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 Vol 2 No 1 I January - June 2017

AARTHIKA
CHARCHE
FPI Journal of Economics & Governance

Ÿ Goods & Services Tax

Ÿ Cooperative Federalism and Goods and Services Tax
Ÿ The ‘Paisa for Panchayats’ Study; measuring fiscal flows within
the jurisdiction of Grama Panchayats in Karnataka
Ÿ Goods and Services Tax: How Will it Play Out
Ÿ The Goods and Services Tax- A Saga of Cooperative and
Contesting Fiscal Federalism
Ÿ Should Revenue and Capital Account be Shown Separately in the
Union Budget?
Ÿ Gram Panchayat Finances in Karnataka: A Regional Perspective
Ÿ Goods and Services Tax Implementation- Issues and Challenges
Ÿ GST Network- A Technical Introduction
Ÿ Challenges in Implementation of GST
Ÿ Issues in Implementation of GST Law
Ÿ GST Today- Have we learnt from VAT Challenges?

Fiscal Policy Institute

Government of Karnataka, Bengaluru
 Editor-in-Chief
K.K. Sharma, Fiscal Policy Institute, Bengaluru

Editorial Review Panel Editorial Office

Prachi Pandey, Fiscal Policy Institute, Bengaluru Managing Director: Prachi Pandey
Subaraya M Hegde, Fiscal Policy Institute, Bengaluru Editorial Support: Archana B Kamalanabhan
S. Leena, Director, Zonal Office, NSSO Vinutha T C
Anantha Ramu M R

Aims and Scope

Aarthika Charche is a bi-annual journal brought out by Fiscal Policy Institute, Government of Karnataka, Bengaluru. Addressed to
practitioners, academics, government and non-government entities, the aim of the journal is to feature articles which bring an
innovative, insightful, and influential view-point on financial and fiscal issues in government and governance.

Submission of Article
FPI welcomes contributions in the form of original articles on current issues and topics; evaluation of relevant programs, projects, and
policies; literature reviews (of recently published / seminal books in the field); and perspectives on how the field should and will develop
in the future. For further details please visit www.fpibangalore.gov.in (refer to Guidelines for Contributors).

Subscription Information
The soft copy of the journal is available on the website www.fpibangalore.gov.in

Copyright
All material published in this journal is protected by copyright, which covers exclusive rights to reproduce and distribute the material.

Editorial and Administrative Address

Fiscal Policy Institute, Kengeri Post, Bengaluru-Mysore Road, Bengaluru – 560060
Telephone : (91-80) 26971000
Fax : (91-80) 26971010
Email : [email protected]

Printed and Published by Prachi Pandey, Director, Fiscal Policy Institute on behalf of Fiscal Policy Institute, Kengeri Post, Bengaluru-
Mysore Road, Bengaluru – 560060 and printed at Peacock Advertising India Pvt Ltd, Chamarajpet, Bengaluru by Editor K. K. Sharma.
 AARTHIKA
CHARCHE
FPI Journal of Economics & Governance
Contents

Editorial 03

Goods & Services Tax 05

M. Govinda Rao

Cooperative Federalism and Goods and Services Tax 09

Ritvik Ranjanam Pandey

The 'Paisa for Panchayats' Study; measuring fiscal flows within the
jurisdiction of Grama Panchayats in Karnataka 13
T. R. Raghunandan, Swaroop Iyengar, Tanvi Bhatikar, Uthara Narayanan
and Padmapriya Janakiraman

Goods and Services Tax: How Will it Play Out 21

R. Kavita Rao

The Goods and Services Tax- A Saga of Cooperative and Contesting

Fiscal Federalism 25
V. Bhaskar

Should Revenue and Capital Account be Shown Separately in

the Union Budget? 29
Charan Singh, Devi Prasad and K K Sharma

Gram Panchayat Finances in Karnataka: A Regional Perspective 37

K. Gayithri, Vijeth Acharya, Swati Singh and Nagesha. G

Goods and Services Tax Implementation- Issues and Challenges 51

S. Venkataramani

GST Network- A Technical Introduction 55

Bhuvan Joshi

Challenges in Implementation of GST 61

Sujit Ghosh, Sudipta Bhattacharjee and Abhishek Garg

Issues in Implementation of GST Law 65

Karthik Ranganathan and Prerana Dash

GST Today- Have we learnt from VAT Challenges? 67

Madhukar N Hiregange
 Editorial

Since the liberalization of the Indian economy, different sectors have undergone varied
levels of reforms and, today the tax sector cannot be claimed to be a laggard as India waits
with bated breath for the appointed date for GST implementation to arrive. The Constitution
has been amended, other legislation including the Central GST and the IGST bills have been
passed and now, the operational rules are being readied. The much awaited tax reform, in the
pipe-line since the beginning of the millennium, appears ready to take on the challenge of
propelling India's economic growth and market unification.

Around 140 countries in the world have adopted GST model of taxation but, nowhere, has the
transition been painless or without adjustments. Any tax reform gains ground with experience,
exposure and dissemination of information. The extent of its acceptability also lies with maximum
awareness since ignorance or mis-conceptions fuel unnecessary fear and insecurity. Consistent with
our track-record, Aarthika Charche, in its third edition focuses on the fiscal issue of the day, i.e. GST
tax reform, as well as future areas where public finance is likely to witness innovation and reform.

