Author: Najib Shah

The Union Budget 2021 changes in GST law

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

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The recent Union Budget did not propose any changes in the GST rates; this being possible only on the recommendation of the GST council. So, the debate about the rates being high, about the multiplicity of slabs, about the need to converge rates, will continue.

The Finance Bill 2021 however did propose several important changes in the GST law. These, spread from clauses 99 to 114 of the Bill cover a range of issues.

Three amendments are proposed to be effective from July 1, 2017. The first, (Sec 7 (1)) of the CGST Act seeks to undo a Supreme Court decision which had in the context of the erstwhile service tax held that there cannot be the sale of goods or services between unincorporated private clubs and its members owing to the principle of mutuality—the Supreme Court order basically treated the club and its members as the same person. The proposed amendment seeks to expand the scope of the concept of supply to specifically include such activities as taxable events. A consequential amendment proposed is in Schedule II of the Act which specifies the activities or transactions to be treated as supply of goods or supply of services.

Another amendment which has been proposed to be made effective July 1, 2017 is the proposal that interest would be charged only on net cash liability in cases of a delayed payment of tax. This is in keeping with the recommendation of the 39th GST council.

The unhealthy precedent of retrospective amendments in fiscal laws thus continues in this Finance Bill also. We should remind ourselves that the Supreme Court while approving retrospective amendments which are beneficial, has frowned on others. In its 2018 observation in civil appeal No.5793 of 2008, the Court had held that the legislature cannot overrule any decision of the judiciary by retrospective amendments because that will amount to violating the concept of separation of powers.

The Finance Bill also seeks to address the issue of pernicious and large-scale misuse of the input tax credit. Thus, additional conditions have been prescribed (Sec 16 (2)) for availing credit, namely that such credit will be available only if the details of the invoice or debit note on which credit is being availed have also been furnished by the supplier in the statement of outward supplies which details have been communicated to the recipient. This is in keeping with the recent amendment made in the CGST rules whereby the credit has been restricted to 5 percent in respect of invoices not furnished by the supplier.

Again, in keeping with the concern regarding fraud, amendments have been made in the section relating to fraud (section 74) thereby making explicit that in cases of fraud involving the detention of goods or conveyances, action to confiscate and penalise can be initiated and that such cases will not be covered by the liberal penal provisions.

A change which has serious implications for GST is the amendment proposed in the Customs Act (Sec 113 of the Customs Act) whereby customs officers have been empowered in cases where there is a wrongful claim of the refund to confiscate the goods meant for export. Another amendment (subsection 1 of Sec 83 of CGST Act) again seeks to strengthen the hands of the enforcement by providing that that provisional attachment of any property, including bank account, can be made not only to a taxable person but also to any person involved with the offence.

In keeping with the same tenor, several amendments have been proposed which appear stringent-proposal to increase the penalty from 100 percent to 200 percent for release of detained/seized goods and conveyances; provisional release in cases of detention/seizure to be permitted only on payment in cash as opposed to the earlier provision of execution of bond; to increase the option for release of goods where the owner does not come forward to 50 percent of the value of the goods or 200 percent of the tax payable whichever is higher; to empower the department to dispose of goods detained/ seized if the penalty imposed is not paid within 15 days from the date of receipt of the order imposing the penalty. All these are harsh measures-necessary perhaps but to be exercised with caution and under strict well laid out protocols.

Appeals would now become difficult in terms of the proposed amendment in Sec.129(3) of the CGST act. A deposit of 25 percent of the penalty has been proposed, up from 10%. While this should reduce frivolous appeals, it also casts on the adjudicating authority the responsibility to wield powers of the imposition of the penalty with greater circumspection.

A proposal which has caused a lot of concern with the Institute of Chartered Accounts of India (ICAI) is the doing away of the mandatory requirement of getting annual returns audited/reconciled by the CA; self-certification which is a natural step forward of self-assessment has now been proposed. The ICAI has claimed ‘that thousands of crores of rupees collected in tax (GST) happened because of the chartered accountants” This is sheer hyperbole. In any case, the role of the CA in the finalisation of accounts in terms of the Company Law remains untouched; and my estimate is that most/all companies will continue to use the CA also for the purpose of GST reconciliation and use that as a basis for self-certification.

The IGST provisions have been amended to restrict claiming of IGST refund in case of supplies to SEZ’s only to the notified class of suppliers or goods. This in effect has also the consequence of withdrawing the earlier facility of exports on payment of IGST-the earlier option of either exporting under bond/LUT or on payment of IGST being modified. Federation of Indian Exporters Organization (FIEO) has expressed deep concern at this change and sought a reversal to the earlier regime. Incidentally, the rates under the Remission of Duties and Taxes on Exported Products (RoDTEP) available on all exports from January 1 should be announced urgently.

Apart from this, they have been other sundry changes—empowering the Commissioner to call for information, restraining the Commissioner from disclosing the information without first hearing the party concerned etc.

The Budget, unfortunately, missed the opportunity to expand the base of GST by bringing petroleum products within its ambit. Petroleum products being out of GST, have an impact on prices. The GST Council needs to seriously debate this and appreciate that imposition of GST on petroleum products will ultimately reduce the tax burden across commodities.

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

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Impact of tax evasion on SDGs and sovereign rating

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

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The pandemic and lockdown have had a severe impact on government revenues. The fiscal deficit is estimated to be in excess of Rs 10.75 lakh crore, 135 percent of the budget estimate. With the Union Budget round the corner, it is thus paramount that every single penny due is collected and available.

Unfortunately, unscrupulous elements have sought to exploit the pandemic and lockdown induced shortages. It was business as usual as far as evaders were concerned. Far too few, be it individuals or corporates, be it personal income tax or corporate tax, be it GST taxes or Customs duties, are paying what is due.

