1) First of all, the discussion paper on GST in India, released by the Empowered Committee of State Finance Ministers on 10th November, 2009 turned out to be the ‘First Discussion Paper’ only and not the ‘White Paper’. In fact, during the last two months. Dr. Dasgupta had repeatedly said that the Central Government will come out with a White Paper stating the details in respect of the proposed GST in a short time. But that did not happen. Therefore, Shri Saurabh Patel, the Finance Minister for the State of Gujarat, has clearly stated that the Gujarat Government gives its consent for the Gujarat GST but not for its implementation in hurry. Unless the issues like the structure of tax rates and the items to be covered under the proposed GST along with several other important issues are thread bare discussed and finalized it will create lot of confusion and unwarranted controversy among all concerned. For example, at present there is no levy of VAT on Sugar and Cloth.What will be its position under the proposed GST legislation ? Whether GST will be imposed on cereals like wheat, rice, dal and other allied items ? Not only the State of Gujarat, but even the Congress ruled State of Hariana, and other States like Punjab, Zarkhand, Chhatisgadh and Madhya Pradesh have also raised several issues pertaining to the levy of proposed GST on various important products of the respective States and its far reaching effect on the trade and industry of the relevant States. Further, the DMK ruled State of Tamilnadu has also objected on the ground that it has not yet received the compensation for the loss of revenue from the Central Government, though promised, for implementation of VAT in the State. Till that is paid the expected date of 1-04-2010 for implementation of the proposed GST is objected by the said State. In the past few months, negotiations among States have run into difficulties as regards decision on a common threshold for exemption from tax, list of goods to be exempted from tax, rate of tax and such other issues. The Union FM, Pranab Mukherjee, has said that the above referred ‘First Discussion Paper’ is a baby of the Empowered Committee and the Centre will carefully consider the proposals and suggestions made therein, by making a deep and minute studies of the same. Therefore, the target date of implementation of proposed GST with effect from 1st April, 2010 is likely to be not possible and as such the GST rollout is going to be delayed by one year or so.

2) Further, a director of ‘National Institute of Public Finance and Policy’, Mr. Govind Rao, who is also a member of the economic advisory Committee to the Prime Minister Manmohan Singh, has also by his letter to the PM, recommended to go slow in the matter of implementation of the proposed GST on the ground that it requires constitutional amendments and many other administrative things to be considered.

3) In the present federal system of Government, where the various States and the Central Government have been endowed with mutually exclusive taxation privileges, it is difficult to embark on unified taxation system of the proposed GST, without consensus by all concerned, on various important issues like; (i) Taxes to be subsumed in GST, (ii) Rates of tax, (iii) List of exempt goods, (iv) Rules for availing of Input Tax Credit and (v) Sharing of tax between Central and State Governments etc. In addition to that, some consequential constitutional amendments are also required to be made for, (i) Levy of tax by State Governments on services, (ii) Levy of tax on imports, (iii) Levy of GST concurrently on same goods and services by Central and State Governments and (iv) Levy of GST by Central Government on transactions under the domain of State Governments and vice versa. Apart from that, administrative and procedural issues at Central and State level for administering new law and withdrawal of the present legislations are also required to be considered. Not only that, various problems associated with on-going transactions of sale of goods and services are also required to be solved with consensus of all concerned.

4) In fact, other than the concept of integrated goods and service tax (IGST) for interstate transactions, the paper offers very little- no mention of classification of goods or an exempted list, no plan for phase out of exemptions, no measures to prevent deviation by States from agreed rates, no monitoring machinery, no mechanism for settling disputes and so on. The paper has only reiterated what we knew, that there will be a central GST (CGST) and a state GST (SGST). And that on goods, there will be four rates at the State level- a 0 % for exempt goods, a nominal rate (perhaps 1 %) for precious metals, a concessional rate for goods of basic importance, and a standard rate. The paper has also proposed that States continue the exempted items list they have under value added tax (VAT) at least in the initial years. Effectively then, the SGST will be the current VAT with a new nomenclature. For services, the discussion paper has proposed a single rate. The GST structure at the Centre is yet to be known. The Centre will perhaps make its mind known after the Thirteenth Finance Commission, chaired by Vijay Kelkar, comes out with its recommendation on GST. No one disputes the compulsion driving a dual GST structure, although a single GST would have been ideal. India’s Constitution allows fiscal federalism, and asking States to give up their power to levy taxes is impossible. However, given the experience with the implementation of VAT, a smooth rollout of GST will be challenging.