As always, the editorial process has been an intellectually stimulating exercise with all the associated
reviewers having heated discussions about the issues raised in the different articles. I am sure each of our
readers will have a similar experience as they come across the different ideas and opinions expressed.
The idea for this issue came from the very generous feed-back of the noted economist, Dr. Indira
Rajaraman and we thank her for the same. FPI is guided in its activities by the broad vision of the
Chairperson, Governing Council, FPI and Additional Chief Secretary to Government of Karnataka, Shri I.
S. N. Prasad, IAS, that the outcomes should have practical relevance for the government. This issue of
Aarthika Charche will certainly fulfill this aim and we thank the Chairperson for his encouragement and
support.
Prachi Pandey
Director, FPI

The present edition of 'Aarthika Charche' comprises special articles written on Goods & Services Tax (GST) by
eminent scholars, administrators, practitioners, legal experts and chartered accountants. These articles cover
various aspects of GST which include international experiences of GST, genesis of GST in India, challenges of
framing the GST Law and its implementation and the impact of GST on cooperative federalism in India. The
deliberations in these articles will immensely contribute to existing debate on GST and it would really help in
clarifying concerns in GST law and its implementation.

The present issue also provides a brief view of recent research works undertaken at Fiscal Policy Institute. The domain
of research work at FPI is vast, covering various aspects like 'Prices of Agricultural Commodities', 'Local Government
Finances', 'Externally Aided Projects' 'Social Pension Schemes'. These studies may perhaps help many researchers and
students of Economics & Public Finance.

There are nine articles out of twelve articles in the present issue exclusively on GST and the remaining three papers are on
rural finance in Karnataka and on relevance of revenue and capital account distinction under the budget. We presume that
this special issue on GST will be of great use to all the stakeholders, researchers and students.

K. K. Sharma
Editor-in-Chief
Goods and Services Tax
1
-M. Govinda Rao
Abstract

The passage of the Bills in the Parliament paves the way for
implementing the Goods and Services Tax (GST) in the country. This is
expected to result in the simplification of the tax system, creation of a
unified market through out the country, provision of more comprehensive
input tax relief and elimination of inter-state tax exportation. These are
expected to potentially improve the efficiency and export competitiveness in
India in the coming years.

While these are potential gains, the actual gains from the reform will depend
Dr. M. Govinda Rao is Emeritus Professor at upon the structure that will eventually emerge. The developments so far do not
NIPFP, New Delhi. He was a Member of the give room for over-optimism. The exclusion of alcohol and more importantly,
Fourteenth Finance Commission (2013-14). petroleum products from the GST base will continue to cause substantial
Prior to that, he was the Director, National cascading. The multiple rate structure that has been agreed upon will
Institute of Public Finance and Policy (2003- complicate the tax and result in high compliance costs and classification
13), Director, Institute for Social and disputes. It is therefore, useful to view this merely as the next stage of consumption
Economic Change, Bangalore (1998- 2002), tax reform rather than a game changer.
and Fellow, Research School of Pacific and
Asian Studies, Australian National I. Introduction:

T
University, Canberra, Australia. He was a he replacement of the existing multiple domestic consumption taxes
Member of the Economic Advisory into a unified Goods and Services Tax (GST) is considered important
Council to the Prime Minister of India for a variety of reasons. Besides unifying various consumption taxes,
(2004-2013). the reform will evolve a simpler tax system which will reduce the three costs
associated with taxation namely, collection cost, compliance cost and distortion
* * * cost. The reform is expected to enable more comprehensive input tax relief,
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯ supposed to pave the way for a national market, reduce transaction costs by
changing the supply chain management, and improve inter-regional equity by
making it destination based.

In the Indian context, the consumption tax system reform is currently jammed like
a bullock cart stuck in mud. There is no doubt that replacing the prevailing narrow
based, complex system of multiple indirect taxes with a comprehensive value added
tax on goods and services holds the key to ensuring fiscal stability in the country and it
is important for both Union and State governments to meet the emerging challenges of
globalization (Rao, 2011). However, as both the Union and State governments are
empowered to levy domestic indirect taxes, the reform involves negotiation and
bargaining even as both levels of government see this as desirable. The States view the
reform as an assault on their fiscal autonomy and want to ensure maximisation of gains.
Interests of all the states are not identical as there are predominantly producing states and
predominantly consuming states. The Union government wants to ensure uniformity in
the tax system, overall control and minimise its own costs while persuading the states to the
reform. Finally, each of the two tax administrations want to ensure that their turf is
protected fully in the process of simplifying the tax system and inducting technology in tax
administration.
1
Views expressed are personal.
 Goods & Services Tax 6

