Author: Najib Shah

View: The Union Budget 2022-23 and proposed changes in Customs Act

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

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The presentation of the Budget always carries along with it an air of mystique and excitement. (Incidentally though the word ‘Budget’ is so widely used, there is no mention of this word in the Constitution. Article 112(1) of the Constitution only provides for laying before both the Houses of Parliament a statement of estimated receipts and expenditure of the government for that year).

This year was no exception. More so as it was coming after a year of the pandemic and in the shadow of omicron. The importance of the Budget 2022-23 cannot be overemphasized.

To quote from the Minister of Finance’s Budget speech ‘This Budget continues to provide impetus for growth. It lays a parallel track of a blueprint for the Amrit Kaal, which is futuristic and inclusive. And for big public investment for modern infrastructure, readying for India at 100.’

In this backdrop, let me focus on the major changes proposed in the Budget in the Customs Act. The amendments proposed in the Act have been necessitated to further the facilitation measures, to plug evasion and to correct infirmities in the law as observed by judicial forums.

Thus Section 5 of the Act which deals with powers of officers of customs, will see a new sub-section being added in recognition of the practice of faceless assessments and to remove the limitation of jurisdiction. Empowered by technology, industry specific expertise is sought to be developed.

Another facilitation measure is the amendment specifying the validity of an advance ruling to 3 years — the section as it stands today would make it appear that there is no end date. Section 28J of the Act has been amended accordingly.

March 2021 had been a cruel month for the premier investigative agency under the Customs Act — the Directorate of Revenue Intelligence (DRI). The Supreme Court had in a decision which had far reaching impact held that officers of DRI are not ‘proper’ officers of customs. The concept of a ‘proper ‘officer is an essential feature of the Act — only such officers are empowered under the Act.

Being held to be ‘improper’ the DRI officer in effect could not conduct any investigation under the Act. The amendments proposed in the Budget seeks to address these concerns. Section 2 of the Act dealing with the definition of “proper officer” has been modified. Section 3 of the Act has been sought to be amended to include among others the officers of DRI in the ‘classes of officers ’. This too is an essential feature of the Act. As a corollary to these amendments Section 5 of the Act has also been amended empowering the Board to assign functions to officers of customs.

A Clause 96 has been inserted in the Finance Bill, 2022 to give validation to any action taken or functions performed before the date of commencement of the Finance Act, 2022. This is a necessary retrospective proposal. It seeks to specifically address the consequence of the fallout of the Supreme Court decision regarding the powers of the officers of DRI. This hopefully should set at rest the confusion caused and restore the DRI back to its pristine glory.

Officers of the DRI (among others) were on completion of investigation also empowered to issue notices. An amendment has been proposed and a new section sought to be introduced (section 110 A) whereby after investigation the report would have to be transferred to the proper officer having jurisdiction for further action.

Another significant step to check evasion is the proposal to amend the section regarding valuation (section 14). Additional obligations are being cast on the importer in respect of certain class of imported goods as selected by the Board.

Another change proposed is to protect (Section 135AA) the data submitted to the department by importers or exporters in their declarations. The publishing of such information unless provided by the law, has now been made an offence. This was a major problem with confidential data being sold in the market.

There have been some changes in the Customs Tariff Act basically aimed at bringing clarity in classification. An exercise of ‘ tarrifisation ‘ has been carried out -basically meaning the rates as prevalent in notifications have been brought into the tariff .The exemptions itself would be phased out. This would be a very useful simplification measure.

Similarly, the weeding out of exemption notifications has been done. This was an exercise initiated last year. This Budget will see the end of about 350 notifications. A sunset clause has also been introduced for all exemptions -yet another commitment of the last Budget.

The Minister in her speech had warm words of appreciation for the functioning of the Customs department. She mentioned that the ‘Customs administration has reinvented itself over the years through liberalised procedures and infusion of technology. She went on to add ‘During Covid-19 pandemic, Customs formations have done exceptional frontline work against all odds displaying agility and purpose.’ The officers of the Customs department have reason to be proud.

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Union Budget: FM must focus on incentivising economic activities, widening tax base

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

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It is that time of the year when North Block is buzzing with activity. Chambers of Commerce, industry associations have by now given their wish lists. The Departments of Revenue, Expenditure, Disinvestment & Public Asset Management (DIPAM) and Economic Affairs would be busy confabulating with each other.

The high-security modern printing press in the bowels of North Block will soon be chock a block with activity. Officers from the Law Ministry would vet the documents with the officers of the four departments proof reading. These are the mundane aspects of the budgetary process.

The more important aspect is of course what will the Budget 2022-23 hold for all of us. With the coming in of GST, indirect tax proposals, apart from Customs, have little play in the Budget. But first, the macro-economic background in which the budget is being presented.

The World Bank in its latest Global Economic Prospects (GEP) report forecast that global recovery will sharply decelerate in the wake of continued COVID-19 resurgences, lesser policy support and persisting supply bottlenecks.

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This is reflected in India too. As per the CSO’s estimates, India’s GDP is expected to grow by 9.2 percent in FY22 as indicated in their first advance estimate for the year. This high reading of growth can primarily be credited to the low base (of -7.3 percent) in FY21. The CSO’s GDP growth estimate is lower than the 11% projected in the Economic Survey and 9.5 percent estimate of RBI.

In December ’21, the pace of headline inflation (CPI) accelerated to 5.6 percent, 68 basis points (bps) higher over 4.9 percent in the previous month. The retail inflation rose driven by a rise in food inflation.

As per the household survey of the Centre for Monitoring Indian Economy (CMIE), the labour participation rate turned up to 40.9 percent in December. An industry-wise analysis by the CMIE indicates that jobs were lost in manufacturing, hotels, tourism, and education, while more jobs were created in construction, agriculture and retail trade.

