Five Mantras to help a GST regime achieve its objectives
“Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings to the public treasury of the state” wrote Adam Smith in The Wealth of Nations (Book V, Chapter II, Part II).Taxes are a critical component of any government’s revenue. Hence, the rates and collection mechanisms must be judicious so that taxpayers are not overburdened. That alone will ensure improved tax collections- which is one of the avowed objectives of the transition to a GST regime.
The five mantras that are critical to implementing an effective GST regime are: Authenticity, Administrability, Acceptability, Adaptability and Accountability.
For any indirect tax incidence, the starting point is the manufacture or production followed by sale of the manufactured goods or the provision of taxable service. . The tax on manufacture or the provision of service is within the purview of the Centre while tax on sale of goods is administered by States. The revenue generating event for the Centre is therefore manufacture or rendering of service. Both the terms “manufacture” and “ taxable service” do not have a clear-cut understanding despite the definitions given in Section 2(f) of the Central Excise Act 1944, the notes on the activity contained in the relevant chapter to the Central Excise Tariff and the Finance Act. Section 2(f) defines manufacture to include any process incidental or ancillary to the completion of a manufactured product. It is pertinent that the term “process” has not been defined under the Act.
Several cases help in understanding the issues that have been arising on the concept of manufacture. These include UOI v. Delhi Cloth Mills 1977 (1) ELT (J 199), M/s Ujagar Prints and Others v. UOI and Others 1988 (38) ELT 535, Deputy Commissioner of Sales Tax, Ernakulum v. Pio Food Packers 1980 (6) ELT 343, Hawkins Cookers Ltd. V/s Collector- 1997 ELT 507 S.C, Crane Betelnut Powder Works v. CCE, Tirupati 2007 (210) ELT 171 (SC), Kesarwani Zarda Bhandar v State of U.P, 2008 and recently, Grasim Industries Ltd. v Union of India 2011 (273) ELT (273) ELT 10 (SC).
In all these cases, the Apex Court has held that “Manufacture implies a change, but every change is not manufacture and yet every change of an article is to be the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; of a new and different article must emerge having a distinctive name, character or use”. This suggests that not all the processes amount to manufacture. Here again, observations made in cases such as CCEx. V. Mahavir Aluminium Ltd. (2007) 212 ELT 3(SC), A.P. Products v. State of AP (2007) 214 ELT 485 (SC), Indian Cine Agencies v. CIT (2009) 233 ELT 8 (SC), Fedders Lloyd Corporation v. CCEx., Mumbai, 2007 (221) ELT 3 (SC) and board circulars issued do bring clarity on the thin line of distinction between “processes amounting to manufacture” and “processes which do not amount to manufacture”.
In the overall analysis, differences in understanding of the term “manufacture” leads to conflicts related to availment of input credit, refunds, tariff classification, misleading information, misrepresentation etc and result in appeals. While it is agreed that GST alone may not be able to eliminate these conceptual challenges, a conscious attempt to incorporate the the five mantras into the spirit and letter of the GST regime would possibly make for smooth functioning and a more collaborative and open relationship between revenue and tax-payers. Here’s our view of the five mantras.
The first mantra is Authenticity. The rules of interpretation have to be applied in the most judicious manner. Assessees and the revenue must be on the same page in terms of interpretation. The documents relied upon by the assessees should authenticate the interpretation and shall be beyond doubt.
The second mantra is Administrability. The twin administrators- States and Centre- shall be technically capable and trained adequately so that they relate the assesse’s business to the laws in the form as they would read. It is extremely important for Law Practioners to equip themselves to untie the Assessee-Revenue knot on understanding of the term “Manufacture” under Excise laws.
The third mantra is Acceptability. Once certainty and clarity are available on any issue, they tend to become acceptable to both the parties- the challenge is often inconsistent interpretation. This requires that the spirit of the law be unambiguously aligned with the letter.
The fourth mantra is Adaptability, which suggests absence of rigidity. A minor technical lapse that might not lead to any loss of revenue to the Government must be viewed liberally. This will enhance a healthy business environment where trust between assesses and revenue is built. Also, as business models evolve, the rules may need to be adapted so that they remain consonant with the afore-mentioned mantras.
Even if all the preceding mantras are in place, the GST regime will not be sustainable in the absence of accountability, which is the last of our five mantras. Accountability must rest with both assessees as well as revenue. Without a doubt, assessees indulging in wrongdoing must be brought to book. But equally, officials responsible for assessment and verification must also be held accountable for inconsistent application of rules. For example, it has happened that an assessee who is engaged in the same line of activity and over a period of time, follows the same method of availment of input credit is suddenly questioned on aspects that have remained unchanged for many years. In an accountable regime, we would suggest that the jurisdictional officers who are in charge of the assessee’s accounts be asked to explain their findings so that the assessee is aware of why something that was seemingly OK for several years, is suddenly no longer OK. .
Clearly drafted tax laws and their judicious enforcement will boost confidence and increase buoyancy of tax revenue. It will reduce the temptation to evade taxes and thus reduce the probability of a thriving parallel economy. In the absence of a GST regime that is underpinned by the five mantras mentioned above, the mere shift to a GST regime will not achieve its goals; it may well turn out to be old wine in a new bottle.