Indeed, few fiscal innovations in the 20th century have had early success in the European Union and second, the key role
such a pervasive influence on the countries as value added tax on played by the IMF in spreading this in developing countries. As
goods and services (Bird and Gendron, 2007). The promise of Mick Keen states, “…there is a strong and significant positive
greater revenue productivity and neutrality in resource allocation correlation between participation in a Fund program and the
that has led over 140 countries in the world to adopt one form of probability of adopting a VAT”. Surely, IMF has been a major
GST or another and the discussion of reform is gaining ground 'change agent'. However, unlike other Washington Consensus
even in the United States, the last bastion which has resisted its reforms, this is perhaps the least controversial. In the literature,
imposition thus far. Over the last 65 years since GST was first advocacies for the tax are mainly in the writings of IMF
introduced, there have been several lessons learnt, innovations economists. Not surprisingly, there is considerable craziness in
made and different variants of the levy implemented depending the policy design and implementation, which has been candidly
upon not merely best practices but also political acceptability. discussed in a comprehensive survey by Bird and Gendron
Introduction of GST is an important element in virtually all (2007) who argue that “…on the whole, we conclude that much
International Monetary Fund (IMF) programmes. The reasons of the conventional wisdom about VAT design is sound”. They,
for the popularity of the tax has to be found in the fact that it has unlike the IMF, consider that the 'one size fits all' design may not
been a revenue spinner, a well-designed GST has much lower be desirable and each country should chose the design which it
distortions than both tariffs and any other broad based considers appropriate. Each country has to make the difficult
consumption taxes, and since the tax is supposed to be self- choices and sometimes, even “…some bad initial features may
assessed, it minimises compliance cost as well. Without be an essential element of getting the tax accepted in the first
exception, the developing countries need both more revenue and place”. However, it is desirable that the basic features of the tax
better revenue systems. A broad based consumption tax is almost are not violated to ensure its success in raising revenue
always a critical element in such systems and GST is considered productivity by minimising distortions.
to be the best form of general consumption tax.
The important point is that, unlike in small unitary countries,
II. International Experience with GST the dual GST adopted in federal countries would entail several
The international experience is that in most of the countries compromises. The basic compromise is between sub-national
the GST has been essentially a Central tax and the levy of sub- fiscal autonomy and tax harmonization. Absolute harmonization
national GST was considered infeasible or undesirable due to implies complete uniformity which is the negation of fiscal
high collection costs, compliance costs and distortions arising autonomy. In a federation with strong sub-national governments,
from tax disharmony. Technical objections for the levy of sub- seeking such a solution may be elusive. Thus, in countries like
national GST were also raised on account of cross-border trade. India, compromises are inevitable between the Union and the
Therefore, most federal countries have the GST at the federal states and among the states inter-se. Therefore, a 'flawless GST'
level though some of them share the revenues with sub-national is not possible. The attempt should be to ensure that the basic
governments. features of the GST are retained. It is also important to view the
reform as a process involving clear targets and roadmap to reach
From the viewpoint of lessons, the most relevant are from the the target. As Yogi Bera states, “If you do not know where you
experiences of Canada, European Union and Brazil. Sijbren are going, every road will lead you to somewhere else”.
Cnossen (2010) summarises their experiences as the “good, the
bad and the ugly”. Even in the Canadian case which has the most III. Lessons of Experience:
harmonised GST, there are three different systems. All the International experience can provide useful guidance in
provinces except Quebec and Alberta have fully harmonized designing the tax. It is clear that the tax should not be applied to
GST with the federal government with both federal and the stage of transaction but should be based on the threshold.
provincial governments administering the tax. In Quebec, the tax Classification according to manufacturers, wholesalers and
is administered for both federal and provincial governments retailers does not carry much meaning in the modern world. It
entirely by the province, and Alberta does not levy the provincial would be useful to keep the exemptions to the minimum in order
GST at all as it gets bulk of its revenue from oil. The important to make the tax comprehensive for crediting input taxation.
point is that though the debate on how best to design and Furthermore, the international experience shows that the
implement GST at sub-national levels is far from settled, there threshold should be relatively high. The threshold should be
are no doubts on its feasibility and therefore, focus on the reform chosen to balance the collection cost with marginal revenue
in India. gains as Keen and Mintz (2004) show and typically, the number
of taxpayers in low thresholds is large but their revenue
The two most important factors for the popularity of GST are, contribution is not very significant. It is desirable to keep the
first, its perceived success in several countries, particularly its
 7 Aarthika Charche - Vol 2 No.1