The issuance of E-way bills — an indicator of freight movement — increased to 7.2 crore in December, the second highest in its history. This would suggest robust GST revenue in January 2022.

The fiscal position of the Union government continued to post improvement. Net tax revenues touched an all-time high of 73.5 percent of budget estimates (BE). The gross fiscal deficit came down to 46.2 percent of BE during April-November 2021, as against the five-year average of 50.6 percent.

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Collections under GST posted a YoY growth of 12.7 percent in December 2021. In Q3FY22, the highest quarterly GST collections of Rs 3.9 lakh crore were recorded.

An RBI state of the economy report mentions improvement in state finances with revenues surpassing pre-pandemic levels. States’ tax and non-tax receipts recorded a YoY growth of 29.2 percent and 53.8 percent, respectively, during April-November 2021.

India’s merchandise exports touched an all-time high of $37.8 billion, recording a sequential improvement of 25.9 percent in December; 75 percent of the target set for 2021-22 has been achieved.

Merchandise imports rose to their highest level of $59.5 billion in December 2021, indicating a strong domestic demand. Trade deficit eased to $21.7 billion in December 2021. On a quarterly basis, the trade deficit reached a record level of $62.4 billion during Q3FY22. Foreign exchange reserves stood at $632.7 billion in mid-January 2022, providing a cover equivalent to 13 months of imports.

And to this mix we have Omicron casting its shadow creating uncertainty and impacting several areas of the economy. Under these circumstances, the budget necessarily has to focus on incentivising economic activities. Social sectors will see an increase in expenditure. Public infrastructure will be another area of focus. The scope of PLI schemes could be increased. Part B of the Union Budget dealing with tax proposals to meet these challenges will be the key. The overall arching concern both on the indirect tax side as well as the direct tax side will be to widen the tax base, improve compliance and reduce litigation.

On the Customs side, with Atmanirbharta being the mantra there will be pressure on increasing tariffs. As Arvind Subramanian and Josh Felman have pointed out in their article published recently in Foreign Affairs, there have been some 3,200 tariff increases since 2014; 70 percent of total imports have been impacted. India’s tariff barriers have increased from 13 percent to nearly 18 percent.

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The finance minister should not succumb to the demand for increasing customs tariffs. This is more so in the backdrop of the multi-pronged efforts to enter FTAs with a host of countries — where tariff reduction is a given. So, at best a review of the various rates should be done-and where necessary reduced. Gold is one such commodity. The present tariff rate encourages smuggling with all its attendant problems.

The previous budget had mentioned an ongoing exercise of rationalisation of customs exemptions. Nearly 80 exemptions were withdrawn. At least 400 more were up for review and hopefully some will cease to exist.

On the GST side all decision making is with the GST Council. The report of the GoM on the issue of inverted duty structure and rate rationalisation is still awaited. Amendments in the GST law as recommended by the GST Council could figure in the Budget. This could include the GST return format, levy of interest only upon utilisation of ITC, credit accumulation utilisation among others.

Petroleum products continue to be outside the fold of GST. There should be no increase in central excise duty on petroleum products. This is more so since the price of crude is in the region of $86.

The Commerce Ministry has been mentioning of simplification of SEZ scheme. There are issues regarding SEZ sale to DTA which need closure. Exports should be supported.

The Finance Minister has an unenviable task.

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View | The Mediation Bill 2021

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

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The fact that the litigation (defined in the delightful The Devil’s Dictionary ‘as a machine which you go into as a pig and come out of as a sausage!) in India is time-consuming and costly is well known. It is also well known that the court system is overburdened resulting in delay in decisions. This in effect means delay in justice being rendered. Hence it is that Alternate Dispute Resolution (ADR) is encouraged as a faster, cheaper option.

In fact, section 89 of the Code of Civil Procedure and as clarified by the Supreme Court in the Afcon’s Infra Ltd. case enjoins upon the courts to do so. Thus, in situations where, ‘it appears that there exist elements of a settlement which may be acceptable to the parties’ the courts are expected to reformulate the terms of a possible settlement. The Courts are to refer the matter for a possible arbitration or conciliation or judicial settlement including settlement through Lok Adalat or mediation.

Hon’ble Justice N.V. Ramana, the Chief Justice of India has in his erudite speech at the India-Singapore Mediation Summit 2021, highlighted the role that mediation can play and the absence of a law on mediation.

India does have an Arbitration and Conciliation Act. And the mechanism of mediation finds mention in various existing laws. However, we do not have any comprehensive law governing all aspects of mediation.

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It is in this background that the Mediation Bill 2021, Bill number XLIII was introduced in the Rajya Sabha in December 2021.

As the Statement of Objects and Reasons mentions, the Bill seeks to promote mediation as a preferred mode of ADR. Mediation has been defined in the Bill ‘as a process whereby party or parties, request a third person referred to as mediator or mediation service provider to assist them in their attempt to reach an amicable settlement of disputes.’ This is indeed laudable. And one would have thought that this would mean an element of voluntariness. However, the Bill inter alia stipulates compulsory pre-litigation mediation in matters of civil or commercial dispute, before parties approach a court. This provision is also proposed to be applicable to the tribunals as notified by the Central Government or a State Government. The Bill proposes to force the parties to stay in mediation for at least for two mediating sessions. This is unusual.

The Bill also provides for filing a suit or appropriate proceedings before a court or tribunal before commencement or during mediation proceedings in “exceptional circumstances.’’ What would constitute “exceptional circumstances” has not been defined. One suspects that this provision is likely to be used extensively by parties reluctant to go in for mediation.

A period of one hundred and eighty days (extendable with the mutual consent of the parties by another one hundred and eighty days) is prescribed for completion of the mediation process. The mediated settlement agreement would be final and binding and enforceable in terms of the Code of Civil Procedure.