Evasion of taxes is bad. It results in loss of revenue for the Government, hurts genuine taxpayers, funds criminal activity, fuels corruption and damages the integrity of institutions. While these aspects of the pernicious impact of tax evasion are known, The Transnational Alliance to Combat Illicit Trade (TRACIT) a US based think tank, have highlighted some other consequences which have not been debated sufficiently. TRACIT has published studies about the impact of illicit trade on Sustainable Development Goals (SDGs) and on a country’s Sovereign Credit Rating.

The UN Sustainable Development Goals (SDGs) was conceived in 2012 – the objective being to produce a set “universal goals that meet the urgent environmental, political and economic challenges facing the world”.

Thus, the UN 2030 Agenda for Sustainable Development adopted by all member countries including India, has ambitious goals. There are 17 goals – no poverty, zero hunger, good health and wellbeing, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, industry, innovation, infrastructure, reduced inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace, justice and strong institutions, partnership for the goals.

The TRACIT study has noted the importance of trade as a means of attaining these ambitious goals and conversely the negative impact that illicit trade has in achieving these goals. The study seeks to map the impact of illicit trade on the 17 SDGs and suggests that the macro impact of such evasion runs across all the goals. The study specifically highlights the threat which illicit trade poses to SDG 16 (Peace, Justice and Strong institutions) and SDG 8 (Decent work and Economic Growth) arguing that illicit trade results in corruption, undermines the credibility of institutions, threatens economic growth. Money that can otherwise be used for development not being available.

India having “adopted the SDG framework and aligned its development priorities with Global Goals” has submitted its report, the Voluntary National Review 2020. The Review highlights the progress made by the country towards achieving the SDGs. No mention is made of the lost opportunities – of progress which has been impacted because of shortage of funds caused by evasion.

TRACIT has made another study of the impact of illicit trade on the sovereign rating of a country. The study argues that countries ill-equipped to handle illicit trade would suffer from poor credit worthiness; that illicit trade has a negative impact on the country’s economy and institutions and that this, in turn, impacts the sovereign credit rating.

We have to juxtapose this with the estimate made by Prof. Arun Kumar in his “Understanding the Black Economy and Black Money in India”, (published by Aleph Book Company in 2017) that the figure of the black economy in 2012-2013 was 62 percent of the GDP; he has thereafter extrapolated this for 2016-2017 and arrived at the humongous figure of Rs 92 lakh crore. As the learned Professor has pointed out, this is more than the income generated by agriculture and industry; it is larger than the size of the government (Centre plus states) spending. Calculated on this basis the country’s economy is said to have been losing on an average 5 percent growth.

It can be fair to conclude that the Studies hold good for India; that the economy has been adversely affected because of evasion of taxes. And that the present sovereign ratings given by Standard & Poor’s, Moody’s or Fitch (ranging from BBB negative to Baaa3) would have been very different had some percentage of the estimated quantum of unaccounted money, the black economy, been available for developmental expenditure.

Which brings us to what the Budget can do to address this serious problem. The temptation to raise tax rates to generate revenue should be balanced with the impact any increase of rates has on evasion. While what should be the ‘correct’ rate is always a matter of debate, the fact remains that a higher rate provides the necessary arbitrage to evade. Policies ultimately should strengthen the hand of the enforcement agencies. The fundamental principles of tax policy-fairness, simplicity, equity, enforceability should never be lost sight off.

Amnesty schemes in the hope that all evaders will declare their unaccounted money and the Government can then start with a clean slate has never really worked-the fact that Government has had to repeatedly resort to such schemes is testimony to this. They do not contribute much and are ultimately an insult to the honest, compliant taxpayer. So, hopefully, this Budget will not see the announcement of yet another such scheme. There are better ways to mop revenue.

Enforcement agencies should be aware of the larger context in which they are working. Their task of curbing and detecting tax evasion, thwarting smuggling is much more than the amount they have detected. It has a huge multiplier effect and contributes immensely to the exchequer. And to the country achieving its larger goals. Given the enormous damage tax evaders inflict, they need to be dealt with far more severely than they are.

The Finance Minister has promised a “never before” like Budget. The tax to GDP ratio is currently about 17 – 17.5 percent (after including the Centre and States’ tax revenue). A major step in this direction will be to improve the ratio – so that the Government has more money to meet its SDGs which in effect encompasses all aspects of the economy. And what better way to celebrate the 71st year since becoming a Republic.

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

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Budget 2021: The challenges before the Finance Minister

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

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It is that time of the year again when there is feverish activity at the North Block. The entry is restricted to the sections which house the Tax Research Unit (TRU) and the Tax Planning & Legislation (TPL), the wings of the CBIC and CBDT respectively which directly deal with the preparation of the Union Budget. Access is given only to the few people with security clearance even from the Department. During this time, long hours are spent discussing and debating the Tax Policy, the fiscal position, the way forward et al. The Halwa ceremony would happen in the next few days when tucked within the labyrinth which is North Block, the security press will start the process of printing the budget papers.

It is also that time of the year when economists of all hues and captains of the industry, trade associations and industry bodies, give their wish lists and their prescription as to what ails the country, their sectors and the solutions. Invariably trade bodies seek exemptions and protection from competition.

It is Union Budget time scheduled to be presented to the Parliament on February 1. Incidentally, the word ‘Budget’ does not figure in the Constitution. Article 112(1) talks of an annual financial statement, a statement of estimated receipts and expenditures of the government which is what the budget is.

The Union Budget coming as it does after a year when the Indian economy has been ravaged by the pandemic assumes a huge significance. The CSO has estimated a contraction of 7.7 percent for the economy; the Reserve Bank of India (RBI) has estimated the contraction to be at 7.5 percent; these are still better when juxtaposed with the estimates of multilateral institutions. IMF has estimated a drop of 10.3 percent, OECD 9.9 percent, and World Bank 9.6 percent. The short point is that the nominal GDP is at a record low and is estimated to be at Rs 194.9 lakh crore for the year.  The Indian economy has entered a technical recession.