threshold high enough since even if some revenue is lost by New Zealand has the least number of exemptions and the most
dropping small taxpayers, the administration can be freed to comprehensive coverage of GST, but it may not be possible to
make greater effort on those who can contribute more. The follow that in a country like India. At the same time, it is
international experience shows that high thresholds also are important to resist the political pressures to accord exemptions to
important for equity because, the consumption of the poor fulfil ostensible objectives of equity, administrative ease,
largely comprises of purchases from small traders. Of course, regional development, employment creation through small scale
international experience shows wide variation in the thresholds. industry development and many more.
In the case of developed countries, it varies from zero in Sweden
to USD 600,000 in Singapore. In the case of developing What should the rate structure be? Expert advice on the
countries, the thresholds vary from USD 18000 in Morocco and issue is simple: there should be only a single and uniform rate.
Pakistan to EUR 100000 in Lebanon. After reviewing the This is also the usual IMF recommendation for the developing
experiences of several countries, Bird and Gendron (2007) countries. This is based on the assumption that the gains from
suggest a thumb rule that a threshold of USD 100000 should be lower administrative and compliance costs outweigh the loss
generally acceptable. from efficiency and equity arguments. Although the optimal tax
theory argues for multiple tax rates depending upon
The international experience with GST suggests that it is compensated price elasticity of demand, it does not provide
necessary to keep the exemptions to the minimum, but resisting practical help in formulating tax policy. Besides the problem of
the pressures from various political groups to accord exemptions inadequate information to design such a tax, there are
on one pretext or other is not going to be easy. However, it is administrative and equity considerations in addition to political
possible to prune the list collectively by all the states concerned economy dimensions preventing application of the approach for
in a reform exercise like this. Keeping the exemption list long practical policy formulation in developing countries. It is argued
will not enhance states' fiscal autonomy, makes the tax base that multiple rates in the given political economy environment
narrower and in any case will not ensure comprehensive actually lead to distortions in choice and welfare losses. Most tax
crediting of input taxes. International experience also suggests advisers, therefore, are comfortable advocating a single rate of
that zero rating domestic consumption is a bad idea. It is also not tax. It is also argued that in the presence of a lower rate of tax, the
a good idea to have tax incentives and concessions in the GST general rate of tax will have to be much higher to raise the same
regime and any incentive that is proposed should be given in amount of revenue and as the distortions from the tax are
other forms and not by way of tax preferences. equivalent to the square of the tax rate, it leads to much higher
inefficiency in resource allocation. Redistribution in tax policy,
In India, there is considerable discussion on what should be is supposed to be taken care of as exempting essential food items
taxed and what should not be. The present list of exemption is and keeping the threshold high enough. Having a lower rate of
large. With over 300 commodities and quite a few services tax on items of common consumption predominantly by the poor
exempt at the Central level, the tax boils down to 'selective benefits the non-poor as well.
taxation'. Although, the states have desisted from giving sales tax
exemptions and deferments in recent years, the hangover of such There is much to be said in favour of having a single tax
policies continues even as studies have shown that they only rate from the viewpoint of minimising administration and
create fiscal holes and create additional distortions with little compliance cost. This is particularly advocated for the
benefits to the economy. It is important to have minimum developing countries which have low administrative capacity.
exemptions not only to broaden the base of the tax but also to However, most countries do not seem to be listening and not for
ensure comprehensiveness in the input-credit mechanism. the first time the world does not seem to care for the expert
Exempting unprocessed food items is necessary for both equity advice. The real 'standard' seems to be to have at least two (non-
and administrative reasons. It may also not be feasible or even zero) rates though more recent adopters seem to have opted for a
desirable to tax government services and meritorious services single rate. In the European Union, where adherence to the Sixth
like education and healthcare, stationery and books and life Directive is a precondition for joining the Union, with the
saving medicines. There are hard to tax services like financial exception of Denmark, there is no country with a single rate and
services, housing and real estate. Most countries exempt real most countries have two reduced rates. Even as the economists
estate transactions and subject land and real property to taxes overwhelmingly argued for having a single rate in Sweden
other than GST. Levying taxes on financial services even in recently, the government found it impossible to embrace it.
developed countries has been difficult and the feasible option for Given the highly unequal distribution of incomes in developing
countries like India is to include all fees and commissions and countries, distributional policy objective mandates a more
subject all margin services to GST. Among different countries, explicitly progressive GST.
 Goods & Services Tax 8

