On IT Backbone for GST

CBEC is hoping that the IT systems for GST will be up and running by January 2017. This is dangerously close to the proposed April 2017 rollout, and does not offer much time to remove glitches that will inevitably be there in the first version.

GSTN has given the contract for IT backbone to Infosys. Let me put this in context. This year,

Making GST Better

My previous post explains why GST is not the 'One Nation One Tax' it is made out to be, and why we should cheer only as much as is due. In this post, I consider how GST can be made better. Some ideas:

1. Dual Control

A critical problem in GST is the significant jump in compliance burden for traders and service providers. Currently, traders are assessed only by VAT authorities at the State level while service providers report to Central Govt. In GST, each of them will have to report to both Central and State GST authorities. 

This can be easily resolved by having a liberal turnover threshold (say, Rs. 10 crores annually) upto which State authorities will assess for both State and Central GST. Since same set of codes and same IT infrastructure is to be used, this change can be incorporated with no notable burden. If required, GST Council can devise norms for compensating States for discharging the burden of Central Govt. 

Similarly, multi-state enterprises should be permitted to report exclusively to Central GST authorities. 

2. Release Draft Rules, Tax Rates and Exemptions 

There is no reason why the proposed details are not in public domain if GST is supposed to be rolled out from April 2017. Release them now so that entrepreneurs can look at the nitty-gritties. 

3. Section 16(11)(c) 

Section 16(11)(c) of the Model GST Bill requires that the supplier should have paid tax before you can take credit. This clause may disrupt business cycles and freeze up transactions as customers have no good way of finding out if the supplier has paid the tax. Thus, they may withhold payment unless supplier can furnish some evidence of tax payment. This will delay settlements till beyond the return cycle. I have discussed the problem in greater detail in an earlier post. 

The idea behind the clause is to safeguard revenue against false credit claims. However, this safeguard can be easily provided by having a system under GSTN where the supplier can voluntary furnish information for taxable supplies to parties. Once the supplier uploads particulars of an invoice on GSTN, there would be a rebuttable presumption that the supply is genuine and the supplier intends to pay tax on the same. In case of default by supplier in payment of tax, the presumption would stand rebutted where there is reason to suspect collusion or where related parties are involved. 

ERP packages can design a system wherein desired invoices can be uploaded on GSTN on a daily basis automatically where they can be seen by the customer whose registration number would be contained therein. The customer can log-in and verify that the supplier has intimated transaction to the GST authorities. Assured of the supplier's bona fides, he can make the payment within the normal credit cycle.  

4. Match Timings for Payments and Credits

For services provided over a period of time, the Model GST Bill provides that tax is payable when the supply of service commences while customer will get credit when the the supply ends. 

Many service contracts are structured to run over a period of 1 or more years. Thus, for an AMC for an asset, full tax will be charged at the beginning of the contract while customer will get credit after 1 year. There is no reason why credit should be delayed till the end of service period once tax has been paid. The customer should be able to claim credit as soon as the supply becomes taxable. Otherwise, the tax credit chain is not seamless and credit gets bundled up. 

This provision should be re-drafted so that the tax liability should be broken up over the period of service with reference to quantum of work done or payment, with credit available on the same basis. 

5. Allow Transfer of Credit between Centre and State 

The Model GST Bill specifically provides that credit for Central GST cannot be utilised for paying State GST and vice versa. Meanwhile, credit for both can be used to pay Integrated GST on interstate transactions. A customer relying on small suppliers exempt from Central GST may accumulate credit under State GST. In such cases, these enterprises will find interstate transactions more beneficial than intrastate ones, distorting the idea of 'One Nation One Tax'. 

The Central Govt will in any case be adjusting and transferring revenue from one State to another and from Centre to States for interstate transactions. The scope of these transfers can be expanded to provide utilisation of credit between the two chains of Central GST and State GST. 

6. Reach Out to Small Enterprises 

Now that the feat of pushing the 122nd Amendment to the Constitution through Rajya Sabha has been accomplished, the Govt needs to phase out the hype and invite small enterprises to look into the details. A political statement from the top on suggested lines would help: "At ground level, our traders, manufacturers and service providers transact in a million different ways. We are committed to Ease of Doing Business. We have laid out the vision for an integrated tax that will unify the nation. But the task of writing the detailed rules cannot be left exclusively to officers sitting in New Delhi. Every small trader, every enterprise should join in the process and be a partner in this change." Amen!

GST Mythbusters

The 122nd Amendment to the Constitution does two major things:

A) It gives Centre the sole authority over interstate transactions, paving way for interstate credit not available under VAT regime.

B) It gives States the power to tax services.

These are great changes. Yet, GST is not the 'One Nation One Tax' it is made out to be. There is nothing in the 122nd Amendment to restrict the power of any State or Central Govt from playing with tax rates and rules. There is a GST Council, but it can only recommend. Its recommendations are not binding.

1. There is no restriction on the number of GST rates. States or Centre may have several different rates. There is no provision to ensure that tax rates are same across states.

2. Credit under Central GST cannot be used to pay State GST. Credit under State GST cannot be used to pay Central GST. However, both can be used to pay Integrated GST.

3. Different states may have different items exempted from tax and provide different basic exemption limits.

4. It will increase documentation burden on small taxpayers. Under VAT, a taxpayer simply classifies transactions as being within the state or interstate. In GST, he will have to maintain state-wise particulars for all interstate purchase and sales. For larger taxpayers using ERP, this poses no burden. However, this requirement will be burdensome for small taxpayers.

5. Large service providers providing services across the country (such as banks and telecom companies) will have to get registered in each state and pay State GST there. This will create a lot of confusion over which state the service is taxable.

6. Traders currently have to deal only with VAT authorities. They are not bothered with Central Excise authorities. Under GST, traders (except those with turnover below Rs. 1.5 crores) will have to get assessed with both of these authorities. Since excise authorities (to be renamed Central GST authorities) have been dealing with manufacturers who are typically larger and also have more detailed bookkeeping, the transition will be painful for traders.

The problem of Dual Control had been admitted by Central Govt as an important potential challenge to GST rollout. It is vital that traders voice their concerns in a timely manner.

7. Traders with turnover below Rs. 1.5 crores will not be liable to Central GST and pay only State GST. This has important implications for customers of such traders if the customer is liable under Central GST. A customer buying locally from several small traders and maintaining high levels of inventory will accumulate credit under State GST,which cannot be utilized to pay Central GST.

However, this credit can be used to pay Integrated GST on interstate transaction. This will create am environment where a taxpayer with accumulated State GST will be incentivised to prefer interstate transactions. This may lead to taxpayers setting up dummy units outside the state which will buy the goods and sell them back in 2 interstate transactions.

8. Once States exempt some items and impose high rates on others, they will have to continue with checkposts at state borders to ensure that goods are not being wrongly classified to evade taxes. So trucks will continue to sit idle at state borders awaiting checking, though the wait should be shorter.

9. Everytime an item is exempted, the tax credit chain will get broken at that point and cascading taxation will begin afresh.

10. Detailed draft rules and procedures for implementation, proposed tax rates, exemptions, norms to ensure timeliness of distribution of States' share in Integrated GST, method of computation and timeliness in distribution of compensation- All these are yet to be made public. As such, the homework for April 2017 rollout is not visible in the public domain.

We have seen the consequences of poor rollout in Companies Act 2013. Small companies are stuck when it came to raising equity or when lending or guaranteeing loans of sister concerns. Three years after it was notified, the Govt continues to bring amendments to nullify poorly thought provisions.

The lessons are twofold: One, having the bill in public domain is not adequate, detailed draft rules and procedures hold the key. Two, small players must learn to engage the Govt in a timely manner i.e. before the law is implemented.

The impact of the Company law fiasco was limited only because it adversely affected only a restricted group and also affected only financial transactions. But GST impacts everybody and all sale-purchase & service transactions. Hasty rollout will jeopardize the economy and all its constituents.

I remain positive on GST. The proposed setup involves much innovation and eliminates many problems in earlier drafts. And yes, some things we will learn on the feet, they will get improved only when the system is introduced. But let us ask for details before we cheer the proposed regime. And cheer only as much as is due.

Input Tax Credit under GST

On 14th June 2016, the Finance Ministry released a draft of the Model GST Bill. (This time, the draft is official, unlike the last time!)

Since the whole idea behind GST is to have a seamless tax credit chain, it would be appropriate to look at that clause before anything else. Uh Oh! This is problematic. 

Here's section 16(11), have a quick read of clause (c):

"(11) Notwithstanding anything contained in this section, but subject to the provisions of section 28, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless

(a) he is in possession of a tax invoice, debit note, supplementary invoice or such other taxpaying document as may be prescribed, issued by a supplier registered under this Act or the IGST Act;

(b) he has received the goods and/or services;

(c) the tax charged in respect of such supply has been actually paid to the credit of the appropriate Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and..."

(emphasis supplied)

Basically, you cannot take input tax credit unless the seller (or service provider) has paid the tax. This will disrupt payment cycles across businesses, forcing buyers (and service recipients) to re-plan their business behavior afresh. Here's why:

The responsibility of tax payment by seller (or service provider) has been cast on the buyer (or service recipient, as the case may be). But how can the buyer ensure when the seller deposits tax?

Remember MODVAT era? Rule 57A(6) of the Central Excise Rules, 1944 then required buyer to exercise 'reasonable care' that tax was actually paid by seller. In the case of CCE v. Kay Kay Industries, the Supreme Court ruled that 'reasonable care' did not imply that assessee should go and confirm from the department that tax has been paid. 

Now note that the proposed law does not talk of 'reasonable care' but just creates a blanket condition that tax should have been actually paid. The burden of ensuring tax collection has simply been shifted from revenue authorities to the buyer (or service recipient). Yet, there is really no framework for a buyer to find out whether the seller is paying tax or not. Hence the questions:

1. Since tax credit is conditional on actual tax payment by the supplier, should buyers try and withhold payment of the tax component in the invoice till they have proof that tax has been actually paid to the department? If so, this will disrupt payment cycles and business behavior in a big way. 