Barring agriculture and electricity, as a report by CARE Ratings has pointed out, all other sectors are estimated to fall in gross value added (GVA). The fall in trade, hotel, tourism, transport, mining, quarrying, manufacturing being the most severe. There was a drop also in financial services, real estate and professional services. Similarly, the report estimates that barring government expenditure, all other components of GDP are expected to register a sharp decline with consumption at -9.5 percent and investment at –14.5 percent being the sharpest. Exports are expected to decline by 8.3 percent, while imports are to decline by nearly 20 percent. The trade deficit for the period ending December 20 was $15.71 billion.

GST collections for December were Rs 1.15 lakh crore—the highest since GST was launched. For the period April-December 20, the total GST collection stood at Rs 7.8 lakh crore, which is 14 percent lower than the corresponding period the previous year.

The fiscal deficit is likely to be in excess of Rs 10.75 lakh crore, which is 33 percent higher than the corresponding period last year and 135 percent of the budget estimate. This highlights the financial stress—a decline in income, an increase in expenditure, and a consequent widening deficit. Revenue receipts have decreased sharply. Except for receipts from excise, thanks to petroleum products still being out of GST, and interest, all other collections from the major heads of revenue are lesser than the previous year. The Finance Minister should not hesitate to invoke the provisions of the FRBM Act like was done in the last budget to take deviations from the provisions of the Act.

The only silver lining in this dismal scenario is the steady growth in the foreign exchange reserves which presently is at a historic high of $581 billion and the galloping strides at which the equity market is growing—with foreign portfolio investors continuing to pump in money. It is in this backdrop that the FM will rise to present the Budget.

Obviously, the focus has to be on growth and recovery. This will mean spending to stimulate growth. The limitations of the health sector were brought out starkly during the pandemic. The MSME sector, the backbone of the economy, and so essential for the creation of jobs, will need special attention. Infrastructure would need big spending. Agriculture in the wake of the current protests would need special schemes for farmers’ welfare.

Given the current dire situation, a fiscal boost should be provided through higher expenditure and appropriate tax cuts which in effect is very similar to the theme of budget 2020 where the FM had highlighted three themes—Aspirational India and meeting those aspirations, Economic development for all and caring society, Antyodaya; each of these themes with an emphasis on health, education, better jobs, economic development and humane society and rise of the last person, to rid the nation of poverty, are even more relevant today. And to add to these themes is the current focus on Atmanirbharta.

All of which means you need money. So, the tricky part would be Part B of the Union Budget speech—how are we going to raise the money?

On the indirect tax side, with all aspects of GST to be first discussed and approved by the GST council, there is very little elbow room with the Central government. One does wish the larger issue of increasing the scope of GST had been discussed in the GST Council. The budget would have provided an ideal opportunity to include petroleum products, land, electricity within the ambit of GST. The budget will be restricted to addressing making amendments in the CGST and IGST law as already recommended by the GST Council.

The customs side will present challenges. Should the Government in its quest for Atmanirbharta become protectionist and increase import duty rates across the board? One hopes this does not happen—we have reached where we are after years of gradually reducing rates and this will be a retrograde step. Having said that if at all we do need to protect specific sectors, the message should be given that these are temporary measures; a clear sunset clause should be mentioned. Ultimately with globalisation here to stay Indian manufacturers need to compete.

Protectionism increases inefficiencies and ultimately makes domestic products uncompetitive in the global market. What does need to be done is to look at the inverted duty structure and take steps to address the problem. Exports desperately need support. The Remission of Duties and Taxes on Exported Products (RoDTEP) scheme has been announced; the rates have not. The last budget had announced a NIRVIK scheme to provide higher insurance cover for small exporters. Nothing has been heard of since.

On the direct taxes front, there have been steady calls for the abolition of the Long-Term Capital Gains Tax (LTCG). A point made is that LTCG and Securities Transaction Tax (STC) coexisting act as a deterrent against investment. With Corporate Tax rates having been rationalised recently there is unlikely to be any change; similarly, on the personal income tax side, the only possible relief can be tax deduction because of increased health expenses. With direct tax collections at about Rs 4.95 lakh crore as against Rs. 6.01 lakh crore in the same period last year, there is little space for further relaxation in rates.

What both Indirect and Direct tax administrations should focus on is on simplification of laws and rules, swift dispute resolution, on increased accountability. Both statutes need to reduce exemptions; these should be exceptions. The CBIC and CBDT should focus on ensuring compliance with stern action need to be taken against evasion.

Revenue generation thus will be a challenge. Disinvestment has not been successful. As former RBI governor Raghuram Rajan has said the government should take advantage of the ‘peaks in the Indian equity market ‘and sell stakes in PSUs.

The FM has an unenviable task ahead.

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

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VIEW: The fight against GST evasion

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

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The government is finally cracking the whip. Having recognised the scourge of evasion, 2020 ended with a flurry of goods and services tax (GST) enforcement activity. The last few months of the year witnessed the detection of more than 3000 cases–primarily of misuse of input tax credit facilities. The sheer audacity of some of these fraudsters has been staggering with reports of instances of a single person having more than 500 entities—all operating from non-existent addresses generating fake invoices. The consequential loss of revenue to the government would be in the region of several thousand crores.

The USP of GST is the availability of credit on taxes paid in the earlier stages of the value chain. This is the strength of GST—unfortunately in the hands of unscrupulous entities this very strength is exploited to avail credit that is not due.

The government has apart from initiating stern enforcement action also reacted with several changes in the CGST law and rules aimed at curbing evasion.

Several amendments brought about by the Finance Act 2020 have been made applicable from January 1. The most significant being the provisions relating to punishment spelt out in Sec. 132 of the CGST Act. Thus, the specific situations whereby benefits flowing from fraudulently availing input tax credit without invoice or bill are sought to be retained has been made a cognizable and non-bailable offence. It may be mentioned that the GST law provides for arrests. Last year had seen more than 200 arrests under the provisions of the CGST Act.