For the same reason, sometimes, it is argued that items of rule has been broadly worked out, there could be a lot of friction
conspicuous consumption should be subject to a much higher between the states in its implementation. Finally, there could be
rate of tax. Indeed, there are arguments that people who enjoy transitional problems.
conspicuous consumption like a ride in luxury cars should pay
higher rate of taxes. However, too much of rate differentiation V. Concluding Remarks:
would add to administrative complexity and compliance cost. The above discussion should not however, be taken to
Furthermore, it is important to consider the total effects on construe that the reform is not important. The GST reform is
employment and poverty rather than simple consideration of important. However, over optimism on this would be misplaced
whether the item is consumed predominantly by the poor or rich. and the reform should be taken to be the next state of
The best way to deal with the issue is to levy a separate excise on consumption tax reform in the country. This implies that the
such items just like the excises levied on sumptuary items like efforts at rationalising the imperfect GST initially levied will
petroleum products, alcohol and cigarettes and levy GST at the have to continue. It also implies that the reform will not be a
general rate on the excise paid value. The case of levying taxes on smooth affair as has already been demonstrated so far. There are
diesel and motor spirit is similar. The present draft of the severe technological and administrative challenges and we will
Constitutional amendment seeks to exclude motor spirit, diesel have to see how these will be overcome. Introduction of GST will
and alcohol from the coverage of GST which is clearly be a win-win strategy for both the Centre and States and there is
inappropriate. Indeed, revenue is important, but this should not every reason to embrace it. However, reform of this nature
be done by truncating the GST coverage. A separate excise in involving both Centre and States is an experiment in co-
addition to the GST is the answer for sin taxes, green taxes or operative federalism and requires stewardship by the Statesmen.
even additional levy on a few items of conspicuous consumption. In fact, that is the difference between leaders and Statesmen and I
am sure, we have them in both Centre and States who will rise to
IV. Can GST be a Game Changer in India? the occasion to accomplish the task.
The GST Council has decided to that there will be four tax
rates at 5%, 12%, 18% and 28%. In addition, there will be References:
exempted items, a low rate on bullion and surcharge on the 1. Bird, Richard and Pierre-Pascal Gendron (2007), Value
conspicuous items of consumption. Thus, in effect, there will be Added Taxes in Developing and Transitional Countries,
seven rate categories and this is clearly excessive. Having (Cambridge and New York), Cambridge University Press,
achieved a measure of convergence of rates to evolve broadly a 2. Cnossen, Sijbren (2010), “VAT Coordination in Common
two rate structure in VAT, the decision to levy GST in terms of Markets and Federations: Lessons from the European
seven rate categories is clearly retrograde. Besides increasing the Experience”, Tax Law Review, Vol. 63. Pp. 584-622.
administrative and compliance costs, this could result in inverted
3. Keen, Michael (2009), “What Do (and Don't) We Know
rate structure while availing input tax credit and lead to
about the Value Added Tax?”, Journal of Economic
classification disputes. Along with the complications in
Literature, Vol.47, No.1. Pp. 159-170.
resolving the inter-state tax through IGST, this could create a
technological nightmare. 4. Keen, Michael and Jack Mintz (2004), “The Optimal
Threshold for a Value Added Tax”, Journal of Public
It would be misleading to pronounce that GST will be a Economics, Vol. 88, No.3-4. Pp. 559-576.
game changer based on the developments on the reform so far. In 5. Rao, M. Govinda (2011), Goods and Services Tax: Is it a
particular, the exclusion of petroleum products from the tax base Gorilla, Chimpanzee or a Genus Like Primate?” Economic
in particular leaves out 35-40% of the excise duty and VAT and Political Weekly, Vol. XLVI. February, 2011. Pp. 43 –
collections and cascading on this account will continue. The 48.
decision to levy the tax in multiple rates robs its attractiveness
6. Rao, M. Govinda (2007), “Resolving Fiscal Imbalances:
considerably as, besides adding to administrative and collection
Issues in Tax Sharing” in Robin Boadway and Anwar Shah
costs, it would create additional distortions. The division of
(Eds), Intergovernmental Fiscal Transfers: Principles and
administrative responsibilities between the central and state tax
Practice, World Bank. Pp. 319-337.
administrations could hamper the smooth functioning of the
system and from the experience so far, it would appear that the
turf war between the two tax administrations could be a factor
hampering harmonised tax administration. The administration of
IGST, particularly the technology to track each inter-state
transaction, could be a problem. Although the place of supply
Cooperative Federalism
and
Goods and Services Tax
-Ritvik Ranjanam Pandey1
Abstract

GST legal framework is an exemplary model for how cooperative

federalism can work in India. It is not a minor achievement that Centre
and States with varied strengths and challenges have agreed to a common
framework. GST, touted as the biggest tax reform since Independence,
requires not just constructive engagement and harmonization of processes
and procedures but change in the attitude and perceptions regarding
traditional areas of autonomy and decision-making. Some of these issues,
certainly unique to India, are discussed in this paper.

Shri Ritvik Ranjanam Pandey, IAS belongs to

the 1998 batch of the Indian Administrative
Service. He has done both his B. Tech and M
Tech. from IIT Kanpur. Upon joining the IAS
at the age of 22, he has held various
I n August 2016, after over a decade of discussion and debate, the Goods
and Services Tax Bill was passed in Parliament. Thereafter, the Bill was
ratified by 50% of the State Legislatures before it received Presidential
assent. GST, touted as the biggest tax reform since Independence, requires not
responsible posts both in Govt. of India and just constructive engagement and harmonization of processes and procedures
Govt. of Karnataka in the Ministry of but change in the attitude and perceptions regarding traditional areas of
Finance, Election Commission, etc. He is autonomy and decision-making. Some of these issues, certainly unique to
involved in the forefront of implementation India, are discussed here.
of Goods and Services Tax (GST) at both
the state and national level by virtue of Unitary or Dual GST
There were many supporters of a unitary GST when it was being
being the Commissioner of Commercial
conceptualized and even now there are many supporters of a unitary GST. But,
Taxes, GoK and member of the GST law
there is no doubt to my mind, that India can only have a dual GST. GST is not a
drafting committee.
new levy but is a replacement for several taxes of the Central Government as well
as State Governments. The taxes that are getting subsumed into GST are
* * *
significantly important for Centre as well as States. Neither Centre nor States can
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
surrender their taxes in favour of the other. The total revenue from taxes that will get
subsumed into GST in 2015-16 is Rs. 8.65 lakh crore out of which Rs. 4.25 lakh
crore comes from central taxes and Rs. 4.40 lakh crore comes from the taxes of
States. The revenues coming from Central taxes into GST form 29.2% of its total tax
revenues and the revenues coming from State taxes into GST form 47.2% of their tax
2
revenues . This clearly indicates that any loss of control of this tax base would imply
significant loss of fiscal autonomy for both. Thus, a unitary GST levied by Centre, even
if devolved to States, would not have been possible in India. There can be no
disagreement with the argument that a unitary GST would have been ideal but, equally,
there can be no dispute that given the federal structure of India, if there has to be a Goods
and Services Tax in our country, it has to be dual.