5) With the release of this First Discussion Paper and the Annexure on Frequently Asked Questions and Answers on GST, interaction with the representatives of industry, trade and agriculture has begin at the national level, and simultaneously at the State levels. Similarly awareness campaign for common consumers has also been initiated. As a part of the discussion and campaign, the views of the industry, trade and agriculture as well as consumers are also being sought by the Empowered Committee in a structured and time bound manner.

6) Therefore, in view of the above, it is absolutely necessary to discuss thread bare and in details, the various issues raised by the different States, pertaining to the proposed GST and the date of its implementation. Further, it is also equally necessary to consider carefully, the suggestions that may be received from the various business organizations like, Indian Merchants’ Chamber (IMC), Federation of Associations of Maharashtra (FAM), and the All India Business Council (AIBC), which are like a federation of various business organizations of Mumbai, India, AND the institutions of tax practitioners like, The Institute of Chartered Accountants of India (ICAI), BCA, and The Sales Tax Practitioners’ Association of Maharashtra (STPAM) which is an Association having STPs, CAs and Advocates, all the three categories of professionals together, as its members, pertaining to the proposed GST. There is no need of making hurry in this important matter and all concerned should also make sure of required constitutional amendments and proper administrative system to be adopted in the matter, as the proposed GST is likely to subsume the following major taxes under one taxation system to enhance the process of tax reform. Viz:

State taxes like:

(i) VAT/Sales tax
(ii) Entry Tax not in lieu of Octroi
(iii) Luxury Tax
(iv) Vehicle Tax
(v) Duties on electricity
(vi) Entertainment Tax,
(vii) Taxes on goods and passengers and
(viii) Tax on Lottery, betting and gambling etc.

Central taxes like:

(i) Central Excise Duty
(ii) Additional Excise Duty
(iii) Additional and Special Additional duty of Customs
(iv) Service Tax
(v) Central Cesses except Education Cess
(vi) Central Surcharges and
(vii) Central Sales Tax (CST) etc.

7) In past, all the States had their different local Sales-tax law/s according to their respective revenue needs and the requirements of their trade and industry. There were different declaration Forms, prescribed for total exemption from levy of Sales Tax and/or for levy of Sales Tax at the reduced rate, on particular sale transaction/s. For this type of concessions, in the State of Maharashtra, we had prescribed declaration Form No.14, 15, 16, and 17 etc. In absence of issue of the said declaration Form/s, we also had the provision for granting set-off of taxes paid in respect of taxes paid on raw materials used in the manufacture of taxable goods for sale, and also in respect of Inter State sales as well as on sales resulting into export of goods/export sales etc. When the old Sales-tax law was replaced by the Value Added Tax System (VAT) in the year 2005, the provisions for these declaration Forms, which gave rise to bogus claims by dealers in many cases, by producing bogus declaration Forms, and also consequent rise in corruption, for allowing such bogus claims by the assessing officers, were abolished. It is therefore, a welcome step taken by the Government while replacing the old Sales Tax legislation by the present VAT system legislation and it is good that such declaration Forms are not provided in the proposed GST legislation also.

8) Now, when the proposed GST is to replace the present VAT system, I would like to suggest that the proposed provision made therein, for giving credit for taxes paid on inputs, by a continuous chain of set-off from the original producer’s point and service provider’s point up to the retailer’s level, which will give birth to fake dealers, rise to production of bogus bills and consequent rise to bogus claims, for credit of taxes paid on inputs (ITC) by the dealers, should be given go by. This will enable the States to keep the GST tax rate very low, say ranging from 1/4th % to a maximum of about three or four per cent on every transaction of sales/supply of goods and services. This will also enable the Government, to eliminate the complex verification of all voluminous purchase/s and service/s bills and vouchers, including relevant debit and/or credit notes that may have been issued, pertaining to the purchases, sales and services by the dealers, in order to determine and/or to certify the correctness of the claim/s, of set-off of the taxes paid on inputs (ITC) by the dealers, by submitting audit report, to be prepared by a Chartered Accountant, in prescribed Form, like present voluminous Form No.704, running into about 74 pages under the VAT System, for the simple reason that no credit for taxes paid on inputs will be required to be given to the dealers. Consequently, no manipulation by production of any bogus purchase and/or supply of goods and services bills by dealers and no need for them to pay premium/higher fees to auditor/s for giving unqualified audit report. No need for paying any corruption money to the assessing officer/s, as the main root cause, giving rise to corruption while granting credit of taxes paid on inputs (ITC) will not remain. This will certainly simplify tax administration and compliance, by eliminating distortions and complexities associated with the present VAT system and the proposed GST legislation on similar system, which provides granting of set-off/credit for taxes paid on inputs (ITC).