Similarly, changes have been made in the CGST Rules. A restriction of 5 percent has been imposed on claiming credit in respect of invoices/debit notes not furnished. This is a relaxation of an existing provision and should ensure the registered person knows his supplier.

More significantly, a new rule has been introduced whereby certain categories of taxpayer whose taxable supply in a month exceeds Rs 50 lakh has now been restrained from using input tax credit in excess of 99% of output tax liability. The balance one percent has to be paid in cash. While only time will tell the efficacy of this new provision, the fact remains that the category of taxpayers to whom this rule has been made applicable are the least liable to evade. The government has in response to concerns regarding this new provision clarified that it will apply only to a minuscule percentage of taxpayers-which is precisely the point being made.

Incidentally, it would appear that this rule goes beyond the assurance which the CGST Act gives that credit of input tax charges on any supply of goods or services or both ‘shall be credited to the electronic credit ledger of such person’. What is being restricted through the new rule is the utilisation—obviously, a distinction is being sought to be made between credit and utilisation, but it would nevertheless be worthwhile to reexamine the legality of this Rule.

The Finance Bill scheduled to be presented to the Parliament on February 1 would provide an opportunity to rectify the position. There has also been a change in the validity of the e-way bill—it will now be valid for a day for every 200 km as against 100 km earlier. This in effect makes the validity of the e-way bill more restrictive.

E-invoicing which was initially introduced for registered persons whose aggregate turnover exceeded Rs 500 crore has now been made mandatory for entities whose turnover exceeds Rs 100 crore. Incidentally, there is a wrong perception that e-invoice means the generation of invoices by the government. The registered persons will continue to prepare their invoices. This will have to be uploaded on the invoice registration portal and an invoice reference number (IRN) obtained. The invoice copy containing inter-alia the IRN (with QR code) issued by the supplier to the buyer is commonly referred to as an e-invoice. What has been done is that the format of the invoice has been standardised and the exchange of data between the supplier and the buyer facilitated.

Earlier, in late December 2020, several changes were made in the Rules relating registration of new GST entities. One of the major challenges which GST officers face while investigating cases of fraud was the non-existence of registered entities. Since the provisions contemplated approval within three days of application, there was little time with the department to cause any verification regarding the credentials of the applicant. Fly by night operators sprung up-all of whom indulged in large-scale availment of fraudulent credit.

The fraudsters would shut shop within a period of a few months leading to investigations reaching a dead end. The changes now made have extended the time period with the department to grant registration to seven days. Further in situations where the applicant fails to undergo Aadhaar authentication, the department has been empowered to carry a physical verification of the existence of the applicant—the time period in such cases has also been extended to 30 days. More powers have also been given to the department to cancel the GSTIN-even, controversially, without a hearing.

The concerted efforts made by the Government have indeed been successful. The GST revenue collection of about Rs.1.15 lakh crore for December 2020 which is an all-time high since the implementation of GST is testimony to this. The government should continue also to focus on upgradation of technology-and for greater coordination between the CBDT and GSTN/ CBIC. Every evader of GST tax is necessarily an income tax evader too.

Ultimately technology and greater coordination amongst the enforcement agencies is the key to curb this 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 unfortunate Wistron happenings

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

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The recent happenings at the factory of Wistron Infocom Manufacturing (India) Private Limited the contract manufacturer of Apple iPhones and products for Lenovo and Microsoft are most unfortunate. As has been widely reported a mob of about 500 disgruntled employees went on a rampage in the factory earlier this month.

The initial FIR filed by the company estimated the losses at over Rs 400 crore; this was after a few days scaled down to about Rs 56 crore. In the filing with the Taiwanese Stock Exchange, the company estimated the losses to be Taiwanese $100 million in the region of about Rs 26 crore. The damage, however, is much more than whatever these numbers.

READ MORE: iPhone maker Wistron to remove India vice president after plant violence

By way of background, it may be mentioned that Narasapura in Kolar district on the outskirts of Bengaluru is a National Investment and Manufacturing zone (NMIZ). The NIMZ were conceived to be integrated industrial townships. The zones themselves are an integral part of the National Manufacturing Policy (NMP) an ambitious programme designed to raise the global competitiveness of the Indian manufacturing sector. The success of the NMIZ depends a lot on the initiative of the States. Narasapura off Bengaluru with a whole array of big units, being a shining example of what can be achieved.

Thus, Wistron the Taiwanese contract manufacturing giant opened their unit in Narasapura and also opted for the liberalised customs warehousing provisions of in bond manufacture. They have invested in excess of Rs. 2800 crore in its 43-acre manufacturing facility for the manufacture of iPhone SE with an export target of 3 million units in 2020-21. India being, besides Brazil and China, one of three countries in the world that manufactures Apple products.

Everything did seem to be going well-till this horrific incident happened. And in retrospect, it appears that this was a crisis waiting to happen.

Wistron employs around 1400 permanent employees and 8500 contract workers. The contract workers were contracted through five different firms; another contractor provided the housekeeping staff. There are murmurs that local political heavyweights are involved in some of the firms.

Reports suggest that the anger among the workforce had been simmering over the last six months. Contract workers were not said to be paid their full salaries -and even this was not being paid in time. Overtime was not being paid. An inspection report by officials of the Director of Factories Boilers and Industrial Safety after the incident has confirmed that there was a difference between what was paid by the company to the contractors and what was actually paid by the contractors to the workers-even this was being paid erratically. The report also suggests that the housekeeping staff have not been paid.

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Employees are said to have approached the management a couple of months back who took the stand that this was the concern of the contractors. Subsequently in October this year, over 100 employees had approached the Kolar administration requesting the intervention of the district administration. The administration is said to have requested the management to adhere to the requirements of the Factories Act. Nothing happened.

