Fundamental Reforms in GST Law Amendments- Budget 2021?

28-12-2020 CA Madhukar N Hiregange

The retrospective amendments and their impact on the certainty of tax laws is one major factor for attracting investments to India. This was highlighted in the Vodafone Issue where Rs.22 thousand crores demand by the Income tax department was held to be inequitable unfair as per the DTAT as held by the International court. This has again happened now in the recent Cairn’s issue where the international courts have not favoured retrospective practice and awarded Rs.740 crores.  

The practice of registering oneself in tax havens while doing no business there while operating and earning in different countries provides an undue advantage to such MNCs when the shares get transferred. The gains by structuring the transfer of shares without payment of taxes in the Country where the gains accrued is not reasonable or fair. It also does not provide a level playing field to the entities within India. Tax planning within the framework of law is permissible even if gives illogical results. What is needed is a balanced approach while drafting the law. This means that before any important amendment is made, it needs to be vetted by an independent panel comprising reformist minded knowledgeable permanent group whose patriotism and independence is not questionable. This group would focus on long term impact in law making. 

Understanding this in 2015 the election promise was – no more retrospective amendments by the present PM, FM as well as the earlier FM Arunji. Sacrificing the long term credibility of policy making in India to short term gains based on the advice of the executive appears to be the error of judgment. It has also whittled the credibility of the leaders amongst the foreign direct investors as well as those who have already invested in India hoping for fair laws. This risk would be factored in while pricing the products making them more expensive.

It has been observed over the last 2 decades that the tax administrators views are becoming the defacto law and not the Legislature. The Courts have also appearing to follow the rule that policy even if unreasonable is the prerogative of the law makers. However, when the tax administrators take all issues to the Supreme Court and encourage retrospective amendments- the law becomes uncertain and cannot be relied upon by the wealth creators of the nation. It is not at all fair that the one who risks is rewarded with uncertainty. The 3 pillar of democracy the law makers, the court and the executive be made clearly separate. The interest of the wealth creators is given due importance.

This requires the following fundamental changes in my view:

  1. Legislature not to delegate its powers to the executive. In GST there is excessive delegation.
    1. The council’s role is highly derogated – issues such as extent of ITC, the material conditions etc. instead of being discussed at council level are introduced through backdoor of role making power
    2. The executive functions are not monitored – e.g. under rule 117 (1A) the power to extend dates for TRAN-1 form is to be recommended by the Commissioner on recommendation of council – however many cases are not even getting reported to council and commissioner is taking arbitrary action – there is no monitoring of how many applications are accepted/ rejected etc.
  2. Every law to build in anteriority with sufficient exposure to the industry/ trade and only after their inputs be promulgated.
  3. Tax administrator’s role would be to implement these laws fairly ( barred from extending the law by way of executive instructions/ circulars) and not kill the golden goose- i.e the entrepreneurs/ investors confidence.
  4. The Courts to be totally independent. The Tribunal concept under the GST Law suffers from the fundamental flow, such that the presiding (technical) officers are usually representatives of the revenue side of things and the bias is apparent. How a law is formulated with such apparent bias, is a relevant question to be debated upon?
  5. Discretionary powers to be minimized – The GST law was framed within the larger framework of technology driven law, majorly to achieve the corruption free administration. However, on daily basis, numerous rules are being introduced giving wide and discretionary powers to the revenue officers. The ultimate result of discretionary power is corruption. The EWB mechanism has miserably failed and the High Courts are flooded with frivolous EWB detention orders where the mistakes are trivial and technical.
  6. No cancellation of registration – The recourse to cancellation of registration is leading denial of fundamental right to do business. The very fact that the cancellation power is bestowed upon the revenue officers shows the mediocrity in which we are heading. The cancellation power in respect of points of debate, such as anti-profiteering clause, should never have been there in the first place. The cancellation power definitely needs a radical thinking.
  7. ITC as a right – Thinking of Input Tax Credit as a concession, is the most naïve idea by the legislature and the executive. While it is undeniable that control is required over who avails ITC and to what extent, but framing of rules without determinative principles is making the rules arbitrary. First and foremost, the any rule making restriction/ prohibition on ITC should be prescribed only making a distinction between bona fide and non bona fide taxpayer.
  8. Fulfilling the promises – It’s essential for a man to fulfil his promise, but it is paramount important for a sovereign to fulfil its promise. Over the years, both the State Government and Central Government in the wake of inviting investments offered tax concessions. But when the investors acted upon such promises, the government(s) are taking a back seat, backing out of their part of the bargain. The area based exemptions are sought to be curtailed on the ground of GST – “mere implementation of GST”, sad story. This trend needs to stop, regardless of GST is there or not.
  9. Rationalization of the dispute resolution – as it stands, the remedy of any revenue action [meritorious or vague] is limited to the Commissioner (Appeals). The history shows us that more than 80% of the cases adjudicated at revenue level results in revenue’s favour, whereas out of those that goes to a higher court, results in more than 70% success for the assessee. This basically shows that the machinery is incompetent. The proper machinery is not even in place. Adding to that is the pre-deposit figure, which is substantially high [even at commissioner level]. The flawed machinery needs a revisit.
  10. Benchmarking with International VAT – the refunds under the Singapore GST regime gets processed at average time of 7 days. It is easy to say that we are miles off. Why would somebody [particularly a service provider who can work on his business by his computer only] come to India to do business, when he can do it with much more ease in Singapore? This is a classic case of non-introspection. The Indian government living in a modern age compares itself to its old-self rather than the competing nations.
  11. Converging of the regulatory laws. Different sorts of figures are invited under tax laws Income tax, GST, companies, and these figures are compared with each other and the persons are thrown a notice to reconcile the figures. It is like creating a ghost in our minds and telling us to use some stone or charm to kill it and present to the government. The converging of the reported figures should be done based on AI, the tools should be developed to figure out the differences, if any, why is the job of reconciliation is thrown back at the taxpayer, when in the first place it is the government had sought such scattered information?
  12. Bridging the knowledge gap of State GST officers – the practical experience has shown that the State GST officers are miles off in terms of both the textual and practical of the GST law. The result of which is either throwing the taxpayer off the hook or leading to emphatical revenue leakage (because the revenue could not properly produce the law). Radical change is needed in this behalf.

Holding GSTN public ally accountable – The GSTN network has number of transparency issues. Over a period of 3 years, the taxpayers have witnessed data breach, mass emails totally incorrect facts/ figures, the GSTN portal acting contrary to law, going downlink at the most absurd times etc. Amidst all these issues, no person or authority has come forward to take cognizance of such issues. The GSTN has become another of the bureaucratic department wherein no person is held accountable for the errors. Feedback at [email protected]

Article published in Tax Sutra- Link