9) At present, from the media reports, it is learnt that bogus and/or wrongful claims for set off/ credit of taxes paid on inputs are being made by many dealers and only few of them are caught in making such bogus claims. This, not only results in huge loss of revenue but it also amounts to wrongful withdrawal of money by dishonest dealers, from the Government exchequer. Further, the tax rate being high, say of 12.5% and even more in the proposed GST, many dealers will be tempted to do wrong, because the percentage of profit margin on wholesale and retail business transaction/s may be even less than the percentage of tax to be charged on such transaction/s. Even consumers in retail market will not be willing to pay such a high rate of tax of say 12.5% and above, and consequently in order to keep the business survive, in competition with other black sheep in the market, who issue fake sale bills or do not issue sale bill/s, the honest dealers will also be tempted to do wrong. Therefore, the best way is to keep the tax rate very low on each transaction, ranging from 1/4th % to about 3 or 4 per cent only, and to do away with the proposed provision of giving credit of taxes paid on inputs (ITC), to achieve the desired goal of simplicity and also to collect more revenue, like a honey bee softly collecting honey from flowers, by making the consumer feel that he is paying only a pittance of tax under the GST legislation, at the same time, the revenue collection will be the same or even a little more than the expected collection of tax by the Central and the State Governments. Further, it will not have any undesired adverse cascading effect. Let us understand the same by the illustration shown below:-

(i) Let us presume that the GST rate of tax is 10% on sale and for input tax credit.
(ii) Value added owing to process made on goods and/or profit margin of the dealer.

In the above illustration, if the tax rate of GST is kept low, instead of 10% say at 2½ % only, and no input tax credit is given as suggested above, the revenue collection will be Rs.2.5 x 3 = Rs.7.5 instead of Rs.7/- only i.e. more by ½ % which means a little more revenue. At the same time, the dealer and/or consumer will feel comfortable by paying only 2 ½ % GST instead of paying 10 % GST and there will be no temptation to do wrong by not issuing sale bill/s or by issuing fake/bogus and unaccounted sale bill/s. Further, there will be better tax compliance and no chance of revenue loss, on account of giving wrongful inputs tax credit and/or inputs tax credit in respect of bogus bills. Consequently, there will be no need to have complex audit provision and comprehensive audit report. The tax return/s will be simple in real sense. The dealers will be happy as they will be free from worry of proving their inputs tax credit claims. In case of rejection of any input/s tax credit claim/s on any technical ground, the dealer may have to suffer a heavy loss instead of making a reasonable profit, and that may be the funeral of his honesty. This will give birth to corruption. My above suggestion may amount to multiple tax system but if that is found beneficial to us as stated above, we should introduce the same and discard the proposal for VAT type GST legislation. Though VAT type tax system is introduced in more than 150 countries, including several federal countries, as stated in the First Discussion Paper by the Empowered Committee, it may be seriously noted that the same is not introduced and/or adopted by the country like U.S.A. Therefore, we need not be like sheep to go in a herd, by blindly following the pattern of GST introduced by other countries. In fact, our Maharashtra Government should have courage enough to come forward to subsume levy of Octroi under the proposed GST legislation. It is well known that the levy of Octroi is the major and real impediment in making progress by industry, trade, commerce, agriculture etc., and for its removal various representations have been made by the people, time and again, to the State authorities concerned but in vain. I need not enumerate the evils of levy of Octroi by the State Government but I hereby make a very strong appeal for its removal by subsuming the same under the proposed GST legislature, for the benefit of the economy of the nation as a whole.