Obviously, neither the company nor the local administration saw the writing on the wall. Resentment was brewing and while the exact trigger for the outburst is unclear, like in all such acts of leaderless violence there are multiple versions. Whether it was premeditated or spontaneous is unclear – what is clear is that workers indulged in large scale vandalism and destruction of property. The police intervened. An FIR has been registered against 7,000 unknown people including 5,000 contract workers, in connection with the violence. 158 people are said to have been arrested.

Apple has moved swiftly to curb the damage. A team of auditors rushed to the plant and their initial report has been troubling. Apple’s guidelines mandate that third-party staffing agencies pay the workers on time as well as offer other benefits as per rules. These have been held to have been violated. And this was precisely what the workers had been saying all along. Apple has placed Wistron on probation and has stated that no new orders will be placed on the company till matters are sorted.

Wistron has issued a statement regretting and apologising for the incident; the vice president overseeing the manufacturing unit has been asked to leave. And to think that it was only this year that the government had announced that Wistron was eligible to be part of the much-talked-about Production Linked Incentive scheme!

While the Karnataka government has assured that it will take steps to assuage investor sentiment, it needs to act urgently. This incident has hurt Karnataka’s investor-friendly image coming as it does after the lockdown of the Toyota plant in Bengaluru. Action needs to be taken against the management and the erring contractor firms about which there has been no mention thus far. And the Karnataka government needs to be cognizant of the fact that such incidents coming as they are after July 2020 ordinances amending the labour laws are not good. These ordinances amongst others amended the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA). They were aimed at improving the ease of doing business in and attracting investments to Karnataka.

Karnataka and the country cannot afford to have a repeat of such incidents.

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

Disclaimer: Views expressed are personal

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VIEW: Bring petroleum products within GST now!

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

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Oil literally makes the world go around-its price thus has a huge impact on the economy of every country. The lull caused by the pandemic which saw a ‘demand destruction’—planes were on the tarmacs, vehicles in the garages, trains idling in stations, factories with their shutters down, witnessed a steep reduction in economic activity and consumption. This resulted in an unprecedented drop in prices—WTI was being quoted at negative and Brent at under US $20. The price war between Saudi Arabia and Russia did not help matters either.

The glad tidings of a vaccine for the virus and the December 3 meeting between OPEC and non-OPEC ministers resulting in a declaration of cooperation to ensure a ‘stable market’ has eased prices. As on December 13, WTI crude traded at about $46.57 while Brent is at $48.70. This has had an impact on global economies—India being no exception. This particularly so since India imports most of its requirements.

India has seen a steady increase in the prices of petrol and diesel. As per the Petroleum Planning and Analysis Cell (PPAC) attached to the Ministry of Petroleum and Natural Gas, as on December 12th diesel was retailing at Rs 73.87 per litre and petrol at 83.71 in Delhi; in Mumbai, it was 80.51 and 90.34 respectively. Petrol has become costlier by 4 percent and diesel by 5 percnt in a span of 20 days. Again, as per the PPAC, this is the 56th revision of price of petrol since April this year; in the case of Diesel, it is the 67th revision. The present prices are the highest in the country since October 2018, when crude prices were in the region of $80 per barrel. These are not pretty statistics.

Taxes obviously form the biggest component and the reason for the increase in prices. While the Government had not passed on the commensurate benefit of the decrease in petrol prices to the consumer, it has with alacrity, imposed taxes with an increase in the global prices. As per the price build-up data of petrol at BPCL outlets as on December 1st in Delhi, the price charged to dealers is only Rs 26.75. To this are added the Central Excise duty component which is Rs.32.98, the VAT component of Rs.19.02 and the marginal cost of the freight and dealer commission. Petrol as on December 1st sold at a whopping cost of Rs.82.40 in Delhi. Thus, the tax component is Rs 52 out of the price of 82.40. or nearly 63 percent of the cost. In the case of diesel, it is Rs 42.47 out of the price of Rs 72.42.

The levies themselves consist of basic excise duty, a Road and Infrastructure cess (previously the Additional duty of excise) on motor spirit, a National Calamity Contingent Duty on crude petroleum, a surcharge (special duty of excise) on motor spirit and a Road and Infrastructure cess on high-speed diesel. These contribute substantially to the kitty of the central government.

Thus, as per the receipt budget of 2020-2021, union excise duties, which primarily are on petroleum products, contributed about Rs 2.32 lakh crores in 2018-2019 and Rs 2.48 lakh crores in 2019-2020. States, which are in an even more fiscally precarious position have also not missed an opportunity to increase the VAT rates on these products. Gujarat, Haryana, Delhi, Maharashtra, Karnataka have all been guilty of raising VAT rates.  Crisil, the rating agency,   has estimated the states would earn as much as Rs. 1.96 lakh crore in the current fiscal- up from Rs. 1.8 lakh crore in 2019-2020.

Rising fuel prices have a huge adverse impact on the economy.  Petroleum products are not in the GST regime—this means input credit is not available and the tax element sticks to all products. Given the universal utilisation of petroleum products, this obviously puts inflationary pressure and increases costs of all products. This flies in the face of concerns which the RBI has expressed recently. In the last Monetary Policy Committee meeting, while keeping the policy rates unchanged, RBI acknowledged that price pressures prevailing in the domestic economy were more severe than estimated. This obviously was one of the reasons why rates were not lowered-and as has been pointed out what this results in is an increase in cost of money which in turn hurts growth.

Which brings us to the crucial need for urgently bringing in petroleum products within the GST fold. While the Central government did include petroleum products within the ambit of GST, five products, crude oil, petrol, diesel, aviation turbine fuel and natural gas were temporarily excluded.  They were to be included whenever the GST Council decided to do so. Which is how the Centre and States have been looking at petroleum products as a cash cow and levying central excise duty and VAT on them. While it was necessary to protect the revenues of the Centre and the States when they were entering into GST, it makes little sense to continue to exclude these products now, three years after the implementation of GST. Once within the ambit of GST, it would be the GST Council which would decide on the rate, ensuring uniformity of rates within the country. More importantly, credit of input tax would be available-this will facilitate industry, create audit trails, cut costs and rationalise GST.