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The Bill also proposes the ambitious goal of conducting community mediation with consent of parties for disputes which are likely to affect peace, harmony and tranquility amongst the residents or families of any area or locality. This is much needed given the increasing deep divisions in society. However, it will be a huge burden and it would be interesting to see how this will pan out in reality.

There is a proposal for the establishment of a Mediation Council of India. The aim being to promote mediation and to develop India as a robust centre for domestic and international mediation.

The Bill would override all other all other laws on mediation with few exceptions. Consequential amendments are also proposed in such other laws. The Bill provides for mediation in online mode-obviously lessons learnt from pandemic.

And even as the Mediation Bill is to be discussed, we should not lose sight of the fact that some other areas which help in the speedy disposal of litigation are suffering.

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The Income Tax Settlement Commission and the Customs & Excise Settlement Commission are to cease to operate from 1.2.21. Settlement is a process whereby cases pending adjudication can be settled without having to undergo the elaborate process of adjudication. The law stipulated time bound disposal; the functioning of the Settlement Commission was efficient and fast. Its absence will be felt by assesses.

Similarly, the offices of Ombudsman in both the CBDT and CBIC have been closed. Ombudsman was an effective grievance redressal forum. And it should not be forgotten that despite multiple prodding’s from the Supreme Court, the vacancies in the various Tribunals have yet to be filled up. These need to be filled up urgently — Tribunals too reduce the load on the courts.

Hopefully, it will be referred to a Standing Committee for a closer examination and ironing out the rough edges. Having said that The Mediation Bill is a step in the right direction.

To quote again from the Statement of Objects and Reasons’ ‘Mediation results in amicable resolution of disputes in civil, commercial, family and matrimonial matters and fosters collaborative approach, reduces the burden on the courts, and preserves relationships amongst disputants. ‘

The test ultimately will be in its implementation.

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View: GST and the challenging last quarter

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

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The Rs 1,29,780 crore gross Goods and Services Tax (GST) revenue for December 2021 was welcome news. GST revenue is ultimately a proxy for consumption and indicative of the fact that people were spending. This is sweet music for policy makers.

The December revenue was 13 percent higher than the GST revenues of December 2020. IGST at Rs 69.155 crore was a major contributor-and this included a sizeable Rs 37,526 crore from the import of goods. This is one reason why despite a drop in the number of e-way bills generated in the month, GST revenue performed well. It was just Rs 1,746 crore lesser than the revenue of November 2021.

The average monthly gross GST revenue for the third quarter of this fiscal was Rs 1.30 lakh crore-up from Rs 1.10 lakh crore and Rs 1.15 lakh crore in the first and second quarter respectively.

The Ministry of Finance press release attributed the GST collection to ‘improved tax compliance and better tax administration by the Central and State Tax Authorities.’ So, we can justifiably bask in the GST revenue performance of December. However, this should not take away from the fact that we now enter the critical last quarter of the fiscal. And the signs are ominous.

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Omicron is increasingly casting its ugly shadow across the country. India at the time of writing this article (7.1.22) has an active caseload of 2,85,401 cases. The previous day witnessed a record single-day hike of 90,928 cases. The increase in cases in Maharashtra is particularly worrying. Medical care facilities are being tested once again. The number of personnel from the medical fraternity getting impacted by this new variant is increasing at an alarming rate. AIIMS New Delhi alone has reported 90 doctors down with the virus.

These numbers conceal the debilitating impact the pandemic has on the economy-the Government, both Central and States, have the difficult task of balancing the safety of lives with impact on the economy. To impose restrictions, lockdown, curfew or not is a difficult call.

Most States have however begun putting in place night and weekend curfews. Work-related restrictions are increasingly being contemplated officially. However, very many manufacturing and service-related industries having learnt from the previous experience are voluntarily cutting down manufacturing/ supplies. Contact intensive service sectors particularly bear the brunt of any such disruption.

There are several other factors which are of concern.

The performance of the eight core sectors at 3.1 percent in November was sluggish. Supply side constraints continued to dog manufacturing. The manufacturing PMI consequently moderated in December 2021.

This resulted in high raw material and input costs. As per MOSPI retail inflation went up to 4.9 percent. Wholesale inflation rose dramatically to 14.2 percent.

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CMIE data would suggest that the manufacturing and services sectors are showing signs of strain in the wake of the third wave. Firms surveyed for the PMI by HIS Markit reported ‘broad based ‘job losses both in manufacturing and services’. CMIE has reported that the unemployment rate hit a four-month high in December. The unemployment rate rose to 7.9 percent in December from 7 percent in November-the highest since August.

RBI data shows bank deposits dropped by 5 percent; corporate bond issuances were lower in December by 16 percent. NSDL data shows that net FPI inflows remained negative for the third successive month.

A silver lining was exports crossing the USD 30 billion mark for the ninth straight month. The Minister for Commerce & Industry, Textiles, Consumer Affairs, Food & Public Distribution called it a’ historic achievement and attributed it to the leadership of Prime Minister Shri Narendra Modi’.

But demand for oil, gold and electronics pushed imports up. The trade deficit widened to USD 21.99 billion and reached a worrying USD 143.97 billion for the period April-December 2021.

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The result is that India’s current account balance recorded a deficit of USD 9.6 billion (1.3 percent of GDP) in the second quarter (July-September) of 2021-22 as compared to a surplus of USD 15.3 billion (2.4 percent of GDP) in the second quarter of 2020-21. This was primarily due to the widening trade deficit and an increase in net outgo of investment income.

The rupee had depreciated by the end of December to a record Rs 75.53. It has marginally improved since.

