By Mukesh Butani & Tarun Jain

The adage “old is gold” is not necessarily true, and has exceptions. The same applies to the pre-GST indirect tax landscape of India. The long-queues of trucks at state-borders (with entry upon cascading and exorbitant entry taxes), the rampant tax evasion on inter-state characterisation of local sales, etc, and the incoherent and localised VAT policy, with cascading effect, rate-wars between states, etc, many ills marked the past. Hence, GST is a shining example of the present being better than the past. Having said that, the foundations of a bright future do not rise on a stand-still present. In fact, more work is required, over the hard work already done. Unfortunately, time is not on the side of the policymakers. The expected buoyancy of GST collections is yet to be achieved, many distortionary taxes (like stamp duties and those on petroleum, electricity, stamp duties) continue. The clock is ticking, and it is now less than a year before the true contours of cooperative federalism, the idea on which GST is based, begin to get perceived. Some policy issues are identified here as requiring urgent action.

From July 1, 2022, states will be on their own, the cushion of GST compensation lapsing, given that there is no formal acceptance by the Centre—much less an amendment in law—to extend compensation timelines. This is a far cry from last year’s scenario, the entitlement with which the states cajoled the Centre to borrow on its own and compensate the states for Covid-led economic diminution. It is an open secret that the underlying objective of the five-year compensation window (allowing states to conclude capacity-building, officer-training, and other initiatives) has not materialided into self-sustaining economic realities for most states. Why should it be a national concern if some states have chosen to ignore investments in capacity-building? The answer is clear. Vertical inequities amongst states result in dehyphenated policy-solutions with local issues superseding national developmental goals. Lop-sided and disjointed state interests imply a divided house, which is likely to result in frequent deadlocks in the GST Council. This will threaten the ability of this constitutional body to work. That GST Council should take immediate stock of such harsh realities can’t, thus, be overemphasised.

This requires conceptualising and implementing macro-economic solutions to bridge the economic divide amongst states. However, that alone would not be enough. The GST Council can’t rule out the possibility of a hung house. So far, it has worked with Group of Ministers (GoMs) to address differences among states. Whether it be the impasse on sugar cess, flood cess, or other issues, GoMs have performed satisfactorily. However, one cannot ignore the salient effect of the Centre compensating the states. With no such cushion around, disagreements with the states or their overt refusal to heed GST Council recommendations may turn out beyond the influence of Union finance minister’s office. An external intervention hinges upon guidelines for adjudication mechanism to address disputes amongst GST Council members owing to the constitutional stipulation for adjudication as the dispute resolution mechanism. It would be prudent for the Council to evolve the rules for adjudication in time, lest a solution on resolving disputes itself becomes dispute-ridden. It is notable that in absence of pre-defined adjudication mechanism, all political disputes may have to be tried as judicial ones by the constitutional courts.

Entrusting relatively junior officers with the responsibility to quell doubts of taxpayers does not appear to have yielded dividends for the GST Authority for Advance Ruling (AAR), a mechanism which was expected to impart certainty and obviate disputes. Even a two-tier machinery, with appeals against AAR being heard by senior tax officers, was found wanting in its objective of resolving inadequacies of AAR rulings. This led to creation of a third-institution—National Appellate Authority—to hear disputes arising from ‘conflicting advance rulings’. As on date, however, this forum is dysfunctional, with members yet to be appointed. Even otherwise, in most cases, the quality of AAR rulings has not been inspiring for taxpayers, often inviting interjection of the High Courts. There is urgent need for policy-makers to take stock. An ideal solution would be to replace the three-tier system with a single-tier AAR, like the ones recently-introduced for income tax and customs laws, with very senior officials determining request for advance ruling and working under appellate supervision of the High Courts.

GST tribunals have become a ping-pong in the apparent ego-clash between policy and law. Having to bear the brunt of adjudication owing to lack of tribunals, the Allahabad High Court and other High Courts have directed the policy-makers to urgently operationalise these. Almost parallelly, the Madras High Court quashed the legal provisions relating to the tribunal, highlighting lack of independence of its members owing to restricted qualification of members. The GST Council has not yet acted on the judicial opinion. As a result, there is not a single GST tribunal despite rise in GST disputes, especially those arising from refund claims and goods-confiscation. A recent guidance of the Supreme Court in the context of tribunals seems to vindicate the Madras High Court’s observations. Thus, this can brook no further delay, even by pleading that the matter is sub-judice. Being without tribunals implies locking precious tax revenue in litigation, which is self-defeating for GST reform. Piling tax refund claims and resorting to criminal law measures for recovery with breakdown in adjudication mechanism needs urgent intervention and an overhaul.

There is no room for procrastination. Covid-induced lockdown can influence tax collection, but should not be a reason for policy-inactivity. One would hope that the mechanism to seek resolution is put in place well in time to avoid disputes reaching unmanageable levels.

The authors are Partners, BMR Legal
Views are personal