and sort out problems. This forum should be used.

What India’s fulfillment of its TFA commitments would also mean is that the road to achieving India’s ambitious targets of becoming a $5 trillion economy and export of $800 billion has been set. It is for the trade and industry now to rise to the challenge.

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View | The August GST revenue

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The revenue from Goods & Services Taxes (GST) for the month of August has again been impressive. At Rs.1.43 lakh crore it is 28 percent higher than the revenue in the corresponding month of 2021. The August revenue is marginally lesser than the revenue of July 2022 by about 4 percent. It however is the sixth consecutive month where the GST revenue has crossed the Rs 1.4 lakh mark.

IGST from import continues to be the single largest component of the GST revenue. At Rs 42,067 crore it is more than the IGST revenue from imports in July 2022.

It is important to place the performance of the GST revenue in perspective.

The latest data from the National Statistical Office (NSO) estimates real GDP at constant ( 2011-12 ) prices to be at a level of Rs 36.85 lakh crore in Q1 2022-23 .This is as against Rs 32.46 lakh crore in Q1 of 2021-22. This is a growth of about 13.5  percent. Similarly, nominal GDP at current prices in Q1 2022-23 is estimated at Rs 64.95 lakh crore, as against Rs 51.27 lakh crore in Q1 2021-22, showing a growth of 26.7 percent .

The GVA at basic prices for Q1 (April-June) 2022-23 (at 2011-12 prices) across the major sectors have shown an overall growth of 12.7 percent. Most of the major economic indicators have shown an increase except for a fall in telephone subscribers, cargo handled at airports and a drop in the IIP data relating to minerals. The wholesale price inflation (WPI) at 15.7 percent for all commodities is high.

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The combined Index of eight core industries increased by 4.5 per cent (provisional) as compared to the Index of July 2021. The production of Coal, Refinery Products, Fertilizers, Steel, Electricity and Cement industries increased in July 2022 over the corresponding period of last year.

The manufacturing PMI for August at 56.2 is very close to the high of 56.4 achieved in July 2022 suggesting sustained economic activity. Similarly it is likely that services PMI will be better than the July figure of 55.5 .

Credit off take has been good and expanded by 14 percent (y-o -y). As the RBI data shows, Gross Non-Performing Assets (GNPAs) of India’s banking system have steadily fallen from 11.2% of advances in March 2018 to 5.9 percent of advances in March 2022.

The performance of the corporate sector has in the quarter been good. However there is undeniable impact of the base effect. In fact as economic columnists have pointed out this is also true for the improvement in GDP numbers.

Thus , there has been steady improvement in the economy which the GST revenue is also reflecting. Having said that we should not lose sight of the fact that there are also several worrying factors at play.

The merchandise exports (absolute) in August at $33 billion is lower than the six-month low of July. Imports at $61.68 billion were also lower than the July imports but again above $60 billion for the sixth straight month. The trade deficit for the month being $26.8 billion; and for the April-August period a very troubling $122.2 billion. The rupee continues to be weak with RBI having to step in repeatedly.

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Vehicle registrations for light and medium passenger vehicles, as well as two-wheelers, dipped marginally in July. Typically, this should improve as we head towards the festive season. Power consumption, reflective of overall economic activity, also slowed in July compared with June amid widespread rains in the country. Unemployment rose to 8.3 percent; sequentially it fell by 2 million to 394.6 million.

Both fiscal and current account deficit are matters of concern. Fiscal deficit for Q1 FY23 has reached 21.2 percent of the annual target compared to 18.2 percent in Q1FY22.

SBI research have suggested that nearly 8 percent of the increase in GST revenue can be attributable to inflation. As pointed out in their paper consumer price index (excluding fuel ) and GST have moved more or less together prior to the pandemic. The gap between the two started increasing since May 2020 with a significant difference between the two since mid-2021.
Global growth is slowing down.

Global uncertainty has been increasing-the Russian-Ukraine conflict, China-Taiwan tensions and the consequential impact on supply chains. Central Banks across the world have been tightening controls-the spectre of inflation is real The Fed has indicated that it will continue on this policy path. IMF in its July 2022 outlook had revised the global GDP growth projection lower by 0.4 percentage points to 3.2 percent for 2022.

So, they are mixed signals. GST revenue should continue to do well. However for this to happen the focus should continue to be on improving compliance, simplification of processes and ensuring that technology works efficiently. Data Analytics leading to effective enforcement and audit will continue to be a key factor. Evasion of taxes should be dealt with sternly. We cannot afford to slip up on the indirect tax revenue front.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow