‘One Nation-One Tax’ tangled in complexity

Rajeev Varaiya, partner at Varaiya and Shah, is a chartered accountant with specialisation in direct taxes. In a conversation with Pankaj Joshi and R N Bhaskar, Varaiya shares some pain points in taxation. This is in view with Finance Minister seeking public opinion about what the budget should include. Free Press Journal (FPJ) thought that there was a crying need to voice the problems people face with Goods Service Tax (GST).

Edited excerpts:

GST was supposed to be a game changer—one nation one tax, procedural simplicity and much more. It is almost two years now and how does the report card look? Are there any structural issues?

There are some issues. Let us start at the first stage, the advance ruling system, wherein a prospective entrepreneur asks for details of tax levy on his potential line of business. Theoretically, we have ‘one nation and one tax’, but advance ruling is handled at state level.

Each state administration gives a different level, and people get confused. Take the example of solar panels. Uttarakhand state rules that this is a case of supply of composite item, whereas there are different viewpoints coming from Karnataka, Maharashtra and Andhra Pradesh.

Imagine in this context, one business entity with branch offices in different states. All would have to follow different rulings, different systems and different pricing levels for the same activity.

In the same spirit, you have today appellate tribunals set up everywhere under different state jurisdiction, which again goes against the ‘one nation one tax’ principle. We have so many decisions taken on different principles across so many states. There is no single precedent that a business can follow with confidence.

Third comes registration. With a head office at one location and branch offices at other locations, a business needs to have multiple registrations. The logic behind this is that the collection process should remain under jurisdiction of state governments.

But this does not mean that multiple registrations are necessary—a central rules and regulations system can still be implemented. Particularly when systems like Aadhaar have been implemented and data is already there in digital format. All that is needed is a good information technology backbone.

Lastly, there are some states which have specific issues, like Kerala wants to levy a flood tax in the aftermath of the floods. We respect it, but the system has to be robust for such inclusions.

Then you look at a corollary to the head office and branch issue, again an anomaly in the context of the ‘one nation one tax’ principle. GST is levied on two slabs—one is central and one is state level.

Right now, the fact is that even central GST levied at a location has to be claimed and adjusted at the same location. It will otherwise lapse (within a time period)—it cannot be transferred across the nation. Effectively it belongs to that territory.

These are serious matters. Any other anomalies?

Quite a few. Certain products, like petroleum based items, are out of the GST basket. They continue to attract Value Added Tax (VAT) which is state-specific.

However, that VAT payment cannot be adjusted against GST obligations. Assume that a plastic product manufacturer pays VAT on his petro-based raw material and GST on his final product. He cannot get a set-off.

Similarly you have electricity duty which cannot be set off against GST, because that again is a state subject. So in all this, what happens is the end product gets more costly, or, where the supplier has limited bargaining power, his already thin margins get squeezed.

Prior to GST, works contracts across industries acknowledged material and labour components. Now the new regime just acknowledges works contracts only for immovable properties (essentially real estate development and renovation). Everywhere else, such contracts would attract consolidated tax at the higher of the two slab rates.

These are structural matters. Is there any further pain, like in implementation?

Indeed. Implementation wise, the single major problem is the sheer number of circulars and notifications, that too with ad hoc dates. It is not as if there was a council meeting and things happen in that context.

Two years of GST legislation, yet many products have witnessed change in rates several times. How can one do a long-term planning?

Even in case of exports, the export incentive (MEIS licence) was earlier rated at 18 per cent, then 5 per cent and now exempted.

In refunds space, which is vital, you have roughly 15 types of circulars coming out in the two-year work span. Beyond that, let us get down to a more critical aspect of compliance, namely filing. The website has filing issues, especially towards the last critical days of filing.

Secondly even uploaded returns take time to reflect, which again creates apprehension. If the site does not load, the return is not acknowledged. Given that most filing takes place in the final days of the deadline, this kind of delays results in late fees, where the assessee is not at fault.

It is reasonable to assume that the government must have garnered a good amount of late fees, even though the main issue was at their end. Overall, as consultants, we know that returns are innumerable and even messages and queries are not consolidated. We have to deal with queries on piecemeal basis.

Is there any other way how businesses would have lost money?

Definitely. The next big issue is that of refund policy. Refunds are critical to all businesses, but right now they are available only on to two categories—exporters and to the businesses where the rate on inputs exceeds the rate on outputs.

That effectively means that the ordinary businessman will have nothing by way of cash refund, just carry forward credit. That effectively means blockage of working capital, whereas under the VAT regime, cash refunds happened regularly.

Beyond that is the matter of interest levied on delayed payment of GST. For instance, a gross amount of Rs 1 lakh was payable, and adjusted for credit the amount came to Rs 20,000—the interest would still be levied on the gross amount, even though there was adjustable credit in the accounts of the government. That in itself amounts to a gross injustice.

Then we come to the audit question. For the nine month period ended April 2018 the deadline is June 30, 2019. Audit form 9C is to be filed by those businesses where turnover exceeds Rs 2 crore. Now, when we get online, we find that the data (automatically) populated in the forms is often not reliable.

Procedure guidelines are vague, sometimes conflicting. Today, with all the constraints outlined, I assure you that (may be) a tenth of the returns would have been filed.

In that context, you understand that there is no provision to file a revised return, where an error can be rectified or merely to facilitate a vendor's claim. That is recognised worldwide as an essential requisite but our Act has no provision for it. This has massive implications.

How do you think the situation can be improved?

First is professional inputs. Today the GST council comprises almost entirely of ministers and bureaucrats. No professionals have been invited to attend, consult and guide.

Those who have ground awareness are not in the loop. Such people will know how to move forward in case of structural or procedural hurdle. Likewise, the trader/manufacturer representation is vital. Last but not the least, the refund mechanism has to be streamlined and made user friendly.

This defies the concept of uniform tax law:

• Advance ruling is handled at state level for an all-India tax structure. Hence several varied rulings on the same issue.

•Even appellate tribunals are not at the central level, but at state levels, leading to differing judgements.

•A business with multiple offices in different states needs to have multiple registrations. A single registration in an electronic age is ignored.

•GST is levied on two slabs— central and state. State level tax cannot be transferred across the nation for claims, adjustment and tax credit.

•Certain products are out of GST purview. They continue to attract VAT which is state-specific again. Set off for GST against VAT not possible.

•There are a number of circulars and notifications with ad hoc dates.

•The website has filing issues, especially towards the last critical days of filing.

•Refunds easily granted only to exporters and to businesses where the rate on inputs exceeds the rate on output.

•The data populated in the online forms are often not reliable.

•No provision to file a revised return.

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