Nilesh Shah flags worries over GST, says quality of rates is key

Last week the The GST Council, set up to oversee the indirect tax reform, agreed on a more steeply progressive structure for goods than earlier foreseen with rates of 5, 12, 18 and 28 percent, depending on the kind of product involved. The top rate, Jaitley said, would apply to the kind of goods bought by middle-class Indians.However, the big question as to who will be the assessing authority - Centre or state -- remains unresolved. On November 24, the state finance ministers will again deliberate on dual control.Finance Minister Arun Jaitley after the GST council meet had said that one of the objects of integrating taxes is that each assessee will have to face only one assessing officer.In the latest episode of Indianomics, Hasib Drabu, Finance Minister Jammu & Kashmir (J&K), S Naren, CIO, ICICI Prudential AMC, Nilesh Shah, MD, Kotak AMC and MS Mani, Sr Director, Deloitte discuss the issue of dual control, and the worries of the financial sector regarding the GST.Drabu explains what exactly is the issue of dual control. In the course of deliberations of the empowered committee, a cut-off based on a turnover of Rs 1.5 crore was decided. Businessmen with a turnover of over Rs 1.5 crore would be jointly assessed by Center and states which is called dual control.According to Union government’s interpretation, services even below Rs 1.5 crore turnover would be overseen by the Center. And states begged to differ on this issue. He also said there is also a turf war between the different levels of bureaucracies.The financial sector is concerned about a few things.Nilesh Shah says that first concern is an absolute rate of taxation. He said financial services is the heavily taxed sector in the country.Second concern he said is related to quality of rates. He explained that in the financial sector there is fund-based transaction and fee-based activities. On fund based transactions, interest income, debited income, asset management charges are made. These are not necessarily part of GST, they are part of the income tax. Whereas, the transaction charges, processing charges, they are part of the GST. He expects that the distinction between fund managment and fee based activity is very sharp.The third concern he said is ease of doing business. There should be a robust IT system so that reconciliation of credit happens smoothly.Final concern he said will be the issue of reporting to multiple authorities.Giving assurance to the financial sector, Drabu said that there is a very robust IT sector; every single invoice will land in one place. There will be one tax authority. He reiterated that services sector will not face multiple authorites.But the key issue remains, who will assess at what level?Below is the transcript for the latest episode of Indianomics on CNBC-TV18. The guests on the show are- Haseeb Drabu, Finance Minister, J&K, S Naren, Chief Investment Officer, ICICI Pru AMC, Nilesh Shah, MD, Kotak AMC, MS Mani, Sr. Director, Deloitte.Latha: The GST Council, which is the all powerful decision making body of central and state finance ministers - today could not resolve the dual control issue with respect to service tax. What does this mean: it means they could not agree on who will assess and audit the payers of service tax. Now India is largely a service country. 60 percent of the gross domestic product (GDP) comes from services, about 33 percent of the Nifty companies are accounted for by finance companies -- they are all service providers, so, how their tax is collected is material to markets and material to the economy as well.Here\\'s how the problem was posed to me by a banker: if bank ABC were to issue a credit card in Nariman Point, which the customer swipes in Kolkata to be paid into an account of a final customer in Delhi, whom does the bank pay service tax? This is one question, there are more questions from the financial sector. Below is the verbatim transcript of the interview.Q: If you can tell us what exactly is the disagreement between the center and the states on the issue of service tax? Drabu: It is not only about service tax. The issue really started off in the course of deliberations of the empowered committee and it was called dual control. If you go back conceptually to the goods and services tax (GST), there is a central GST, a state GST and an interstate GST; there are three components to it, each independent and rated to an authority. So, you have the central GST where the central taxes are merged, the state GST where the state taxes are merged and the interstate places the central sales tax and so on. Now, the issue really is who assess audits and enforces these things. In the course of our deliberations in empowered committee, it was decided that what the states currently have in terms of VAT, they would monitor and the center would do what it monitors in terms of some excise duties and central sales tax and other things. Services was a bit ambiguous and new tax levied by the center as the central tax but it is the most buoyant source of revenues now and it hadn’t been deliberated upon and also the numbers that came from the GST Secretary at that time, they indicate that it was a small number of assesses which was going to be assessed. It was that time decided that what would happen is that you would do a cut off based on a turnover -- that Rs 1.5 crore the turnover cut off which is actually a historical figure, the VAT turnoff and below that the small traders would be assessed exclusively by the state. Tax payers above turnover of Rs 1.5 crore would be jointly assessed by center and states which is called dual control. Now, when the service numbers came and somehow there was a bit of a confusion in recording of minutes and so on and so forth, it turned out that the union government’s interpretation was that services even below Rs 1.5 crore turnover would be done by the center because they had competencies in it and states did not have competencies which the states kind of objected to and said no, we do not want to lose the buoyancies of revenue, we want to assess it and that is how it became an issue. There is also a turf war between the different levels of bureaucracies. You have a large tax administration -- at the center