GST evasion of scandalous proportions continues to be a matter of concern. The latest detection from a perfume manufacturer where cash in excess of Rs 150 crore was seized is a case in point.

The Committee on GST rate rationalisation involving the convergence of rates is likely to present its report in this quarter. If this were to happen it would cause greater volatility. As will also frequent changes in GST policy-if rates after extensive deliberations have indeed been ‘rationalised’ there should not be a reversal of the decision . The issue of continuation or otherwise, of GST compensation cess will also have to be addressed soon.

The net result of all these factors would suggest that the GDP outlook for Q4 would get hit. HDFC Bank in its report has suggested this could result in GDP growth coming in lower by 20-30 basis points than their earlier estimate of 6.1 percent for the fourth quarter. It may be recalled that RBI had projected Q4 growth at 6 percent in its last monetary policy meeting.

We would need to be prepared accordingly. We should aim for a ’mix of relief and support’ for the industry. We should ensure that infrastructure projects actually take off. We should focus on ensuring the vaccination and booster shot drive continues to happen efficiently. In short, we should while taking all necessary measures to boost the economy, and precautions to keep ourselves safe, prepare ourselves for the worst.

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View | Gold policy intervention is required

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

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India’s love affair with gold continues unabated. Licit imports of gold are in the range of about 750 tonnes annually. As per the RBI’s half-yearly report on foreign exchange management, the RBI has 743.84 metric tonnes of gold as of end September 2021. In value terms the share of gold in the total foreign exchange reserves is at a high of nearly 5.88%

Our foreign exchange reserves at the end of November 2021 were at $640.4 billion, the fourth largest in the world. As per a 2018 Niti Aayog report, ’Transforming India’s Gold Sector’, an estimated 23,000-24,000 tonnes of gold is lying unused with households and religious institutions throughout the nation.

Yet smuggling continues — through land and air, concealed in body orifices, in vehicles, in machine parts, as molten metal. The smugglers’ ingenuity being matched only by the customs officer’s alertness. The Rajya Sabha on December 21, 2021, was informed that 7,288 kg of gold had been seized in the last three years from 2019-20 to November 2021. And seizures admittedly represent a small portion of what has been smuggled.

Demand accompanied by supply restrictions imposed by tariff barriers fuels smuggling. We initially restricted all import of gold. We liberalised. Import was permitted at a specific rate of Rs 300 per 10 gm — this translated to about 1 percent and dramatically reduced smuggling. We today have a 7.5 percent basic custom’s duty rate.

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Several other policy measures have been put in place. November 2015 witnessed the launch of three schemes — the Gold Monetisation Scheme, (GMS), the Sovereign Gold Bond scheme and the India Gold Coin. Schemes which the Prime Minister in his inimitable style described as ‘sone pe suhaagaa (icing on the cake)’.

The hope being that citizens would bring out the gold lying dormant to take advantage of these schemes. It was believed that import of gold would come down — implicit in this was the belief that smuggling also will come down.

There was also the Hallmarking scheme. The Bureau of Indian Standards (BIS) Act was amended to provide for hallmarking sale of gold jewellery– whereby unique identification numbers guaranteeing purity are provided to each piece of jewellery.

In early 2021, GMS was revamped (R-GMS). It is estimated that about 22-24 tonnes of gold have so far come under GMS — a very small percentage of the 23-24,000 tonnes of gold said to be in the economy. There are currently only about 950 hallmarking centres in the country. We are currently in the series VII/VIII/IX and X of the RBI’s sovereign gold bond scheme. 

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Smuggling however continues. It has a multiplier bad impact on the economy. It generates black money, spawns hawala transactions; its proceeds finance other criminal activities. It results in loss of legitimate jobs.

It is obvious that the present basic customs duty rate provides profits which outweigh the risks. As a policy we have never accepted the fact that gold is an integral cultural part of the lives of an average Indian. We always believed that import needs to be checked for fear of a drain on foreign exchange. 

Given our reserves, it is time to take a relook. We could reduce the basic customs duty of imported gold-reduce it enough to make the risks of smuggling not worthwhile. And juxtapose the revenue which duty from imported gold generates with the enormous damage which smuggling results in.

With the Union Budget around the corner, this is an ideal time to examine the entire policy on gold. Basic customs duty needs to be reduced enough to make smuggling unattractive. Policy makers could also consider bringing down the rate to the current prevailing GST rate of 3 percent. It would result in decrease in customs revenue and increase in imports initially — and have an adverse impact on the current account deficit. But with exports going up, this is a fallout we can live with.

There should be a robust system of tracing licit imports of gold all along the value chain. This is essential to ensure that that gold stays in the licit economy.

The R-GMS needs to be relooked at. The interest of 2.5 percent which the scheme presently offers is low. This should be increased. Much as I am against an amnesty scheme which in effect rewards the evader of tax, R-GMS should act as an amnesty scheme. No questions should be asked about the source of the gold. A provision should be made in the R-GMS to give back the gold article in its original form if the depositor so desires. This is especially true in respect of ornaments which are family heirlooms.

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Another policy measure required is also to look at gold Dore –cthe semi-pure alloy of gold which is permitted to be imported at a lesser duty currently at 6.9 percent. Obviously, the duty on such Dore imports also needs to be correspondingly reduced. There are serious concerns that such gold Dore which comes primarily from Africa can potentially be linked to conflict, human rights violations and other abuses. London Bullion Market Association (LBMA) has put in place a Responsible Gold Guidance (RGG). This outlines the responsible sourcing requirements. We should adopt these standards.

 Dubai is the major source of gold — both licitly imported and smuggled. We should not lose sight of this fact even as we are negotiating an FTA with UAE.

For a government which invests so much in publicising its schemes, the schemes regarding gold have had little publicity. This should be addressed imaginatively.