Given the revenue from petroleum products being collected by both the Centre and States, this will be a difficult decision but a decision which is essential. And the GST Council would need to take this sooner rather than later. And a collateral benefit, of course, would be that this will increase GST revenues and reduce compensation requirements.

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

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The scourge of evasion of GST

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

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There is a flurry of enforcement activity going on in GST commissionerates all across the country. Press notes announcing the detection of evasion of tax from Rs 392 crore to a mind-boggling Rs 1,278 crore have been issued by the government in the last few days. All the press notes have a common thread running through them — inadmissible credit being availed by companies on the basis of bogus invoices issued by non-existent firms.

Why does evasion take place? Is it a cultural issue? Is it lax tax administration or worse still corruption and collusion? The truth like in all such matters lies somewhere in between. And how does this evasion take place?

Gone are the days of crude outright clandestine removal of goods; it is the more sophisticated misuse of the credit scheme.

Tax assessments today are entirely trust-based. The taxpayers self-assess and pay what they determine is the tax due. The returns filed indicating the liability are a key to enable risk-based audit and controls. This is more so in a credit-based tax system like the GST which operates on the system of ensuring there is no tax on tax. The credit of tax paid at the earlier stage is available for discharge of liability created at a later stage. The GST regime’s USP is this. Hence to the extent of the credit availed there is lesser revenue available with the government.

While it is not anybody’s case that such credit should not be available, it also cannot be anybody’s case that credit which is not due is availed. In the GST regime, this becomes even more important since the silos of the pre-GST regime have been removed and seamless flow enabled. As has been pointed out, “VAT is the only tax that requires Government not only to collect substantial money but also pay much of it back to the same people in the form of input tax credits.” An invoice, which keeps a record of the sale, provides a way to track the date on which goods were sold, how much money was paid and any outstanding debt, is thus a key document.

An invoice constitutes a potential claim on public funds. Hence the emphasis on invoices in the GST law. The law thus stipulates that every taxable person supplying goods or services, issue a tax invoice showing description, quantity and value of goods, the tax charged thereon. Similarly, the provisions dealing with returns prescribe the number and manner of filing returns accompanied with invoices.

It is in this background, the unscrupulous resort to creating companies which are in existence only to generate invoices. Registration of a company under GST is online and automatic. Once registered, the fraud commences. Instances of up to several hundred companies having been created in one complex web of deceit have been noticed. No supply of goods takes place; neither is any payment made. Credit however is availed on the basis of these invoices by a sister concern. This credit is used to discharge tax liability. And worse, in very many cases of export which in the GST regime are zero-rated, even refund of input taxes is sought on the basis of these fraudulent invoices!

The government ends up getting lesser revenue than what is due, since in the absence of credit, tax liability would have been discharged in cash. Such companies are invariably fly by night operators, who shut down after about six months to escape detection. This, when the fiscal position of the government is bad and real GDP estimated to be falling to 8.2 percent this year, is criminal.

The law stipulates the matching of the details of inward supply with the corresponding details of outward supply and penal consequences, where such matching does not take place. Unfortunately, in the initial days of the roll-out of GST, technology was not in place to facilitate such matching. This is a lacuna which is being addressed now. Thus e-invoicing has been introduced from October 2020 for all B2B supplies above a certain threshold.

Issuance of an invoice or bill without supply of goods or services and wrongfully availing or utilisation of input tax credit on a bill/invoice, without any supply of goods or services, is a cognizable and non-bailable offence. And the GST law also provides for the arrest of persons found to be indulging in these offences. While arrest in a fiscal law is always harsh, the damage caused by such evasion is immense and needs to be dealt with firmly.

The tax gap, or the difference between what ought to be collected as tax revenue and what is actually collected, has always been a matter of concern for tax administrations the world over. How much is the gap is also always a matter of conjecture-or like the typical classic reply to a Parliamentary question would suggest “since evasion is a clandestine activity it would be difficult to give an estimate of the extent of evasion”. While estimates in India vary wildly-taking of fraudulent credit is by far the single largest contributor.

As has been noted by Prof.Joel Slemrod, no government can announce a tax system and then rely on taxpayer’s sense of duty to remit what is owed. Technology-driven matching of returns and data analytics is the key. In the meantime, firm action in the form of intelligence-driven enforcement action and audit is essential. The government cannot afford to lose revenues due.

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

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Atmanirbharta: Striking a balance between free trade and protectionism

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

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Arvind Subramanian and Shoumitro Chatterjee have in a recent op-piece* argued that the present focus on Atmanirbharta seems to have overlooked the fact that the export-GDP ratio at 20 percent has been the key catalyst for India’s growth and hence India should ‘zealously boost export performance.’ They have concluded that ’embracing Atmanirbharta is to choose to condemn the Indian economy to mediocrity’.

Strong words indeed. Coming as they are from two eminent economists, one of whom till not so long back, was closely associated with policymaking at the highest level, these are views which need to be taken seriously.

The debate of protectionism versus globalisation, of export-led growth versus a path of import substitution, is an old one. The very fact that there is still a debate is an indication that the divide continues.

India, after a phase of focusing inwards, opened up. There was a complete revamp of the Ministry of Commerce and a chief ‘controller’ of imports and exports with all its negative connotations, was replaced by the director-general of foreign trade. The focus was on exports rather than merely regulating imports. The multiplicity of export promotion schemes, very many which faced challenges for being WTO non-compliant, would indicate that governments across political hues had never lost sight of the importance of exports.