you have a larger tax administration than the states so each finance minister, each state and the center are trying in some ways to protect and provide for it. The solutions are that you must have optimal work for either level. Q: If I understand you right, this is not an issue of revenues because if there was a short fall for a state because it is not itself collecting that service tax, in any case the center is going to divide the revenues between the center and the states. So, this is not a revenue issue, this is only a clout issue or a turf issue as you put it. Drabu: It is an administrative turf issue. It is not a revenue issue at all. The real apprehension of some of the states is that in the back of beyond in a state you will have the central tax administration. CBEC will setup its offices, they will have people there, it may cause harassment of the small tax payer. Their contention being that the local state officers know the context, know the people, know the situation, know the language, so, it will be easier for them to do it. Now, the other complication is that within Rs 1.5 crore turnover, there is a Rs 20 lakh cap which is the exemption limit. So, that data also came in very recently, how many are excluded from it. So, it all became a confused issue and we could not arrive at a consensus today. This includes both goods and services together and there are two propositions on the table, one is that you will have a turnover based thing which is more like a horizontal cut off or you can have a vertical cut off where center and states share the assessments in the ratio of two third, one third, 66 percent, 33 percent with a larger share going to states because they have a larger setup, larger bureaucracy and geographical footprint.Q: How are you looking at the problem if you will have both state and central assessing officers?Shah: There are three concerns which we primarily have. The first thing is related with the absolute rate of taxation. Today most financial services are taxed on a service tax basis at about 15 percent. Now, if they go to 18 percent there is 3 percent increase. For example when mutual fund distributors are paid commission not only they pay full income tax but they are today paying service tax at 15 percent. Now they should go to 12 rather than to 18 because financial services is one of the heavily taxed sector in the country. So, please don\\'t put financial services in 18 percent bracket, my request to Mr Drabu will be please use your past connections in current status to put it into 12 percent bracket.The second thing is related to quality of rates. So, today in financial services we have fee based transactions and we have fund based transactions. On fund based transactions we make interest income, dividend income, asset management charges and so on and so forth. Now they are not necessarily part of the GST, they are part of the income tax whereas when we do transaction charges, processing charges they are part of the GST. So, please ensure that the distinction between fund management and fee based activity remains very sharp.The third thing is related to this ease of doing business. Today there is centralised registration. So, if I have one head office in mutual fund and 50 branches I can manage businesses from the headquarters related to payment of taxes. But under GST I will have to go via the branch registration also. Now, this creates unnecessary multiplicity and duplications. It adds into more paperwork and overheads which is not desirable. The second thing is in relation to reconciliation of credit. Now, if I am dealing with multiple vendors we need to have a robust IT system so that this reconciliation of credit happens smoothly rather than I have to put more amount of time and resources on to it.The final thing will be related to what you talked about multiplicity of reporting. Now, if I have to answer for the same question to three regulators and all three may end up giving me different answers it will unnecessarily create litigation which is not the objective of GST. So, my recommendation is please put financial services into 12 percent bracket, please ensure centralised registration and please ensure robust IT system so that litigation can be reduced to the minimum.Q: This reconciliation problem was pointed out by Mr Mani as well before we started the show. His problem was if software guy has given some service to you as a mutual fund and you have paid him the service tax but he probably is controlled by the Maharashtra state authority. If he doesn\\'t pay whom do I go to with my complaint if he doesn\\'t pay? Since I am personally being assessed by the central officers, this problem certainly is going to emerge, but what do you see as the problem for the financial sector?Naren: Clearly what Nilesh pointed out is very clear that we started off by having almost zero in most services and there has been - if you look at excise duty on goods they all started off by being 40-60 percent including customs duty and slowly they came down. Here over a period of time we have had a situation whereby suddenly now we have had service taxes and taking it to 18 would actually create fair amount of taxes because service is only one of the element, that is income and various other taxes.The biggest problem in services is service is not a product which gets transported through goods like through an invoice. It happens electronically. So, where you actually get the service and where you actually are charged for the service and where you get the input credit these are all proving to be reasonably complicated issues which keeps my chief financial officer continuously occupied. So, clearly the government\\'s goal behind the GST was to do ease of doing business and I hope they really achieve that and not make it difficult to do business. That is where we are and we are grappling with many of these issues.Q: Nilesh and Naren eloquently put out their worries about how the GST might pan out. How do you see the problems for the financial sector?Mani: First point is that many countries in the world have a preferential rate for financial services. So, when people say that we would like to have a 12 percent rate or we should not be subjected to an 18 percent rate it is a genuine ask to my