Parliamentary Standing Committee Report on the Constitution (115 th Amendment) Bill, 2011 relating to GST

Transcription

1 8 August mber 2012 EY Tax Alert Parliamentary Standing Committee Report on the Constitution (115 th Amendment) Bill, 2011 relating to GST Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your Ernst & Young advisor. The Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 (the Bill) relating to GST was referred to the Parliamentary Standing Committee on Finance for detailed examination and report thereon. The report was tabled in the Parliament on 7 August This Tax Alert summarizes the key observations and recommendations of the Committee with respect to the said Bill. The Parliamentary Committee has suggested amendments relating to the compensation mechanism, dispute resolution and GST monitoring mechanism, amongst others.

2 Background The Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 (the Bill), which was referred to the Parliamentary Standing Committee on Finance, headed by Shri Yashwant Sinha, seeks to bring fundamental reforms in the indirect taxes, by integrating and harmonizing the tax rates across the country by way of Goods and Services Tax (GST). The Parliamentary Standing Committee on Finance, which tabled its report on the said Bill in the Lok Sabha has given significant recommendations on a host of issues related to the GST design including the rate structure, fiscal autonomy of the states, compensation mechanism and exemptions from GST. Key observations and recommendations GST design: The Committee acknowledges the apprehensions of the states about erosion of state autonomy and suggests that the Centre must play a pro-active role in maintaining a fine balance between the imperatives of a common market with unified tax structure vis-avis the fiscal requirements of the States. The Committee has recommended that before enacting the Bill, broad consensus on key issues concerning the implementation of GST should be arrived at between the Centre and the State Governments. A credible study should be undertaken to evaluate the impact of GST on the revenue of the States. Sufficient flexibility and fiscal space may be required to be given to the States in order to achieve successful implementation of GST as in the case of VAT. GST may also be made optional for the States, as was done in the case of VAT. Compensation mechanism: The Committee has observed that one of the major concerns about GST implementation is the determination of Revenue Neutral Rate (RNR). States generating high revenue are apprehensive of suffering revenue losses post GST implementation. However, there is no structured mechanism to address this problem. There are differences between the Centre and the States in respect of CST compensation to the States arising on account of the phasing out of CST. The Committee has recommended that a well-defined automatic permanent compensation mechanism should be built in, to address the revenue concerns of the states. A GST Compensation Fund may be created under the administrative control of the GST Council. Administration and Information Technology (IT) mechanism: For the successful implementation of GST, it has been recommended that the Central Government should provide technical assistance and capacity building at State level. This would help in developing robust IT practices like e-filing of tax returns, audit of tax, enhanced GST collections etc. Although a dual GST regime has been proposed, a situation of trade/business dealing with a dual administration and multiplicity of authorities should be avoided, as it may create more hassles rather than ease them. Though not part of the Constitutional Amendment Bill, this issue needs clarity so that dual GST regime becomes acceptable to trade and commerce at large and fosters tax compliance.