Therefore, the Constitution was amended to provide for a dual GST. Interestingly,
there were some views initially that the GST can be levied within the existing framework
of the Constitution but eventually, consensus developed that for a robust GST, amendment
to the Constitution was not only required but desirable.
1
Views expressed are personal.
2
The figures for revenue to be subsumed exclude those revenues that are not being subsumed
today but shall get subsumed later like petroleum products, electricity etc.
 Cooperative Federalism and Goods and Services Tax 10

Constitutional Framework for GST larger good. Given the structure of the Council, it would not be
The underlying principle behind the One Hundred and First over-optimistic to say that the 101st Amendment would also
Constitutional Amendment is special in its own way as it places make this a reality.
GST on a different pedestal as compared to the other functions of
the Union and the States. Genesis of GST Council
The Union Finance Minister, in one of the GST Council
Under the existing distribution of responsibilities between meetings, remarked that the GST Council is an exclusive body of
the Union Parliament and the State Legislatures, the Seventh its own kind. It would be difficult to find a parallel for this body,
Schedule of the Constitution provides for three lists viz., List-I or where Centre and State are equal and which collectively takes
the Union List, List- II or the State List and List-III or the decisions for the Union as well as all State Governments on
Concurrent List. As the names indicate, the Union Parliament matters that have substantial impact on their finances.
has the powers to make laws with respect to subjects enumerated Expanding on this theme, the Finance Minister stated that it
in List-I, the State Legislatures have the powers to make laws would be wrong to say that the Centre or the States have lost their
with respect to subjects in List-II and both have the powers to autonomy, when in fact, they have pooled their autonomy and
make laws with respect to subjects contained in List-III. That sovereignty into the Council. GST Council is, thus, the result of
being the scheme of things, the obvious choice would have been an agreement between the Union and States for the larger
to include Goods and Services Tax in List-III or the concurrent objective of “One Nation One Tax”. In fact, the uniqueness of
list so that Union Parliament as well as the State Legislatures the GST Council in itself is an indication of how the
could have levied GST. administration of GST in our country has to be unique.

However, the division of subjects in three lists provided as GST Council is the most powerful decision making body
per Article 246 comes with an in-built hierarchy amongst the when it comes to GST. A cursory look into the provisions may
laws made by the Parliament and the State Legislatures. Article give an impression that the Council is merely a recommendatory
254 provides that, in cases where the State law has not been body. However, a close scrutiny would reveal that this is not so.
passed with President's assent, the Central law shall prevail and Since the GST Council is a body of all Finance Ministers and
if the State law has received President's assent, the State law since the decisions of the GST Council will be mostly by
shall prevail in that State. However, with respect to GST, the consensus, as has been the experience till now, there is very little
States wanted equality, to be exactly on the same footing as chance that any of the Governments or the legislative bodies will
Centre and not be subordinate to it. In such a scenario, the deviate from the “recommendations” of the GST Council. While
hierarchical nature of Article 254 is not desirable, especially in the Constitution does not specifically say that the
case of fiscal laws where it would compromise the fiscal recommendation of GST Council shall be binding, the structure
autonomy of States. and the decision making process holds the promise that the
recommendations of GST Council will always be accepted by
Therefore, an entirely new scheme had to be adopted for
the Members, Centre or State.
division of legislative powers with respect to GST and all taxes
on goods and services have been kept out of the purview of The Constitution, as amended, states that the decisions of the
Article 246 and 254 of the Constitution, and consequently, out of Council will be taken by a three-fourth majority. Incidentally, the
the three lists. Instead a new article 246A has been inserted that original amendment that was introduced in the Parliament
gives independent powers to the Parliament and State required that all decisions of the Council be taken by consensus.
Legislatures to make laws with respect to GST. This power to However, the then Chairman of the Empowered Committee
make law is “not withstanding anything contained in Article 246 represented before the Standing Committee which was
and 254”, making it amply clear that the GST laws of Union and scrutinizing the Amendment Bill, that it may be difficult
States have equal standing. sometimes to reach a consensus and, therefore, it may be in the
interest of proper functioning of the Council that a three-fourth
Before it is supposed that such a change would promote a
majority be specified for decision making. In the Council, the
divergent legal framework, it would be prudent to recall that the
Centre represents one-third of the votes and States represent the
GST Council exists to forge consensus. In fact, the onus of
remaining two-third of the votes. With this mix and the
maintaining uniformity in this framework lies with the GST
requirement of three-fourth majority, all decisions will require
Council. No doubt, during the deliberations of the Council, there
support of the Centre and more than half of the States. However,
may be disagreements, but the 101st Amendment envisages that, it is pertinent to note that till date many important decisions have
in a true spirit of cooperative federalism, Centre and States will been taken by the Council and never has the situation come to the
work together for a uniform tax structure which will be for the
 11 Aarthika Charche - Vol 2 No.1