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View | On rationalizing GST rates, question is to converge now or later

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

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An issue that has been dogging Goods and Services Tax (GST) since its very inception has been the multiplicity of tax rates. There are as many 6 slabs. 0 percent, 0.25 percent for semi-precious stones/diamonds, 3 percent for gold/silver, and 5 percent, 12 percent, 18 percent and 28 percent for the other range of goods and services.

Tax administrators would have ideally wanted just three rates — a standard rate in which the bulk of the goods and services would fall flanked by a merit rate and a demerit rate. That was not to be. Political reality dictated the need for having as many rates as were finally arrived at.

Thus, revenue neutrality was always a challenge. Even this was lost very early on. As the Fifteenth Finance Commission has pointed out, the effective weighted average GST rate at the time of inception was between 14 percent and 14.4 percent as against a much higher pre-GST weighted average rate. As per a study of the RBI, this had come down to 11.6 percent. The IMF had estimated that the current effective tax rate was around 11.8 percent.

Despite this GST seemed to have settled down. Revenue was doing well. The November 2021 gross revenue crossed 1.30 lakh crore for the second month running. At 1.31 lakh crore, it was the second-highest since the introduction of GST. Multiple reasons can be attributed for the spurt in revenue. The economy looking up, policy measures ensuring improved compliance, GSTN stabilising and robust enforcement.

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It was felt that this was the ideal time for moving towards a rationalisation of rates. It was in this background that the 45th GST Council meeting held on September 17, 2021, constituted a group of ministers (GoM) headed by the CM, Karnataka. The task before the GoM was to rationalise the whole range of GST rates. This included reviewing exemptions, inverted duty structure, the tax slabs rates including the merger of tax slab rates. The GoM was tasked to submit its report within two months -in effect by November end.

In the meantime, there was an unconfirmed news report that suggested that the fitment committee of officers had recommended rates to the GoM. The committee is said to have suggested raising the slab of 5 percent to 7 percent and 18 percent to 20 percent. Further, a suggestion to raise the rate on precious metals from 3 percent to 5 percent is also said to have been made.

Prof. S. Mukherjee of the National Institute of Public Finance & Policy has in a mid-November working paper (No.358) suggested a merger of the 12 and 18 percent slabs into 15 percent, increasing the 5 percent slab to 8 percent and 28 percent to 30 percent.

The GoM thus had its hands full. While all this was being discussed, Timsy Jaipuria of CNBC TV18 broke the news two days ago that the Government had requested the GoM to defer its report. The reasons speculated were many-GST revenue stabilising, the possible impact of a hike in rates on inflation and the volatile political situation, a euphemism for the fact that important state elections were around the corner.

As pointed out earlier there is no denying that GST revenue is doing well. Any rationalisation at this juncture would most certainly have an impact-and not necessarily a positive impact.

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Despite revenues having done well, the fact remains that expenditure also has ballooned to offset the pandemic-driven stress. Fiscal deficit during April-October touched Rs.5.5 lakh crore. Overall debt outstanding to GDP for both the Centre and the States has gone up sharply.

The progress on disinvestment has been muted. The target of Rs1.75 crore despite the successful sale of Air India is some distance away.

The NSO data shows that retail inflation based on the consumer price index has increased to a three-month high of 4.91 percent. Worrying still is the fact that food inflation has increased to 1.87 percent from 0.85 percent in October.

Any rationalisation of slabs would necessarily involve goods from the 12 percent slab moving up. And going by the recommendations of the Fitment Committee and NIFPFP, it could also mean the 5 percent slab being moved up to 7-8 percent. There is no doubt that these will have inflationary consequences. And there is still no certainty as to how Omicron will pan out and the impact this will have on the economy. There are too many unknowns.

In yet another scoop, CNBC TV18 has revealed that the Textile Ministry has requested that the rate rationalisation done to correct the inverted duty structure be put on hold. If this is indeed correct, it is strange to say the least. The correction of the inverted duty structure was done at the behest of the industry. So, if even mere rate rationalisation is going to be a challenge, any convergence of rates will take a lot of effort.

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While convergence is desirable, the decision to defer it for the present is wise. It needs to be done — but should be done after an informed public debate. It should be ensured that sufficient lead time is given for both industry and GSTN to prepare themselves. Ideally, there should be certainty in any change of tax slab. Any change going forward could be implemented from the beginning of the fiscal year. Mid-year corrections should be avoided except in cases of emergency like the COVID-related exemptions.

While there can never be a good time to increase rates, this certainly is, for strictly economic reasons, not the time. The GST Council should continue to focus on easing compliance, tightening enforcement and making technology robust.

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November GST revenue: Steady improvement in performance, but economy yet to surpass pre-pandemic levels

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

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The gross Goods and Services Tax (GST) revenue collection figures for the month of November 2021 have been announced. And no surprise, at Rs 1,31,5126 crore, the revenue continues to show an upward trend. The number of e-way bills generated in October 2021 were in excess of 73.5 million and a sure indication of good things to come.

The GST revenue for November was the second-highest for the fiscal year after April 2021. It was up in absolute terms by Rs 1,399 crore over the previous month. This is the second consecutive month that the GST revenue has crossed the Rs 1.30 lakh crore mark. Impressive statistics in any which way you look at it.

What this means is that the total revenue receipt has crossed Rs  12.6 lakh crore ― nearly 71 percent of the target. The total net revenues have crossed Rs 11 lakh crore or nearly 70 percent of the budget estimate. Corporate earnings have significantly grown in the second quarter as have trade figures. Consequently, corporate taxes and customs duties have also done well. This is also reflected in the fact that the growth in IGST has been driven by significant contributions from import of goods. (It is a different matter that this has also resulted in the trade deficit reaching a record $23.27 billion.)