3 Integrated Goods and Service Tax (IGST): harmonized market for goods and services. The Committee observed that the IGST transactions would be revenue neutral to the extent goods or services are supplied from one State to another for further distribution. However, practically, there might be a positive balance in the IGST proceeds at the end of a fiscal year. Accordingly, suitable amendment should be made in the Bill to provide for the distribution of remaining proceeds of IGST when the accounts of the fiscal year have been settled. The Committee has suggested that an alternate model (Modified Bank Model) as recommended by the Task Force on GST set up by Thirteenth Finance Commission could be considered with a view to simplifying and easing compliance and administrative burden and ensuring a smooth clearing house mechanism between States for facilitating the process of IGST after consideration by the GST Council. Further, as the destination-based IGST model favours predominantly consumer States more than producer States, the revenue concerns of these States also needs to be duly addressed and it should not act as a disincentive for States with a strong manufacturing base. GST Dispute Settlement Authority: The Committee is of the opinion that the proposed provision of GST Dispute Settlement Authority should be omitted, as it would have the effect of overriding the supremacy of Parliament and the State legislatures. Also, it has been suggested that the GST Council should be empowered to decide about the modalities to resolve disputes arising out of its recommendations. Harmonized tax structure: It was observed that Clause 5 of the proposed Article 279A require the GST Council to be guided by the need for a harmonized structure of goods and service tax and for the development of a It has been recommended that the words harmonized structure should be clearly defined. Also, clarification should be provided to the effect that the provisions of Clause 5 are in the nature of guiding principles for the Council and not mandatory or obligatory in nature. Consensus: It was observed that the decisions of the GST Council would be taken on the basis of consensus. However, keeping in view the diversity in socio-economic interests of the States, achieving such a consensus is likely to be very difficult. The Committee has, therefore, recommended voting instead of consensus for decisions of the GST Council. Accordingly, as agreed upon by the Empowered Committee, one-third weightage for central representatives and two-thirds weightage for state representatives may be provided. The decision taken by the Council would be passed with more than three-fourths votes of the representatives present in the meeting. Similar amendment may also be made for increasing the quorum to half from the proposed one-third. Declared goods: The Committee has recommended that Clause 3 of the Bill should be amended to substitute the phrase subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as Parliament may by law specify by subject to such restrictions and conditions of tax as Parliament may by law specify on the recommendations of the GST Council constituted under 279A. This amendment should be introduced to ensure that there is no unilateral decision by the Centre regarding taxation of declared goods kept outside the purview of GST.

4 Entry Tax: The Committee is of the opinion that it will not be desirable to go back to the earlier system of levy and collection of octroi by local bodies. This will be a retrograde step, which would hinder free flow of trade and increase compliance burden. The Committee has, therefore, recommended that entry tax in general should be subsumed in GST. The Bill may be modified accordingly so as to empower the States to collect entry tax for distribution to local bodies instead of leaving it to be collected by different local bodies. Floor Rate: The Committee is of the opinion that the States should have some limited leverage to vary the rate of tax. The Committee has, therefore, recommended that a system of band with floor rate should be adopted while introducing GST, so that the States can have the flexibility to increase or decrease the tax rate within a narrow band depending upon the circumstances. There could, however, be a provision to levy higher rates on demerit goods, whenever necessary. Exclusions: The Bill currently excludes certain goods and services i.e. petroleum products and alcoholic liquor for human consumption from the purview of GST. The Committee believes that such specific exclusions need not be provided under the Constitution, as this will needlessly make the GST regime very rigid. The GST Council should have the discretion to decide about inclusion / exclusion of goods and services. GST Monitoring: The Committee has recommended the setting up of a GST Monitoring / Evaluation Cell to assess the immediate impact of GST on key aspects such as growth in GDP, inflation, compliance costs etc. The GST Monitoring / Evaluation Cell may function under the supervision of the GST Council. Certain pro-consumer measures should be initiated as well, such as, passing on tax credit benefit to retail consumers for cushioning them against possible increase in prices post-gst. Conclusion: GST Council will be a political and recommendatory body. It would be in a position to play a constructive and enabling role vis-à-vis the Legislature. The Legislature would remain supreme in matters of legislation, including taxation. Ideally, the Bill should not include specific aspects relating to rates, exemptions, exclusions, thresholds, administrative arrangements etc. These matters should form part of the GST law and rules. Comments The report of the Parliamentary Committee fully endorses the GST, and generally supports a flawless model of the GST, as developed by the 13 th Finance Commission, under the leadership of Dr.Vijay Kelkar. The Committee recommends that all taxes be subsumed under GST (including entry taxes). The report recommends that any specific design features should not be dealt with under the Constitution. They should be left to the discretion of the GST Council. Interestingly, the Committee is silent about the treatment of real property under the GST. The endorsement by

5 the Committee of a comprehensive base as espoused by the Thirteenth Finance Commission implies inclusion of real estate in GST. However, real property is neither a good nor a service. Without explicit inclusion, it may remain outside the GST under the framework of the current Constitution (Amendment) Bill. All party endorsement of the GST paves the way for its early implementation after the elections. Time is opportune for the trade and industry to now engage with the policy makers to ensure that a robust GST structure is in place.

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