GST: The curious case of the inspector raj
The biggest lesson that one can learn from demonetisation is the fact that the reforms are as much prone to failure as they are to full or fractional success. Such reforms can be good, bad, neutral, or all of them together.
For instance, the ostensible purpose of note ban was to crack down on black money. However, how much of it that the government has recovered so far still remains a mystery. Meanwhile, black money has certainly returned in business and political dealings.
Similarly, the GST was launched with an idea to put an end to the inspector raj in the tax administration, however, in all probability, it may do the opposite, that is, doubling the risk of the inspector raj.
Let’s see how.
Under the GST, all businesspersons have been assigned with a 15-digit GST number (GSTN), which is undoubtedly a unique experiment. In GSTN, the first two numbers belong to states, where businesspersons will be registered. The next 10 numbers are the business person’s PAN and the number after that is their registration number, while the last two are there for technical needs.
With the PAN-linked GST number, for the first time, the government has created a synergy between income tax and indirect tax administration. That means every activity of a business person registered with GST will be watched by GST authorities and the income tax department in tandem. Tax officers can ask businesspersons about their income based on their turnover and can also inquire about their businesses on the basis of their income.
A PAN-based GST looks like a fail-proof effort to check tax leakages, but there remains an inherent risk of the rising inspector raj given the reputation of tax officials in India. One just needs to walk up to the nearest tax office to check out how clean the tax administration of India is. Various transparency surveys corroborate that further.
The GST-inspector raj relationship is curious. The GST had been launched with an idea to create a one-tax authority under "one nation, one tax", precisely to keep a check on the inspector raj. However, when reaching a consensus on creating a single authority to review the tax payers’ accounts became difficult, ultimately poor tax payers were made accountable to both the Centre and state governments.
Now, the state governments will investigate and audit businesses of Rs 1.5 crore annual turnover, while those with a turnover more than that will fall under the Centre’s control.
This formula of dual oversight looks simple, but businesses which will cross this limit every year in any direction will soon find out that their tax sahibs are also being changed every year. This will create a conflict between the tax authorities of the Centre and states over jurisdiction. Businesspersons are in danger of becoming a football between central and state tax authorities.
The GST that we now have is a cumbersome structure of seven rates and dozens of classifications. It is a structure in which all the fearsome flaws of excise and VAT have been arranged in a new package. Multiple-rate system for a single product will force producers who are willing to introduce quick changes into their products to seek the blessings of inspectors. In such a scenario, having digital access would amount to nothing.
Right after the implementation of the GST, the ministry of consumer affairs threatened that hefty penalties or a jail term will be meted out to those who do not show their retail prices correctly. We salute vigilance, but the GST rules preventing profiteering give new powers to inspectors. With GST, a new machinery to check profiteering is coming into existence. The huge network of director of safeguards, special committees at Centre and states and a gargantuan structure of investigations, hearings and appeals have begun to scare businesspersons before reassuring consumers.
The GST has been created to protect government revenues at all costs. That is why its rules of settling tax disputes are frightening. It is mandatory to pay 10 per cent to 25 per cent of the tax before challenging the tax provision.
The GST Act gives draconian powers to tax mandarins to access premises, summon the assesses and search or seizure of properties. This includes specific powers to arrest if the commissioner has reasons to believe that the person has supplied goods and/or services without issuing invoice or has under-reported the description of the supply on invoice. It is important to note that the tax laws always come up with an adequate scope of discretion and GST is no exception to that.
Even though GST subsumes 17 taxes and 23 cesses, there still remain several local and state-level taxes to mock at. There are several such businesses whose one part is covered by the GST but another is under some other tax. For example, transport tax on vehicles in the states is not in GST's ambit while automobile production and sales are a part of it. Same is the case with the construction sector where GST is charged on building material and services, but the registration of land falls outside it. The multiple oversight of various taxes, including the GST, is definitely not going to reduce the agony of inspector raj for taxpayers.
As the tax hounds are yet to be unleashed, we can only pray for a controlled inspector raj.