The revenue impact because of export promotion schemes both during 2018-19 and 2019-20 was in the region of about Rs 25,000 crore. A similar amount for the years 2018-19 and 2019-20 has also been given as incentives under the direct taxes (Sections 10AA, 80-IA). Rebate of taxes on goods and services exported which runs in excess of Rs 50,000 crore on an average annually, is also given; the emphasis being on the export of goods not on taxes, and, finally are the free trade agreements-sixteen and counting. The revenue impact of this as per the budget document of 2020-21 for 2119-20 was estimated to be in excess of Rs. 65,000 crore.

All this apart from the incentives in the form of easy credit, credit subventions which are extended to exporters, the Special Economic Zones, and the Export Oriented Units. The Finance Minister had in the 2020-21 budget speech also announced a new scheme NIRVIK to achieve higher export credit disbursement. The government is in the process of introducing the Remission of Duties and Taxes on Export Products (RoDTEP) scheme from January 1, 2021. So, the emphasis on export promotion continues, even as undoubtedly, there has been an increasing focus on Make in India and its corollary- Atmanirbharta.

Trade has been steadily growing to reach a high of $538 billion in 2018-19. For the period ending September 2020, India had a trade surplus -aided not so much by an increase in exports but a reduction in imports.

Wanting to become Atmanirbhar is not a bad thing. More so when policymakers realize that excessive dependence on one country with whom relations are strained can endanger the economy. Atmanirbharta is not a bad thing when you realize that entire industries in the employment generating small and medium sectors have been wiped out under the onslaught of cheap imports. The toy industry is a painful example.

Atmanirbharta is not a bad thing when you realise that even at the higher end, industries are shutting down unable to compete against preferential imports under the FTA’s. Examples abound. One such, Mybox Technologies, a unit based in Noida and Delhi engaged in the manufacture of set-top boxes, employing in excess of 700 people, shut down after the commencement of the India-Thailand FTA Early Harvest Scheme. Set-top boxes imported under the preferential FTA rates were cheaper. The manufacturer became a trader.

It must never be forgotten that India’s auto industry is today a powerhouse only because of the protection which was afforded to it in its nascent stage. Similarly, the import duty on LED bulbs for instance was increased from 10 percent to 20 percent. This gave the necessary elbow room for Indian manufacturers to ramp up production. Today India manufactures in excess of 70 million LED bulbs.

So Atmanirbharta has translated in an increase in import duties in select products; in the introduction of measures to verify the documentation of imports availing preferential benefits; in emphasis on procurement from domestic companies.

However, India needs to adopt a nuanced approach. Industries in their initial phase need protection-enough to prevent infanticide. Protectionism has to be selective; for those sectors, and industries within those sectors, which need such protection in the form of tariff and non-tariff barriers. Policies should clearly enunciate sunset clauses. India need not be defensive about protectionism; forget the fact that every country in the world practices it in some form and degree. But India should not fall into the trap of prolonged, across the board protectionism. This will hurt more than protect.

Trade takes place because of comparative advantage. It should be the endeavor of the government to create such a comparative advantage by adopting a dynamic trade policy. FTA’s should be exploited by the Indian exporters as much as they are by our trade partners. Nearly 30- 35 percent of all imports are through the FTA route; the corresponding export figure at about 22 percent is much less.

There has been talking of a $1 trillion export target. This can be achieved only by making exports competitive. The present phase of Atmanirbharta should also be focussed on removing infrastructural challenges that impede domestic manufacturing as much as exports. Atmanirbharta should mean industrialization, infrastructure, and investments which will help both indigenous manufacturing and exports.

As Subramanian and Chatterjee have pointed out, being competitive only domestically is no guarantee of either efficiency or low cost. As has been said, protectionism protects the interests of producers, never the interests of consumers. And as the economist, Claude-Frederic Bastiat noted, “All economic phenomena, whether their effects be good or bad, must be judged by the advantages and disadvantages they bring to the consumer”.

—*Indian Express op-ed

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

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The GST Compensation Impasse – A Happy Ending

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

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On a day when the Sensex crashed by over 1000 points, the NIFTY by over 11,700 points and investor wealth in excess of Rs. 3.9 lakh crore was wiped off the market, the announcement that the estimated shortfall of Rs 1.1 lakh crore of the GST Compensation Cess will be met by the Government of India was something to cheer about. This will hopefully bring to an end a dark chapter in federal relations. And more importantly, bridge the trust deficit between the Centre and the States.

To briefly recapitulate, the Centre had proposed two options to make good the shortage in the amount of cess required for compensating the States. In both options, the borrowing was to be done by the States albeit facilitated by the Centre. In the first instance, the Centre offered to fund the principal and the interest through the compensation cess window which would accordingly be extended beyond the transition period; in the second the offer was restricted to repayment of the principal from the proceeds of cess. Ten states had rejected both options insisting that the borrowing should be done by the Centre in keeping with the Constitutional guarantee. The GST council meeting convened on October 13 which was a continuation of the 42nd meeting of October 5 could not break the impasse. On the contrary, it appeared that positions all-around had hardened. There was talk of the disgruntled States moving the Apex court.

It was in this background the Centre released a press statement at 1805 hours last evening informing that ‘ under option 1 , States were to be provided a special window of borrowing of Rs 1.1 lakh crore and above that an authorisation for additional open market borrowing of 0.5 percent of their gross state domestic product(GSDP) ‘. The press statement does not make mention of the imbroglio. Nor the insistence of the Centre that the borrowing will have to be done by the States; or that the Centre had considered the fervent requests, bordering on threats, of the opposition States. It blandly goes on to mention that the estimated shortfall of Rs1.1 lakh crore will be borrowed by the Government of India inappropriate tranches. Further, it states that the amount so borrowed will be passed on to the States as a back to back loan in lieu of GST compensation cess releases.

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This is a huge gesture by the Centre. It should not be construed as a loss of face for the Centre but a victory for cooperative federalism. A recognition that GST is far too important to be trifled around with; to be subjected to a tussle between the Centre and the States. The opposition States should respond with the same amount of magnanimity and accept the offer and let bygones be bygones. There are far too many critical issues which the country is facing for this distraction to continue indefinitely.

