GST Diaries - Part 4

Some of the issues to be considered before implementing the new GST regime are:

(i)                   Fate of the existing concessions, exemptions and compounding benefits offered to the industry

            Concessions, Exemptions and Compounding benefits are offered to uphold equity in taxation. The existing indirect taxes regime offers idiosyncratic concessions to different assessees depending upon their turnover, geographical region, range of activity etc. These concessions, benefits and exemptions are obviously different for different levies. These benefits, in many cases, are proving to be distortionary and even regressive. Hence, there is strong case to do away with these multifarious concessions and instead establish a uniform product based exemption (both in SGST and CGST) at all levels of the supply chain. Now an immediate practical problem the committee will face in the implementation of the GST regime, is what will happen to the existing concessions, exemptions and compounding benefits offered by both the central government and the various state governments. The task force recommends allowing the existing assessee specific concessions to stay and henceforth not permit any additional such offers by the state or the centre.  Yet, it is unclear as to what kind of distortions the continuation of these concessions will impose on the new regime. 

(ii)                Should GST on stock transfers be abolished or be levied with credit given?

Stock Transfers are not a sale. Hence, the transferor (or consignor) will not be able to immediately pass the burden of tax on the customer. He needs to pay tax from his working capital. This will put an undue stress on the working capital of businesses. This will be very similar to payment of excise duty (under rules 7, 8 and 10A of the Central Excise (Determination of Value) Rules, 2000) for a transfer from the factory to a depot which is completely unnecessary and not business friendly. Since the additional cost borne for this additional burden on working capital will again be transmitted on to the consumer, this provision might prove to be regressive in its effect. Moreover, assuming the refund of tax is not automated, or in worst case if there is no provision for refund of tax but only a provision for set-off in perpetuity, the businesses will have to incur additional costs which will in turn hike up the price of their products. However, there is a case of tax evasion which may crop up if the transfer of goods, without payment of tax, is allowed. In order to prevent this tight inter-state border screening will be required which can again imply unwanted transaction delays. Hence, it is important to rightly assess and compare the probable economic cost of collecting GST on consignment or stock transfers with the costs implied from transaction delays caused by strict border policing.

(iii)               Degree of administrative standardization.

Administrative standardization means to offer a uniform/standard procedure for all interface related aspects of the Indirect Tax Regime.  Currently, the interface between the assessees and the motley of indirect tax administrations is variegated and in several instances duplicatory of one another.  For example, a common assessee is required to furnish turnover audit reports (where ever necessary) for Cenvat, VAT and Service Tax Assessment independently. This makes compliance burdensome and increases the transaction costs. Also, the number of forms to be filled for each levy (ranges from 7 Forms for Excise and 10 forms for Service Tax to more than 55 Different Forms for VAT) frustrates the businesses and incentivizes tax evasion. The all-in-one form suggested by the Task Force will help to simplify compliance to a reasonable degree.   

(iv)              Abolish all kinds of Declaration forms and Road Permits.

Road permits have been introduced in order to make good for revenue losses made by abolishing octroi. Road permits, also called as way bills, are issued by purchasing dealers to selling dealers to bring the material from one state to another. Example: VAT 65 in Jammu & Kashmir, ST-38 Haryana, ST -31 in Uttar Pradesh, VAT-47 in Rajasthan, FORM -50 in West Bengal, D IX in Bihar etc. One of India’s most troublesome issues which act as sand in wheels to businesses ranging across states is the permit raj. Any reform in this subject has got implications for administration standardization dealt above. This kind of a camouflaged octroi not only distorts prices for the same between states but also breeds in tax/compliance evasive tendencies in assessees.

(v)                The Case of Services

Services are by far the least understood and discusses subject under the GST. Given the fact that Services are India’s largest and most revenue potent industry, it becomes all the more important to understand their probable role and consequent response to the new regime.There are several questions being posed on their treatment in the tax model. Will they charged be at par with Goods? Will their identification be guided by a positive list or a negative list? What infrastructure will be put in place to track or monitor inter-state businesses? If the goods are to be taxed at different rates and services are to be taxed at one of the rates, won’t there be litigations cropping in? (This can potentially be solved by issuing a positive list of services which will be taxed at a stipulated rates and no litigation or bargaining shall be allowed)

GST Diaries - Part 3

Given the current administrative structure of energy industry in India, subsuming state electricity duties and petroleum taxes under the GST regime may not be feasible.

The following are some the factors which make it, close to, impossible to subsume electricity tax under the proposed GST levy:

 

-          Cost of power generation differs from mode to mode and in many cases from plant to plant. Moreover, Electricity tariffs are differently charged in different states and there is no uniform scientific model adopted in electricity pricing.

-          A potential administrative problem can arise from accounting the transmission and distribution losses between states.

-          Ad hoc demand management during times of power deficiencies becomes difficult.

-          Accounting credit transfers between states will be quite tedious owing to the inter-state or regional management of power generation and transmission.

-          An integration of the multifarious agencies and authorities in the power administration is pre-requisite for this reform.