mind because in the developed world there is a preferential treatment which is given to financial services.Q: That is an easily understood problem. My problem is more with this destination and assessing authorities.Mani: Yes, now as far as destination based consumption tax is concerned what many of the countries have done to address this is to say that in respect of financial services the place of provision is deemed to be the place of consumption. That is the way it is there in the present regime as well. So, today when you have financial services providers who are largely based in Mumbai for instance the place of consumption even in terms of the place of the supply rules as it exists today is where the provider is located. It is not where the consumer is located. But making that change in GST would mean that we are going against the essential grains of GST.Q: Now having listened to the technocrats is there a case that the centre should continue to implement this tax simply because as Naren and Nilesh are pointing out the service will be provided in so many far flung areas, it will be very difficult to reconcile so isn\\'t it better if it is a centrally administered tax?Drabu: No, certainly not. From a policy perspective it is a lot more complicated. You are looking from a convenience point of view of - or an accounting perspective of a service provider. There are political and economy issues here. We are going to see a set of producer states losing but if you do as Mani was saying that you make the place of provision as is done in other countries then they no longer become producer states, they de facto become consumer states also. So, it is a little more complicated than that.What has also not been recognised is that even as you may have different levels of government and front facing maybe multiplicity you may look at it you have a very robust IT backup sector. Every single invoice will land in one place. It is not that there will be multiplicities. So, the reconciliation matters all of those are done electronically at one place, you will have one backend which will be shared by different governments. The access to information to reconciliation will be - so at that level no matter how multiple the front end looks like now with the state government the centre government combination backend is pretty much secure. There will be no regulator as a matter of principle, the assessing authority will be one.Q: Let me give you the very specific example which all these three gentlemen will face. Naren has a call centre in Mumbai and they are picking up calls from Madhya Pradesh, they are picking up calls from West Bengal. Who all will assess them, will they be asked questions even by West Bengal, who will be the authorities they will report to?Drabu: That is precisely the point. There are two issues, one is in terms of where does this service fall in terms of the turnover of the company or whatever. It is not a transaction. It is a company that is now providing a service and that is where which has been deliberated, who will assess what and interstate transactions till now are the domain of centre as we speak. Now, it is also a fact that most of these service providers are registered with states. No matter what the decision is one thing as a matter of principle they should rest assured is there will be only one authority. Why we are spending so much of time is to just prevent that kind of confusion happening. The fact that MP call gets picked up in Pune, India is not the first country to have GST. There are various federal countries that have done it and in terms of the business processes itself I am sure as Mani was saying there are very well defined rules of where it will go. I don\\'t think that is really the key issue that we should be concerned about. Let us also recognise that this is not being done by government, the IT setup.Q: So, what is the key issue then?Drabu: The key issue is the financial services are perhaps the most buoyant one. There will be a lot of things in terms of who should assess and at what level. It is a fact that states don\\'t have competencies right now except Jammu and Kashmir which has been levying it for some time now most states don\\'t have because it was not within the domain of their power to tax. However it is not such a rocket science that one can\\'t learn.Q: I have two direct questions which will perhaps answer the concerns of both these gentlemen. One, I began with the example of the card. A credit card issued in Mumbai and swiped in Kolkata which is paying into a bank account in Delhi. Will this bank have to have SGST numbers in all these states and whom will they pay the tax to, who will assess their books? Drabu: They will have to have a SGST numbers in all states. They in fact have registrations with various states right now. States are legitimate levels of government and tax collection. Now, what was being suggested is that we treat it as a special case. I have not yet seen anything that tells me that we are on a road to treat financial services as a separate case. So, for the moment my understanding is, yes, they would have to register with all states. Q: The final question to you, you spoke about one third of the services being taxed by the center and two thirds by the states. What will be your measure, will it be the size of the organisation, the amount of tax or will it be you take all the services, divide some of them -- telecom goes to center, finance goes to state, how would you divide these two? Drabu: No, it is not functional at all. These are assessments. Let us say you are now doing assessment for 5 percent of the thing. It can be a randomised thing, it can driven by size. I don’t think it will be done on the basis of a type of service that financial service will be done like this - no. It will be as per assesse, not by type of service. However, the real point is that right now these people are facing multiple regulators, multiple authorities. If you are doing business of let us say bank, it faces at different levels, different states. In the event of GST, there will be only one assessing authority whether it is center or states; that may vary but it will be one authority. So, there will not be multiple – I don’t think that should be a cause of concern.