The GST Council had adopted the revised model GST laws in its 12th meeting. An important retro-fitting that has been made by it in the original proposed GST laws, is the concept of residence in determining the place of provision of supply of goods, vide Section 7(3)*.This amendment introduces the idea of residence in to taxation of goods which so far has been used in the taxation of income and of late in service tax, and throws up the question as to how is this principle as put in the proposed GST laws compatible with healthy inter-state relations and is within the interests of cooperative federalism. This paper attempts to elaborate the significance of the provisions of the proposed GST laws on inter-state relations in India.
The proposed GST law is an exercise in unifying the country for purpose of taxation on goods and service throughout India but it has been rightly identified as a major challenge for cooperative federalism. The first challenge to the Union came when the Parliament enacted the forty sixth amendment of the Constitution of India after which States agreed to follow a central enactment, the Central Sales Tax Act, for intra-state movement of goods and to make a revenue sacrifice on outbound goods sold outside the state. The States continued to exercise full control on the goods being exported as well as those which imported in to their territory. The proposed GST law has introduced a new element in the taxation system of the country, in which consumption of goods, and of course services, would be made in one state while the tax paid on it would be credited to another state.
GST Council proposes to get collection of IGST, viz. GST on inter-state transfers, done by the State Tax Administration in a substantial way. The law and the administrative system can reasonably be expected to face a serious challenge from aspect of human behaviour of the nearly forty tax organizations which would be enforcing GST at the same time. The assessment of goods or service in an inter-state transaction (i.e. where goods are transported to another state), will have no revenue interest in the state from where supplies are made, as the tax collected from the assessee would accrue to another state. If Government as a precautionary measure decides to give assessment of such supply of goods to the state where they are consumed, the effective control over the supplier-assessee will remain with the states where the supplier is geographically located. The officers and possibly the tax administration of the supplying state itself, may see greater commonality of interest with the supplier of the goods rather than the revenue of a different state, for one compelling reason that the supplier contributes to the economy of that territory and would have political influence. This can lead to a lax tax control over the supplier and would encourage corruption. Alternatively it may cause the tax administration to persuade the assessee to make use of section 7(3) so that supplies to entities outside the state are rendered in to an intra-state one. In all probability, after establishment of GST, one can expect a trend where consumers in a state will try to source their purchases from another state provided the transport factor is not prohibitive. Under any circumstance, States Tax officers, in their drive to augment revenue, would try to discourage inter-state transactions so as to bring tax money to their state treasury even where consumption clearly takes place in a different state. These are very conspicuous ingredients in the proposed law which will put cooperative federalism to trial after GST on goods is introduced in the form as has been proposed.
The comments made in paragraph above in relation to supply of goods could have been dittoed for services too but for a very critical difference. Whereas the locality of the supply of goods is easily determined by noting the geographical location where the final delivery is made of a three dimensional object, supply of service gives no such comfort. The place of delivery of goods is always documented in transport documents such as delivery challan or way bill or railway receipt. The place of supply of service has no fixed geography and is always a subject of interpretation. The GST law has created a default clause by which the residence of the service receiver would be treated as place of supply of service. This provision has presumably been made clear in view of the disputes that were faced in relation to Service Tax on the issue of residence of receiver of service as against source of the base of taxation. Multi-national marketing activities on the Indian soil are not being service taxed as the residence of service consumer is taken to be a foreign territory, which to the common observer appears anomalous as all the persons in the transaction act in India. This interpretation will be formally instituted in the proposed GST. It follows that the subterfuge of creating a place of supply of choice (at instance of the Supplier State or the supplier or for whatever reason) will be available to all transaction in services except those few that are specifically excluded in the proposed law. Since it is possible to create a residence anywhere in India by any business entity, they may do so to suit their business or the tax collection interests of any particular state to which the parties to transaction are beholden, which would normally be the state where the supplier has most stake. The principle of taxation which says that place of consumption should determine which tax authority will gain jurisdiction to collect tax on the transaction, will be like kernel emptied of any potent matter and infected with germs of vested interests. Cooperative federalism will face severe challenges in this form which GST Council has proposed.
Indirect taxes on goods in India have so far been free from challenges to territorial jurisdiction of an tax administrations as taxing powers has not been dependent on any action that actors in the transaction of the taxing event may undertake. The determinant of jurisdiction has always been a verifiable evidence and which cannot be changed by making interpretations. In levy of customs duty the event is entry of goods in to India, something which cannot be altered by any person. The Import General Manifest of vessel or aircraft is concrete proof of entry. In central excise the point of taxation is the physical removal of goods from factory gate which again is verifiable by evidence. Similarly in VAT the addresses on the consignment note determines which State gets to tax VAT on the transaction and this can be counter checked by locating the goods. These enactment do not provide much room for interpretation to shift positions and a simple factual determination lays to rest any controversy about which tax authority would have territorial jurisdiction to levy taxes on the goods. This comfort was lost in the levy of Service Tax but even within Service Tax, the impact of variableness of jurisdiction was limited to transactions between an Indian entity and a foreign entity. Interstate transactions within India were not affected as Central Government had territorial jurisdiction over entire territory of India. GST brings a wild dose of variableness in tax jurisdiction as theoretically each State or UT may claim jurisdiction over a simple transaction of supply of goods or service no matter who consigned it and from where. The proposed GST will throw up hundreds of opportunities in which cooperative federalism will be put to severe test at the ground level.
The very idea that residence of a tax payer determines the tax administration which will exercise jurisdiction over him has imperial roots. Bret Wells and Cym H. Lowell have traced the origins of the principle of residence in their paper “Income Tax Treaty Policy in the 21st Century: Residence v. Source”* to negotiations of Colonial powers who were concerned with the manner of distribution of profits between Imperial and Colonial countries. The British insisted that profit should be transferred to the Imperial country because the British Managing agencies operating mainly in India were registered in United Kingdom and therefore the verbiage was born that these companies were resident in UK. The concept went through a course of convoluted evolution and presently it is cased in the OECD notion of residence in which residuary income gets allocated to the country of residence. It would not have entered in to the wildest imagination of the framers of the concept of residence as creating jurisdiction to tax that after some time their own resident companies would find ways to shift profits to no-tax states (ex-colonies) by opening offices and registering companies in these tax havens. Base erosion is a serious fight in International Taxation though the wrangle is about the residual income not the entire income because the OECD model allows source countries to hold back tax on certain elements of profit. In GST laws, if a State, where consumption takes place, would feel aggrieved that under the principle of consumption as denoting place of provision it alone was entitled to tax a particular transaction which they would coin as interstate. In such a case they will conclude that their entire tax base has been eroded by borrowing a principle from Income Tax laws; a principle which was evolved to resolve distribution of profit between Imperial and Colonial countries and not devised for use in formulating fiscal policies of independent democracies.
There are major fault lines in the existing GST proposed law which may cause tremors in Inter-State relations. It is an old adage that good fences make good neighbours but the current form of GST makes the fence non-existent. The principle of residence in taxation turns jurisdiction in to a subject of interpretation and it subverts the basic principle that the place of consumption of goods or service should decide the territorial jurisdiction to impose GST on supply. Interstate disputes today have been confined to distribution of a few rivers; GST in the form being introduced will open the flood gates to sharp disputes on jurisdiction prudence dictates and inter-state rivalry for tax revenue. The Union Government needs to act wisely like a Mother to her competing daughters and arrange the collection in a way that maintains harmony in the family. The GST as proposed needs a bold review before they are placed as bills in the Parliament.
* Section 7 (3) of IGST reads as follows:-
‘(3) Where the goods are delivered by the supplier to a recipient or any other person, on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person.’