2. If the buyer asks the supplier to prove that tax on the invoice has been actually paid, how exactly should the supplier do so? The supplier would typically be collecting tax from several parties, and paying aggregate tax in one go. Further, this payment would involve adjusting tax credits as well as cash payment. The supplier cannot establish payment of tax on a particular invoice without possibly sharing a lot of confidential business data, unless GSTN provides a framework which assures the buyer that tax on a particular invoice has been paid.  

3. Tax collected in a month is typically payable in the next month. Till now, tax credit was being taken at the time of receipt of goods (subject to certain conditions). Should the buyer wait till due date of payment of tax before taking credit? That will delay credit-taking by a month. Surely, that cannot be the idea behind the provision!

Clause (c) of section 16(11) thus single-handedly frustates the whole idea of creating a seamless tax credit chain. It needs to go, the sooner the better. 

Why Global Warming is Good for you

The early trick was to deny that the world was indeed warming. The next was to deny that it was man-made. Since both are now seen as incredulous, it's time to change tack and argue that increase in temperature caused by Greenhouse Gases is a great thing. Do add your arguments is support of anthropogenic climate change:

1. We are sending spacecrafts across the solar system and beyond it too. As the mass of Earth falls, Gravitational pull from Sun will decrease, and Earth will move further away from Sun. We need to prepare for that by artificially increasing the temperature.

2. As we rid the Arctic region of all that ice, it will significantly cut travel time. You love cheaper stuff, don't you?

3. Aren't the environmentalist always talking of energy conservation? That's what greenhouse gases do, they conserve solar heat, preventing it's escape into space. Wonder why the activists don't support this energy conservation at macro-level and insist on fringe-level conservation.

4. Life will get easier for Jawans in Siachen as the temperature rises. Where's your patriotism?

5. A lot of energy is consumed in heating homes and offices during winters, particularly in the developed (non-developing?) world. As the planet gets warmer, this consumption would fall. You would think activists would be all excited about how energy consumption is about to fall, yet they are all gloomy.

6. Plants make food by using Carbon Dioxide. That's elementary science. More CO2 means more food. What could be more important that fighting hunger?

7. So many people lose their lives to bitter cold. A warmer planet is our best bet to save lives.

8. This CO2 was in the atmosphere to begin with. We are not destroying the planet, we are reversing the damage caused by millions of years of photosynthesis. We may not be able to return to the planet to its pristine Primordial-Soup state, but surely we should give it our best.

9. A warmer planet would see more evaporation from the seas, resulting in more precipitation. Permanent solution to droughts.

10. Spare a thought for the poor migratory birds that have to fly thousands of kilometres just to avoid the chill. They can stay home and flourish.

No, Two States did not Pay 53% Tax

Income Tax Department released some interesting dataset for AY 12-13 yesterday aggregating key numbers from IT Returns. My analysis is available here.

Today, you may have woken upto reports how 2 states paid 53% of total Income Tax collection, with Maharashtra alone accounting for over 39%. This blog seeks to put that misleading statistic to rest.

Under Income Tax law, profits are taxed where the assessee earns them. For corprates, this means the place where 'control' resides. In practice, corporate tax gets accounted where the registered office is.

So Reliance Industries generates cash in Gujarat and off-Andhra coast. However, since the Registered Office is in Mumbai, the tax payments are recorded as collected in Mumbai.

Analaysing Income Tax data for AY 12-13

Income Tax Department has now released some interesting data summarising tax returns for AY 12-13 . We now know that 1.21 crore assessees paying less than Rs. 1.5 lakhs in income tax contributed a mere 6.7% of total Income Tax collection. Meanwhile, 13,689 Companies paying tax above Rs 1 crores accounted for 59% of total income tax collection. This datapoint alone should be sufficient to re-evaluate our whole approach to taxation.

Some more details from analysing the data:

Only 6 assessees reported salary income above Rs. 50 crores in AY 12-13. Analytical chart has 2 more rows after 50-100 crore slab, salary income Rs 100-500 crores, and > 500 crores. Both rows are empty.

2 assessees with House Property income in the range Rs 100-500 crores. No one above 500 crores.

205 assessees with business income exceeding Rs 500 crores.

Tax Benefits for Startups

The Govt. has recently announced a 3 year tax break for startups as part of DIPP Action Plan for startups. In this post, I point out the well-known landmines that the draftsmen need to avoid:


1. Will the income 'not be included in computation', or will it be 'deducted'?

Income Tax Act may codify a tax break as an exclusion or a deduction. A typical startup will suffer losses in the initial years. If income is excluded from computation, this means that the loss (which is negative income) will not be available for set off against future profits. In Section 10A (exemption for Software tech parks, etc), the law was amended to replace exclusions with 'deductions' which do not deny carry forward and set off.