The GST journey, a concoction of ordeal, delay,
collaboration, negotiation, federalism, and convergence has come to its
conclusion. The leg of journey that laid the foundations of GST has culminated;
and a new journey will begin on 1st July, 2017. The SURPRISE of what
it will be is over. The IDEALISM of what it should be is also concluded. With
the law in place, we are about to see the how REALISM plays out and how the
nation copes with it.
Indian laws generally present a process larger than their
purpose. Bridging that difference has been a blind spot for Indian lawmakers.
While GST is projected as One nation, One tax; is that really so? While every
taxing apparatus of every state wants its powers to tax intact, we have ended
up with a GST that in substance is – Many states, Many rates. The spread of
compliances covering dates, rates, credits, invoicing, reverse charge and
filings; one feels that along with the states, the tax payer should also be
given compensation for going through this turbulence.
Some bigger and worrisome questions seem to hover
around the following:
a. Will GST succeed in including the unorganised
sector in the tax base effectively and swiftly?
b. Will GST be able to deal with the chasm
between the capabilities of medium sized businesses to deal with over sized
compliances vs. the exposure to the risk of non compliance?
c. Will the entire chain get seamless credit of
taxes as they are meant to be? Will it not result in ‘unjust impoverishment’
considering the stringent sections such as 16(2) of IGST?
d. Will GST make supply chain more fragile,
especially for those at the end of that chain?
e. Will place of supply and time of supply
regulations not violate the principles of equity, certainty, convenience and
economy of collection?
f. Will 3 phase monthly schedule of compliances
shift energies of business towards compliance?
g. Lastly, what are the repercussions of
destination based consumption tax? Will the shift of focus from origin to
consumption dissuade production and related economic activities in states?
While GST does remain a bold attempt to unify the
multitudinous taxes that dissipate focus and energies of the nation, we have a
lot more ground to cover even after the GST rollout. While an economic and tax
union is achieved through GST, will we be able to integrate the poorest of
states into the economic benefits the richest states presently enjoy. It is
reported that three richest states are three times richer than the three
poorest states. Four richest states account for interstate trade of the
remaining twenty five states. While uniformity reduces level of differences at
an operational level, it does not necessarily bring result in real economic unity.
While we are jubilant about singularity of one indirect tax, we have some
larger concerns to face. We would not achieve much if we do not close in on the
economic unity, through massive reduction of disparities of income and wealth.
The words of C. Rajagopalachari sum it up – “you cannot achieve unity of this
country by imposing uniformity”.
One World, One Tax (Avoidance) Regime?
While most of us in India are engrossed and entangled in the
roll out of One Nation, One Tax regime, a major shift is getting concluded
globally. Nearly 100 jurisdictions will sign off on conclusions on Multilateral
Instruments (MLI). MLIs will be signed in Paris this month and will result in
‘transposing’ of BEPS projects results into more than 2000 Tax Treaties
worldwide. Upon signing the MLI, each country will apply the provisions of MLI
chosen by it into all the treaties or CTA (Covered Tax Agreements) listed by
them upon signing. MLI will result in amendment to the CTA if listed by both
countries. Of course each country will then ratify and notify those changes.
Some countries, who may not adopt MLI in toto, may only go for ‘minimum
standards’.
In the sphere of international tax, this scale of change is
unheard of, and is a huge milestone towards thwarting Base Erosion and Profit
Shifting in a concerted manner at this level. India is likely to express its
consent to be bound by the convention at the Paris meeting to be held in June
2017. The signing of international treaties being a delegated legislation, the
power to sign and implement MLI falls within the ambit of the Government and
therefore parliament approval is not required as such. The cabinet has already
given its approval last month.
Some of the likely impact will be:
a. Principal Purpose Test may well become the default
anti-abuse measure;
b. Avoidance of PE will be tackled by broadening
the definition and introduction of Specific Anti-Avoidance measures;
c. Hybrid Mismatches caused by Transparent or
Dual-resident entities will be tackled with introduction of specific rules;
d. Emphasis will be on the ‘place where the
activity is conducted’ and not just ‘rights to earn’;
e. Consistency, Certainty and Predictability will
be known only as and when MLI is implemented by
all countries;
f. A monitoring forum is set up for minimum
standards implementation;
g. Signature, ratification and implementation by
countries will be the next step and the success of the entire process will
depend on how speedily the signatories will adopt the recommended measures.
At the ministerial level conference starting from 5th June,
we can expect a silent beginning to Global Tax Turmoil. MLI will close the
highways of Treaty Shopping and shelters like Azadi Bachao Andolan1 will
no longer be freely available. On reading the text, one will realise that it
will be very difficult to differentiate between evasion, avoidance and planning
as they all could be equated on the same lines. Credible deterrence is the
theme that runs through the script of MLI and BEPS actions. One of the
paragraphs from MLI preamble reads as under:
____________________________________________________________________________________
1 Union of India vs. Azadi Bachao Andolan and
Ors – 263 ITR 706 (SC)
Noting the need to ensure that existing agreements for the
avoidance of double taxation on income are interpreted to eliminate double
taxation with respect to the taxes covered by those agreements without creating
opportunities for non-taxation or reduced taxation through tax evasion or
avoidance (including through treaty-shopping arrangements aimed at obtaining
reliefs provided in those agreements for the indirect benefit of residents of
third jurisdictions);
We can hope that the disappearing of profits or shifting of
profits to low / no tax environments where there are little/no economic
activities will not be a legitimate/legal option anymore. In a lighter vein,
various forms of ‘sandwiches’ will now officially get the status of ‘junk’
food. Some estimates foresee saving of revenue loss of $100-240 billion or 4-10%
of global tax revenues. While BEPS seemed impossible, like GST, MLI signing
could well be a milestone towards achieving that impossible goal. A Bahubali
effect of sorts!
July 2017 Annual issue on GST
The Annual issue of the BCA
Journal (July 2017) is dedicated to GST. What a coincidence it will be that the
inauguration of GST and date of Journal publication both fall on the same day
which is also the CA day. The next issue will be a rich collection of about 20
articles on GST themes. Those who wish to circulate it to clients and friends;
you may please book additional copies in advance as per the information given
in this journal.