level of division of votes. This certainly bodes well for the future stabilised. Similarly, tax officials of the State and Centre are now
as an indication of how the GST will be governed. better equipped to understand the differing impact of various
proposals on Centre and States. For instance, there have been
Consensus – the essence of decision making in GST many aspects in the proposed business processes and the model
The experience so far in the decision making process has
law that were new for either Central or State tax officials.
been very positive. The work on finalizing the nuts and bolts of
Sometimes they were unfamiliar to both. When the registration
GST has been going on for more than three years and there has
of business process was being discussed, it was decided that
been close cooperation between Centre and at the State at all
there should be only one application form that should be acted
levels. The approach all along has been to try and reach a
upon by Central as well as State tax authorities. Such a concept
consensus on all issues. There have been several official
was difficult to accept initially and it took time for tax
committees that have analyzed various aspects of GST and made
departments to realise that to implement GST, a completely
recommendations that have been accepted by all. On many
different kind of administrative approach would be required.
issues, there has been no problem in convergence since all
But, later by the time business process for payments were being
taxmen think alike. However, there have been several
discussed, the official representatives from tax departments of
contentious issues that have required detailed deliberation due to
Centre as well as States did not even argue that there should be a
initial divergent views. But the experience has been that, Centre
common challan. At that time, it was the Accounting authorities,
and all the States have reached a solution acceptable to all. In
who were new to the discussions, and who couldn't comprehend
many cases, the solution may not be ideal but it has the weight of
how there could be a common challan! It is a real measure of
consensus behind it and would, therefore, certainly be
success when we see the long road travelled by the people
implemented uniformly across the country.
involved in design of GST, how far they have accepted the
Numerous experts have argued that sectors like petroleum, approach of working jointly and creating consensus, and how
electricity and real estate ought to have been included in GST. In much they have accomplished despite having differing views in
listing the exclusions, they forget to see the kind of consensus the beginning.
that has been reached regarding what is to be included in GST. It
There have been many aspects of the Model law that have
may be recalled that a number of States argued that the merger of
been discussed and deliberated in detail and many decisions
many of their taxes into GST would cause a significant dent in
have been taken that will be applicable throughout the country
their finances. There exist various taxes which are specific to one
that are different from the current practice. For example, many
or a few states like the Purchase Tax levied by Punjab and
States as well as the Centre collect the tax pertaining to
Haryana or the Entry Tax levied by many States like Maharashtra
transactions which have taken place in March in March itself
and Karnataka. Yet, the States have agreed to give them up in
while the tax of every other month is collected in the next month.
favour of GST, even if reluctantly! The kind of consensus that
This issue was deliberated and even if it meant a loss for these
has emerged in the country for implementation of GST is
Governments in the first year, it was agreed that the better
unprecedented. If this momentum continues and the initial
practice would be to adopt a consistent method for taxes relating
experience is not completely against expectation, the coverage
to March as is being followed for other eleven months.
of GST will soon be universal.
Therefore, in GST, even for the taxes relating to March, the last
th
What we have to realise is that, given the mode of decision date of payment of taxes would be 20 of next month in the entire
making that has evolved, reaching consensus will take time on country.
many issues. At the same time, with the varied issues, a certain
Similarly, when the provisions relating to input tax credit
level of maturity has also been reached along with an
were being discussed, everybody realized that the practices vary
appreciation of the broader perspective. In one of its meetings,
a lot from State to State and between States and Centre.
the Council considered the proposal to include sale of land and
However, after detailed deliberations, it has now been decided
buildings within the ambit of GST and deliberated the benefits
that the credit would only be blocked for goods and services that
and challenges. Sale of land and buildings was kept out of GST
are predominantly consumed by individuals. There are many
since the beginning primarily because States levy Stamp duty on
such examples where States and Centre have converged to a
these transactions. Some Members argued that there are far
uniform practice after detailed discussions. Many long standing
reaching benefits of including sale of land and buildings in GST.
practices are being discontinued and many best practices that
After detailed deliberations, the Council recognised that while
have been successfully implemented somewhere in the country,
there are significant benefits, it would be better to go with the
are being adopted.
consensus and consider this proposal at a later stage when the
implications are well quantified and the new system has
 Cooperative Federalism and Goods and Services Tax 12