The robust revenue performance has also meant that fiscal deficit during April-October is at 36.3 percent of the budgeted amount of Rs 5.5 lakh crore. This is significantly lower, both in absolute terms and as a proportion of the budget estimate, when compared to the corresponding period of FY20.

The revenue is also indicative of the performance of the eight core sectors. The growth in October was an impressive 7.5 percent compared to 4.5 percent in the previous month. This was undoubtedly helped by a low negative base of the previous year. This growth has been driven by coal, cement, natural gas and refinery products.

Does this trend indicate that GST has stabilised?  And since revenue is also an indication of the economy doing well, does this mean that the economy is on the growth trajectory? The CEA has in The Economic Times suggested that the growth of the economy by 8.4 percent in Q2 (July-Sept) would mean that ‘India is likely to record a double-digit growth this fiscal’.

The elevated growth rate is an indication of the sharp contraction the economy experienced last year. It should not be forgotten that though the economy is indeed growing, it has yet to surpass the pre-pandemic levels in any meaningful way. When compared to the pre-pandemic period ― Q2 of FY 20 ― the GDP in Q2 FY22 has grown only marginally by 0.3 percent.

Gross Value Addition (GVA) has grown by 7.9 percent ― but this is on a contraction of 13 percent in the preceding quarter.  However private consumption and investment continued to be subdued. At 57.3 percent of GDP, private consumption was the lowest in five quarters.  Investments measured by gross fixed capital formation (GFCF) continued to be below 30 percent. Inflation has been growing.

And there is that known unknown ― Omicron. At last count, it has spread to 25 countries;  more than 50 countries have imposed travel restrictions. All countries have learnt from the COVID experience, and hopefully, will handle this latest threat better. In this backdrop, it would appear that a double-figure growth this fiscal will be challenging. The World Bank has projected an 8.3 percent growth this fiscal; CARE Ratings has forecast 9.1 percent.

Be that as it may, the larger question is whether this is the time for tinkering with GST rates. It is reported that the fitment committee of officers have suggested raising the 5 percent slab to 7 percent and merging the 12 percent and 18 percent slabs to a single slab of 17 percent.  They have also suggested hiking the GST rate on precious metals to 5 percent. While convergence of rates is the desired goal, is this is the right time to do so? The GoM on rate rationalisation has yet to deliberate on these issues.

Any rationalisation will, as has been pointed out by my colleague V.S. Krishnan, aim to balance the twin objectives of revenue neutrality and maintaining competitiveness. However, as the Fifth Finance Commission has pointed out, revenue neutrality has long been lost. We started off with a less than revenue neutral rate ― the weighted average rates were about 14 percent, which has steadily come down to 11.6-11.8 percent. To achieve revenue neutrality now will mean a sharp increase in rates.

Which brings us to the other modes of rationalisation.  Cutting down exemptions and correcting the inverted duty structure are essential first steps and will have a huge cascading positive impact on revenue. Increasing the tax base is another essential step. We currently have 1.33 lakh crore registrants as per GSTN. The GSTN Annual Report suggests that only about 35 lakh registrants actually pay cash to the exchequer. We would need to carry out intense surveys, both of the existing registrants and the eco-system to ensure all who are to be within the net are indeed in the net.

We cannot keep addressing the elephant in the room ― petroleum products have to be brought within the GST fold. These will be more effective steps than any merger of rates. All changes, be they cutting down exemptions, rate rationalisation, or bringing in petroleum products, have to be carried out after involving trade, industry and the States closely.

The Press Notes regarding GST revenue have also been highlighting the efforts of the enforcement agencies in improving compliance. This should continue unabated.  Systems-data analytics of returns, e-way bill data, and industry trends, which should include close coordination with CBDT, should be in place. The aim should be to make evasion difficult, and detection easy.

There is an urgent need for a tax-gap analysis ― of how much revenue we ought to be getting and how much we actually are. This will be of immense help going forward.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal.

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View | Learnings from the US OIG Report

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

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A recent report of the US Office of Inspector General (OIG) (November 17, 2021) on the implementation of the OIG’s recommendations on drug interdictions by the Department of Homeland Security department (DHS) makes interesting reading. The OIG is the equivalent of the Comptroller & Accountant General (CAG) of India. It has the mandate of conducting independent and objective audits, to promote efficiency and prevent fraud, waste and abuse.

The report of the OIG is available here. It is very topical for India given the increase in drug smuggling consequent to the Taliban takeover as also the increased interdiction of drugs by various agencies.

The OIG report inter alia highlights the lack of coordination between the various wings of the DHS tasked with drug interdiction. It specifically speaks of the lack of ‘planning, information sharing, intelligence integration, and response activities for a synchronized departmental response to drug interdiction’. It emphasizes that while there is coordination at the regional level, such coordination did not take place at the local level.

The response of the DHS was to introduce Regional Coordination Mechanisms with a focus on coordinating activities at various levels in order to avoid duplication. Emphasis was laid on joint training exercises and sharing lessons. Additional operating mechanisms to improve information sharing, intelligence integration, and response activities were also introduced. A Security Coordination Working Group was also established. The audit para has been closed by the OIG.

The report also talks of seized drugs not being properly sealed and stored. The report points out that the adhesive strips which were used to seal the bags had a shelf life of 5 to 7 years. When old adhesive strips were used or retained on the seized bags of drugs, the bags could easily be opened and could be tampered with. This report points out compromises the integrity of the evidence.

The DHS has in response carried out an inspection of all evidence bags for defects and replaced them where necessary. All unused bags older than 4 years were ordered to be destroyed. All bags were to have a ‘born on ‘date as a way of determining their remaining useful shelf life. This para too has been closed by the OIG.