-          Electricity consumption entails high volume transactions. Hence, an input tax credit burden will be an unnecessary impediment in working capital cycle.

-          Power sector is an investment intensive administration the melting time required to absorb input tax credit from capital goods will lock-in substantial sums of working capital.

-          Electricity does not form a significant chunk of input cost in many industries.

The following factors detail issues in subsuming taxes on petroleum products:

-          Demand and Supply management in the petroleum industry has strategic and security connotations attached. The current national level petroleum management structure may not accommodate a purely commercial form of levy designed on the destination principle. 

-          Accounting inter-state transfer of petroleum, especially in the transportation sector, will become an administrative nightmare. Consequently many rebating-related complications will arise.

-          Petroleum levies are major revenue earners in many states and are often taxed at rates higher than the average VAT rates. Hence, an inclusion of petroleum levies under the larger umbrella of GST will entail higher GST rates which will inturn be regressive on other goods.

-          Except in certain specified industries like Goods Transport Agencies, Power Generation (where no input tax credit can be passed on as power generation, as suggested by this study, will be kept outside the GST levied) and services specified under the service tax legislation etc, petroleum is not a major input and hence does not occupy a significant percentage of input costs.

The task force report suggests a bifurcation of petroleum levies based on the purpose of its consumption. It recommends that petroleum meant for industrial purposes must be taxed under the GST levy while allowing input tax credit and for all other purposes a levy similar to the ones currently imposed. Though this structure might ideally cater to the demands of political economy, it may impose an unnecessary administrative burden in form of strict vigilance to ensure classification on the basis of consumption is abided.    

China-Japan-India Trilateral Economic and Monetary Union

The idea of a greater Asian Monetary Union or even a China-Japan-India trilateral economic and monetary union, in today's world, remains a farfetched dream. While one cannot deny the benefits that go with a Monetary Union, such as a seamless intra-regional transfer of capital and investment, reduced exchange risk, regional market integration, financial deepening and diversification, the herculean task of fulfilling the preconditions required to achieve this ideal often tends to dampen the general enthusiasm.

A quick look at the available international models of economic and monetary unions will establish the grounds to further discuss this subject. Currently, there are three major models of monetary unions:

(i) EU Model:

The EU model, having a conventional single legal tender and a single central bank system at the regional level, subscribes to the traditional idea of a monetary union. The prerequisites for this model include establishing reliable responsibility/reporting system, relatively tighter political integration with strong political institutions like the European Parliament and the European Court of Justice and most importantly considerable congruence in per-capita incomes within the region.   

(ii) NAFTA Model:

North American Free Trade Agreement is a little more than just a FTA. Its managed floating backed inflation targeting objective makes it another form of a monetary union which is less physical than the EU one. NAFTA ushers its member states (US, Canada and Mexico) to maintain a common monetary policy objective commitment to ensure low and stable inflation in the region. Canada and Mexico are formal inflation targeters while the US is a de facto inflation targeter. Even for a NAFTA like model, there is some fundamental spade work to be done before implementing it. A loose political integration, a coordinated monetary policy action, independent central banks, absence of fiscal dominance and a well defined policy transmission channels are some of the pre-conditions required.

(iii) Latin American Currency Unions:

The third model of a monetary union is a one that demands a rigid currency union where one country absolutely submits its monetary policy autonomy to another umbrella nation by pegging the local currency with the super regional currency of the umbrella nation. This model requires a great deal of political and economic sacrifice beyond other equally painful submissions.

Finally, the preconditions for any sort of monetary union are as political as economic. Convergence of economic structure across member countries, strong and uniform investor rights to facilitate a uniform monetary transmission, prudential supervision and regulation, culture of policy transparency etc are some of the its essential ingredients ( Barry Eichengreen).

In the context of a China-Japan-India trilateral union, none of the above experimented models can be currently employed. Moreover, there is a controversial question of ‘who will submit to whom’ to be answered. Also, there are also wide rifts in the economic (both monetary and financial) structures between these countries. Hence as a potential union they have a far way to go before they meet any of the presuppositions listed in the aforementioned models.

In the hierarchy of Economic Integration (proposed as the second best and practical alternative), preferential trade agreements form the first step, chronologically followed by free trade agreements, customs union, single market, economic and monetary union and complete economic integration. The trilateral relationship between China, India and Japan hasn't even matured to that of a free trade zone forget about a unified regional market.

Thus, in the given state of affairs, to toy with the idea of an integrated Asian market, a single power Asian legal tender and a congruent Asian monetary policy is nothing more than romantic.

Thoughts on Thrift and Development

I don’t earn enough to remain thrifty. Well, it might not sound conventional, but, in my opinion to remain thrifty one needs to have a blanket of surplus money, left-over, after meeting ones essential and semi-essential needs. Hence, I need more money to remain thrifty. Now, what incentive do I have to be thrifty today? I am a little over a couple of decades old and I believe I possess a reasonable set of employment- friendly skills which should place me with a decent paying job in near future. So I reassure myself that I needn’t be as thrifty as I should otherwise be. This reassurance makes me go about running my life peacefully and without any anxiety about future and its fall outs.