10) The above system is also to be followed in case of Inter State Transaction. The tax rate should be low and no credit for taxes paid on inputs and/or of local taxes paid by the dealer is to be given. Provision for declaration in ‘C’ Form, or ‘D’ Form etc. should then be abolished. In short, GST is to be levied on all taxable supply of goods and services, but at a lower rate of tax, without making provision of giving credit for taxes paid on inputs and/or of local taxes paid by the dealer. This will in real sense simplify the entire system of GST and there will be no loss of revenue and level of corruption will be reduced to a great extent.The dealers will find easy to be honest and the consumers will also insist on sale / service bills, as they will be paying only a small amount of tax with a smile. Further, the dealers will be able to do business without requiring to keep, maintain and preserve for a long time, the details of taxes paid on inputs and without bothering to know as to how much credit of taxes paid on inputs will be available to them, under the complex rules and procedures that may be prescribed under the proposed GST legislation by the Central and the State Governments, under the proposed Central GST (CGST), the State GST (SGST) and also under the IGST. No headache to check and cross check each and every bill/s for purchases of goods and services to ascertain the genuineness and/or correctness of inputs tax credit claims that may have been made by the dealers.

11) No Purchase-tax on any type of purchases, like URD, OMS, Interstate, Import etc. Simple and a single GST to be levied on every transaction of supply of goods and services but at a very low rate of tax, without giving any inputs tax credit, as suggested above.
12) In the system suggested above, the assessment of GST payable by dealers will be very simple. For example, say a dealer is dealing in motor parts and the rate of GST on sales/supply of motor parts is 3%. If the turnover of sales of the dealer is rupees one crore, then the GST liability will be rupees three lakhs only. There being no provision for giving inputs tax credit (ITC), simply check that whether the dealer has paid the GST of rupees three lakhs, in the prescribed time limit along with the return/s periodically or not? If not, levy prescribed interest/penalty accordingly and the assessment is over. The dealer will be required to maintain only purchases and sales/services register and in certain cases quantity stock record register, in order to justify/verify the correctness of the turnover of sales/supply of goods and services, disclosed by the dealer/s in the GST returns filed periodically. That is all. No need to have comprehensive audit report in Form-704 etc. as no inputs tax credit is required to be given. At the same time there will be no adverse cascading effect of taxes, as the ultimate tax burden will be the same, as shown in the illustration above. The total revenue that may be received by the State Governments on the proposed single GST as above, should be shared on certain percentage basis by and between the Central and the State Governments, instead of having levy of three different types of taxes viz. (i) SGST, (ii) CGST and (iii) IGST and providing the chain of inputs tax credit, resulting into revenue loss, corruption, administrative difficulties and untold hardship to the dealers in keeping, maintaining and preserving comprehensive records for a long time, in order to get the claim of inputs tax credit, as stated in details hereinabove. At the end of every financial year, after considering the revenue loss or gain made by the State Governments, the percentage of sharing the total revenue collection from the proposed single GST by and between the Central and the State Governments may be suitably revised. Even the rate of tax can be revised suitably by all the State Governments simultaneously, on certain commodities after considering the GST collection every year, without giving chance of so called “rate war” to the State Governments.

13) In any case, exercise of drafting of suitable legislations for the proposed levy of three taxes viz. SGST, CGST and IGST, together with rules and procedures for the same, having the provision for chain of inputs tax credit (ITC), need not be done by the Working Group, as the same will certainly result in a havoc to all concerned as stated in details hereinabove. The Empowered Committee is therefore hereby requested to kindly consider the suggestions made hereinabove, mainly to discard the provision of giving inputs tax credits (ITC) and to have only single GST, with low rate of tax, and instruct the Working Group to work on that line to draft a suitable single GST legislation accordingly.

14) The Central and all the 35 State Governments should consider the above important suggestions to achieve the goal of real simplification, and also to eradicate the main root cause of corruption. Further, let there be consensus among all the State Governments in policy matters also. Under the present VAT system legislation, as per the unfair policy adopted by the Maharashtra Government, only Chartered Accountants are entitled to sign the prescribed audit report (in fact it is only verification of bills/and tax records) in Form-704 and consequently some of the junior CAs are tempted to lend their names by signing such report. Whereas the State of Gujarat and three other States viz. (i) Andhra Pradesh (ii) Jharkhand and (iii) Karnataka have adopted the fair policy of allowing all the three categories of professionals namely, CAs, Advocates and the STPs to sign such report. However, if the above suggestions are considered and accepted by the Governments there will be no need for such complex audit and/or audit report as there will remain only simple verification of purchases, sales and services and not the complex task of ascertaining the allowable tax credit for the taxes paid on inputs in respect of sales of taxable goods and services and as such the Maharashtra Government will have no difficulty to adopt the policy like that of Gujarat Government in this matter, in fairness to all concerned.