In India, the Narcotics Drugs & Psychotropic Substances (NDPS) Act has empowered a whole host of organizations under the Act. This is a reflection both of the seriousness of the problem as also its extent. Thus, apart from officers of the Narcotics Control Bureau (NCB) the nodal agency for drugs, officers of GST, Customs, Directorate of Revenue Intelligence, Central Armed Police Forces, Armed Forces, Coast Guard, Police, Revenue, Drug Control, State Excise are authorized to act under the NDPS Act.

There is consequently overlapping of jurisdiction. Coordination suffers. There is a natural tendency for all agencies to work in silos. Given the challenge in getting credible intelligence and the need for secrecy, there is little sharing of intelligence or information. All this results in duplication of efforts. The NCB has the unenviable task of ensuring coordination between all these different organizations. The Central Economic Intelligence Bureau (CEIB) in India also seeks to ensure cooperation across agencies.

Obviously, these are areas where greater work is required. Joint training sessions and sharing lessons are essential. This will ensure camaraderie on a personal level and trust-building. Analysis and data sharing post successful interdictions should be made essential.

Closer supervisory oversight to enforce coordination would strengthen the anti-drug action. Given the growing drug problem, these steps will ensure a more effective and synchronized action.

The second issue raised in the OIG Report also has resonance for India. Seized drugs are sealed and kept as case property in godowns. Given the fact that powers under the NDPS Act have been given to so many agencies, what it means is that seized drugs are strewn across the country in various godowns. While centralized data regarding the quantum of drugs available should be available with NCB, oversight regarding the safety of the drugs is with each agency. This obviously leads to varying levels of diligence.

The seized goods are key evidence to be produced in the court when prosecution is filed. Court proceedings tend to stretch over years. While the NDPS Act does provide for pre-trial disposal, investigation agencies use this provision sparingly. All drugs are disposed of by destruction. Till that happens, sealing and safe custody of the seized drugs is essential.

The CAG has conducted a compliance audit of the Social, General and Economic Sectors of Punjab which inter-alia includes a chapter on the implementation of the NDPS Act in Punjab (Report No. 5 of the year 2017 ). The report highlights several areas of concern including shortage of equipment, the need for capacity building and training, and the high rate of acquittals. These are issues that are ubiquitous to all states. The report does not touch on the issue of storage of seized goods.

It is necessary that a regular audit of the seized property is done to ensure the seized goods are available, have been effectively sealed, and are speedily disposed of. It is imperative that there is no loss of the seized property. The NCB as the nodal agency should ensure this.

Given the extent of the drug problem (Gujarat again witnessed a major haul of 120 kgs) it is appropriate that multiple agencies are empowered. Given the seriousness of the problem, it is imperative that there is close coordination between the agencies. Petty inter-departmental rivalry cannot come in the way of a coordinated fight against the menace.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal.

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The ambitious Gati Shakti National Master Plan

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

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The recently launched Prime Minister Gati Shakti-National Master Plan (GS-NMP) for infrastructure Development could not have come at a more opportune time. This is in keeping with the PM’s announcement in his Independence Day speech. A robust infrastructure holds the key if we are to meet several ambitious targets. We aim to become a $5 trillion economy by 2024-25, increase exports of goods and services to $1 trillion and improving domestic capital goods manufacturing output to $101 billion, both by 2025.

A little background to put matters in perspective is necessary. Poor infrastructure has always been a challenge for the country. It was universally acknowledged that this was an impediment in the growth of the country.

The Ministry of Commerce had established a High-Level Advisory Group (HLAG) under the Chairmanship of Surjit S. Bhalla to ‘assess the global environment and make recommendations for boosting India’s share and importance in global merchandise and services trade’.

The HLAG had in its September 2019 report focused on various specific sectors with export potential. A common concern across sectors was the inadequate infrastructure which was acting as a drag on achieving full export potential.

A CII-Arthur D Little study in December 2020 ‘Reimagining India’s supply chain’ points out India’s supply chain and logistics industry is one of the largest globally with a logistics industry size of USD 215 billion and growing at a CAGR of 10.5 percent. Despite its size there have been serious disruptions caused by poor infrastructure support.

This has contributed to a staggering logistics cost of 14 percent of GDP as compared to the global average of appropriately 8 percent. As the study points put this creates a competitiveness gap of $180 Billion for India which is likely to increase to $500 billion by 2030.

Niti Aayog had in a separate study in June 2021 ‘Fast Tracking Freight in India – A Roadmap for Clean and Cost-effective Goods Transport ‘ in association with RMI and RMI India focused on the importance of the logistics sector. The report highlighted that logistics sector represented 5 percent of India’s GDP and employed more than 2.2 crore people. The report points out that India handles 4.6 billion tonnes of goods each year costing a humongous Rs 9.5 lakh crore.

The Ministry of Commerce had in a separate study in October 2021 with the acronym LEADS (Logistics Ease Across Different States) covered similar ground. Thus, the report emphasizes the fact that while India is the world’s fifth-largest economy in terms of nominal GDP, efficient logistics are a key catalyst for enhancing competitiveness.

The Study suggests improving supply chain efficiencies and reducing logistics costs are fundamental to India capitalizing on this strategic shift and meeting the well-defined aspiration to become a US$ 5 trillion economy by 2025.

Thus, there here has been a common recognition of the problem as the plethora of studies have brought out. Unfortunately, there has been precious little coordination between ministries and schemes. The result was stilted progress and wasteful expenditure. With increased focus on infrastructure a holistic planning and outlook was essential. It is in this background that the announcement of the GS-NMP has to be seen.

The GS-NMP which was launched by the Prime Minister on October 13 and approved by the Cabinet Committee on Economic Affairs on October 21 should, as the press note says ‘herald a new chapter of governances’ and bring 16 ministries including Railways and Roadways together for integrated planning and coordinated implementation.