However, I am currently being consumed by this disillusioning fear of tomorrow. Not because I can picture one but for the exact opposite of it. When I mean picture I understand I am being quite selfish in trying to concentrate my faculties to sketch a feel of my future, which I may or may not understand. To sound more precise, I am afraid whether I can sustain the style of living I have developed in the last few years. Not that I lead a flamboyant one but I wish to keep my dear and near in good company. Believe me, the goodness of one’s company has a (however, insignificant it may be) functional relationship with one’s earning.

It might be too early for someone like me to worry about a post superannuation or retirement life. But, being an inherent risk mitigator, I have enough reason to worry about my capacity to smoothen my consumption and thereby avoid unwarranted and unappealing jerks to my style of living. I have begun scouting for options available both inside and outside the finance world which will incentivize me to become thrifty when I start making some surplus. 

To my dismay, in my country I find very few such options. I wonder what may be the plight of my not-so-lucky fellow citizens, who can neither afford to be thrifty nor afford to be not thrifty.

The Indian financial markets might have broadened and deepened, might also boast of increasingly complex financial solutions to meet the needs of a select progressive class of citizenry. However, a large chunk of our populace is nowhere in the priority list. More than 70 % of this country’s citizens don’t have clue as to how their consumption power will remain (read life sustain) in this break neck speed economy. It is important to acknowledge the ills of super fast growth and try to rectify them to make sure the benefits of this growth percolates to all. Take an example of a small private business clerk (having 10 more years of service) who probably earns Rs 15,000 a month and saves Rs 2000 and having access to pension/provident funds offering 10% P.A interest rate on deposits. Also assuming an average Income growth rate of 10% P.A, if he begins to invest in these funds, he can aspire to earn around Rs 8 lacs. Assuming a steady inflation rate of 5%, the small business clerk would need approximately Rs 22,000, 10 years hence, to sustain his current consumption level of Rs 13,000. Is it feasible to earn Rs 22,000 per month with a corpus of Rs 7, 00,000 during retirement? In my opinion, it is feasible only to a financial genius who is capable of making the right bets in the financial market can and not to a regular small business retiree. Other option left to this then old man is to seek the generosity of his children or wards. Given the rate of disintegration of India’s traditional family set-up (also India’s most important old age social security system), this is not the best bridge insurance.

Compared to the problems of this small business clerk, mine are small and insignificant. But I am alert to make my hay while the sun shines. Not many are, not many are even aware of this impending plight. Not many can withstand it, I am not predicting an Armageddon but I am most definitely warning of an impending public finance crisis, if systems are not established to take care of the future of millions of have-nots and potential have-nots. PFRDA is a good initiative, but its role seems to remain dormant. I don’t see the kind of publicity I have expected (which it rightly deserves in order to attract savers). Government should also consider tying up with private superannuation fund managers to design micro or maybe even nano plans to suit the needs of our motley citizenry. The policy makers must realize that private thrift (by the common people and not only by businesses) is required to sustain our development momentum. Hence, they must focus their resources to make thrift accessible to our masses.

GST Diaries - Part 2

The famous Chanakya Nithi (in Arthashastra) elucidates that a government should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can sustain. Well, the indirect tax regime in India is more like a leech which parasitically efforts to suck as much blood as it can from its victim and in the process cause a lot of damage. Many assessing authorities take pride in being tax hounds than being persuasive civil servants. Moreover, the system of imposing minimum collection limits in order to meet revenue targets only adds to the tyrannies of the administration. It is high time that the proposed GST regime ushers in a new attitude of taxation amongst the taxing authorities.

Under the interest on delayed payment and the interest on delayed refund provisions of the Central Excise, one can visibly observe a clear arrogance on the part of the taxation authorities. U/S 11 AB of the Central Excise Act interest is to be paid by an assessee in case of a delayed payment of duty at a rate not below ten per cent and not exceeding thirty per cent per annum (currently 13%). However, U/S 11BB of the same act, the interest is to be paid by the department on a delayed refund of duty to the assessee shall not be less than 5 % and not exceed 30% (currently only 6%). Many such double standards in administration of excise duty and various other levies are quite visible. Such undue benefit to the department at the loss of assessees’ is not a sensible tax arrangement.

Under the current system, there is a great amount of discretion available to assessing officers in the assessment procedures. Such discretion not only accommodates red tape and graft but also encourages unwarranted submission of tax payers to the whims and fancies of the assessing officers. The proposed regime must attempt to automate the interface between the tax payer and department at most levels excepting the senior adjudication procedures. This will significantly lessen the compliance costs of most small and medium tax payers and also relieve the department of valuable administrative resources.

Other issues which the current reforms should seek to solve include the complexities involved in equity aimed compounding (of taxes and penalty) scheme, settlement commission, inadequate penal threats, high discretion in approving duty drawbacks, rebates and refunds etc .