The press note is silent on the funding of the borrowing. It would be safe to assume that the recommendation of the 42nd GST council meeting that the ‘levy of compensation cess be extended beyond the transition period of five years i.e. beyond June 2022 and for such period as may be required to meet the revenue gap’ will be suitably operationalised. This will mean that the definition of ‘transition period’ in section 2( r) of the GST (Compensation to States) Act would need to be amended to read as any period as determined by the GST council; section 8 (1) of the Act ibid would also similarly need to be amended to indicate that the levy and collection of cess will extend beyond the period of five years. More specifically, till such period as may be prescribed on the recommendations of the Council. This will require the endorsement of Parliament. However, these are matters of detail on which there should be no disagreement.

The compensation matter hopefully having been put to rest should prompt the GST Council to examine other issues. This is an opportune moment to look closely at expanding the GST coverage-petroleum products, real estate, electricity should be brought within the GST ambit, exemptions should be reduced. The functioning of GSTN which provides the technology backbone to GST should be reviewed.

The States need to introspect. Having been assured of compensation there is a dangerous revenue complacency. They cannot afford to be lax. Evasion needs to be checked—more than 3 years after the launch of GST we cannot afford to keep having leakages. Data analytics needs to be strengthened.

All these measures are essential to ensure that revenue increases and the requirement of compensation reduces. It should never be forgotten that increasing the time period for imposition and collection of cess to finance the borrowing will be a burden which will be borne ultimately by the ordinary citizens of the country.

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

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On the GST compensation issue, Centre should be magnanimous

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

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The GST compensation impasse continues. And is an avoidable distraction for both the Centre and the States in this most critical of times when the country is facing, as per the RBI, a possible GDP contraction of up to 9.5 percent.
The challenge today is because of the plunging revenue caused by the pandemic. The compensation burden on the Centre has increased dramatically. And the compensation cess kitty has not. The extent of shortage is such that it cannot be made good by increasing the cess or even the basket of commodities on which cess can be imposed. There is no option other than borrowing.

The issue of having to resort to borrowings in case of a shortfall in the availability of cess amount was discussed in several GST council meetings when the draft Compensation Cess Act was being discussed. The Chair of the Council, the then Finance Minister had consistently responded that the Centre could always resort to borrowing from the market to make good any shortfall. We should also remind ourselves of the animated discussions leading to the States agreeing to the Constitutional Amendment.

The report of the Select Committee on the Constitution (One Hundred & Twenty-Second Amendment) Bill which translated into the Constitution (One Hundred and First Amendment) Act 2016 delves at length on the concerns of the states about the possible loss of revenue. The Select Committee with members from all political parties had categorically recommended that Parliament ‘may’ by law on the recommendation of the GST Council provide for compensation.

Significantly, the Centre in the course of the discussions in Parliament agreed to substitute ‘may’ with ‘shall’ to allay concerns. Thus, the possible ambiguity of ‘may’ was also eliminated in the final version of the Constitution Amendment Act. The short point being compensation for loss of revenue was always a concern for the States. And the Centre had always assured the States of making good the shortfall.

VIEW: The compensation challenge in the GST regime

It is this background that the Centre’s proposed two options and the indignation of the States have to be seen. The borrowing in both options is to be done by the States albeit facilitated by the Centre. In the first instance, the Centre offered to fund the principal and the interest through the compensation cess window which would accordingly be extended beyond the transition period; in the second the offer was restricted to repayment of the principal from the proceeds of cess.

Unfortunately, what was primarily an economic issue, and could have been addressed through dialogue, typically and predictably became entangled on political lines. State Governments of the ruling party or run by parties owing allegiance to the ruling party agreed for option one. Opposition run states have rejected both options.

The 42nd GST council meeting convened to resolve the deadlock found no solution; the PIB press release after the meeting makes very interesting reading not in what it says but on what it does not. There is no mention at all of the issue which is threatening the very fabric of GST and the very reason why the meeting was convened.

The issue boils down who would do the borrowing. The argument that borrowing by the Centre which already faces large borrowing requirements and additional borrowing will impact g-sec yields and result in an increase of costs of borrowings for all borrowers—Centre, States and private sector, is specious. The States are in a worse fiscal position than the Centre. And in any case, the Centre’s capability to raise funds and resilience to withstand fiscal shocks is many times higher than the States.

The recent financial audit report of the CAG (Report Number 4 of 2020) could not have come at a worse time for the Government. The report states that the Centre did not transfer Rs. 6466 crore of compensation cess in 2017-18 and Rs.40,806 crore in 2018-19 apart from also retaining a portion of the IGST. As Prof. Govinda Rao has mentioned the Centre cannot appropriate cesses when there is a surplus collection and distance itself when there is a shortfall.

Incidentally, the CAG report also highlights the strange occurrence of the Centre having collected (and retained) Rs 382 crore from 17 cesses which had been abolished/subsumed in GST. All this adds to the trust deficit.

The opposing States are seeking to have a Vice-Chairman of the GST council as provided for in the Article 279A (3) and for having a dispute resolution mechanism as provided in Art 279A (11). Neither of these demands bode well and are a reflection of how federal relations have soured.

There is too much at stake here. All options should be brought to the table. A GoM is said to be one such option and should help in defusing tensions. Building consensus should be the aim-at all costs.

And if that means the Centre having to borrow to the extent of the shortfall— be it Rs. 93,000 or Rs. 1,10,000 or Rs. 2,35,000, so be it. The Centre should be magnanimous.

The guarantee of making good the shortfall was the glue which binds GST together. It is a legal and moral commitment given by the Centre and has to be honoured. The Centre cannot let down GST which was not so long ago hailed as a triumph of cooperative federalism. The consequences of doing so would be disastrous.

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

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