The PM Gati Shakti approach is said to be based on six pillars.

Comprehensiveness by including all the existing and planned activities of various Ministries and departments under one umbrella.

Prioritization by cutting across sectoral interactions

Optimisation with a focus on ensuring optimum usage of resources and removing overlapping expenditure/plans.

Synchronization so that the work of various Ministries does not happen in standalone silos.

Analytical with all data available of plans /schemes in one place for a proper analysis and

Dynamic with all Ministries and departments able to visualize and monitor progress across projects.

The GS-NMP is to subsume the National Infrastructure Pipeline announced in 2019.The scheme aims to cut down logistic costs, increasing cargo handling capacity and reducing turnaround time at ports.11 industrial corridors and 2 new defence corridors are to be set up. It aims to expand the national highway network and create more airports.

The Mumbai Port Trust was the first off the blocks and has announced several multi-modal connectivity projects. The aim being to increase cargo capacity, have additional coastal facilities, improve rail connectivity and promote tourism.

Subsequently the Government has earlier this month announced the constitution of a 20-member empowered group of secretaries to monitor development and implementation of the PM GM-NMP.

The specific terms of reference with an emphasis on reviewing progress and coordination will play a key role in fast forwarding India’s journey towards becoming the third largest economy. It is imperative that project overruns resulting in increased costs which has been the bane of most public sector projects in the country are strictly controlled.

Conceptually GS PMP is a much-needed initiative. The proof will lie in its implementation.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal. 

Read his other columns here

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

Vigilance Awareness Week: Why we need to be reminded corruption is bad

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

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It is that time of the year when all government departments and public sector undertakings (PSUs) are directed to observe Vigilance Awareness Week, the week in which the birthday of Sardar Vallabhbhai Patel (October 31) falls. This year, it begins on October 26.

It is a sad reflection of the state of affairs that we have to celebrate a week to be made aware that corruption is bad and needs to be weeded out. That corruption is an ugly reality of life in India. Nothing exemplifies its extent better 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 economic, political and social progress of our country’.

It is worthwhile to recall the letter dated June 23, 2000, of the then Chief Vigilance Commissioner when the idea of a vigilance awareness week was first mooted. The letter mentions the UNDP Report on Human Development 1999 on South Asia. The report states if the corruption level in India goes down to that of Scandinavian countries, the gross domestic product (GDP) will grow by 1.5 percent and FDI will go up by 12 percent. While going on to say that corruption is anti-national, anti-poor and anti-economic development, the letter mentions that India has been ranked 73 out of 99 countries in the Corruption Perception Index.

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It would appear that very little has changed. The UNDP report on human development in 1999 ranked India at 110. As per the 2021 report, India is ranked at 131. And with regards to the Corruption Perception Index, we have fallen down to 86 with a score lesser than the global average.

Having said that it must be emphasised that the survey is only a perception index- the methodology is typically based on surveys conducted with MNCs and big businesses. This is a segment that generally knows the ropes, the system as it were. The results perhaps would have been worse had the survey been extended to the ordinary citizens who grapple with daily challenges.

So, we do have a lot of work to do and yes, unfortunately, need to be reminded about the dangers of corruption, about the need to fight it, about the need to eliminate it. Building integrity and curbing corruption are key elements in the fight.

How then do you develop integrity, which means doing the right thing irrespective of consequences, in yourself and in others? While education is a key requirement, religious values also contribute to character building, a person who will not stray from the right path.

But then ironies never cease. We are a nation of believers. As per the 2011 census, only 0.27 percent are atheists. And you would justifiably think that this would mean a society big on ethical values and morals is less corrupt.

As per the United Nations Office on Drugs and Crime (UNODC), corruption, bribery, theft and tax evasion, and other illicit financial flows cost developing countries $1.26 trillion per year.

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Prof. Arun Kumar, who has written extensively about black money in India, has suggested that the extent of black economy in the country is estimated to be 62 percent of the GDP-generating (at 2016-17 prices) about 93 lakh crore of revenue. To put matters in perspective, this is larger than the income generated by agriculture and industry put together which is about 39 percent of the GDP. Evasion of taxes or an acceptance of bribe are major contributors to the generation of black money. And, this is nothing but a lack of integrity and corruption at its most basic level.

On a larger macro level, transparency and democracy are vital antidotes against corruption. The preamble to the Right to Information Act, a major weapon against corruption, puts in succinctly. It highlights the need for an informed citizenry and transparency of information as being vital for the functioning of democracy and to hold governments and their instrumentalities accountable to the governed. And we would also need to notify, The Whistle-blowers Protection Act that was passed by both houses of Parliament in 2014. Neither of these is panaceas, which will ensure there is no corruption. It is just that it would 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 stipulating procedures with conditions that even the law does not envisage has to be curbed. And laws are meaningless unless effectively enforced-yet another ingredient in the fight.

Technology with an emphasis on faceless interaction with the authorities is essential. What this presupposes is that technology is simple, can be accessed by the ordinary citizen and works. Technology should facilitate and not become an impediment.

Every organisation should assess corruption risks. To ensure adequate checks are in place to prevent corruption. There is empirical evidence to suggest that corruption impinges economic growth. So, if we are to meet the goal of Aatmanirbharta, we would obviously need to control corruption.

To conclude with the words of the Prime Minister in his recent October 20 speech to the officers of the CVC and CBI, “ न्यायमूलं सुराज्यं स्यात् !’ That is, ‘suraj’ (good governance) is possible only when everyone gets justice. Corruption, whether small or big takes away the rights of someone or the other. It deprives the common citizen of the country of his rights, hinders the progress of the nation and also affects our collective energy as a nation. “

We would all need to join hands, both government and civil society, to collectively fight and curb this menace.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

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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