GST legal framework is an exemplary model for how Joint mechanisms for decision making
cooperative federalism can work in India. It is not a minor This kind of cooperation and cross-empowerment in
achievement that Centre and States with varied strengths and administration of GST is expected to lead to faster stabilization
challenges have agreed to a common framework. A common of legal issues. Further, with respect to the legal framework
draft for the law, common rules of procedures, common related to any tax, there are many issues that are finally settled
processes, common forms and a common portal are a precursor only through court orders. Since the legal framework is uniform
to how GST will be administered. The process of finalizing the across the country, many issues will get stabilized in GST in a
design is still on and as we go along, reaching consensus should relatively shorter time. Another note-worthy feature of the GST
only get easier. eco system is the Appellate Tribunal that is a joint mechanism for
both State as well as Centre. In addition to being a joint
Administration of GST and cross-empowerment mechanism, since it is one Tribunal with State Benches, these
Although GST is a dual levy and some argue that with dual benches will act as coordinate benches and decisions made
levy comes dual control, most of the people involved in the anywhere will have persuasive value elsewhere, even if not
design of the GST framework agree that GST cannot work with binding value.
dual control and taxpayers should have a single interface with
tax administration. For providing single interface, it is the cross- Policy formulation and policy response with respect to GST
empowerment model which has found wide-spread support. In will also be a coordinated effort in future. In addition to the GST
this model, officers of both Central as well as State departments Council, which is the highest policy level body, it is expected
are empowered under the GST laws of each other. Irrespective that the system of joint committees will continue. This
of which department an officer belongs to, he is empowered and mechanism has served well till now and would be very effective
mandated to act under all laws with respect to the action that he is in the future. The GST Council Secretariat also is expected to
undertaking. have officers from Central and State Governments.

Cross empowerment is a unique administrative model that Lastly, the role of GSTN, the common IT solution manager
has been adopted for GST to provide a single interface for a dual for GST cannot be under-stated in that it will also ensure close
levy. It empowers and mandates every officer to act beyond his cooperation and uniformity across the country. GSTN will be
administrative hierarchy. During the discussions on cross- setting a large coordinated database that will be operated upon
empowerment, it was the unanimous view in the GST Council by 32 tax jurisdictions. It is responsible for establishing front
that cross-empowerment is the only workable solution which office business processes and interfaces that would remain
would provide a single interface for tax payers and all the three uniform and any change will have to be a result of a consensus on
laws, namely, IGST, CGST and SGST should be part of the cross that issue. Envisaged from the very beginning, the common IT
empowerment framework to provide for a single interface in a infrastructure has, today, emerged as one of the distinctive
true and effective way. strengths of GST. Many administrative formations in other
sectors have tried such common national joint infrastructure but
Cross empowerment is essentially an administrative have met with, at best, only partial success. In this respect, too,
arrangement working on the principle of cooperation. If GST is unique.
implemented effectively, it can lead to a win-win situation. On
the one hand, it will be convenient for the taxpayers where they We are midway in our preparations for implementation of
can be serviced by the tax administration that is best placed to GST. The experience so far of Centre-State cooperation has been
service them and on the other hand, both the tax administrations very encouraging. Problem-free implementation of GST will
can reap the benefits of each other's strengths. Cross require closer cooperation and coordination between Centre and
empowerment is in not a conventional model of tax all States. Many legacy systems will get modified and many
administration. Till now, tax departments have been working perspectives will have to change. During the course of
independently of each other and were responsible for their implementation, at various stages, various agencies involved
respective domains. Henceforth, every officer while acting on with GST have been convinced to change their systems and
behalf of his own government will also be working on behalf of many more systems will change. Nonetheless, reform of such a
the other. This will require close coordination between Central magnitude deserves such large scale changes in systems,
and State tax administration and this coordination will have practices and perspectives. After all, we have amended the
many more benefits for overall implementation of GST. Constitutional framework for introduction of GST.
The 'Paisa for Panchayats'
Study; measuring fiscal
flows within the jurisdiction
of Grama Panchayats
in Karnataka.
-T.R Raghunandan1
Abstract
T.R. Raghunandan, IAS has
served as Joint Secretary, The 73rd Amendment aimed to lay down in the Constitution certain
Ministry of Panchayati Raj, essential features of PRIs to enable them to acquire the status and dignity
GoI and Secretary, RDPR, of viable and responsive people's bodies. This paper argues that more than
GoK. Presently he is an two decades after the passage of this amendment, there is a clear
Advisor to the Accountability indication that decentralization did not end up achieving the objectives it
Initiative and Consultant in has visualized. In particular, Karnataka's political vision of democratic
decentralization, anti- decentralization in rural areas has not been adequately and rationally
corruption and heritage conservation at Centre operationalized through the process of fiscal devolution. However, the
for Policy Research (CPR), New Delhi. problem is not unique to Karnataka. In this context, the paper provides certain
important recommendations to strengthen the democratic decentralization and
Swaroop Iyengar is the make the intergovernmental fiscal transfer system rational, simple and
lead researcher and project transparent.
Manager of the first
'PAISA for Panchayats'
1. Karnataka is often cited as a pioneer in democratic decentralization in
study conducted by
India. The state's contemporary reform efforts began with the enactment of
Accountability
the Karnataka Zilla Parishads, Taluk Panchayat Samitis, Mandal Panchayats
Initiative, CPR, New
and Nyaya Panchayats Act in 1983,2 which established a two-tier system
Swaroop Iyengar1 Delhi.
consisting of a Zilla Parishad at the District level and Mandal Panchayats at the
village agglomeration level3 of elected LGs in rural areas. The law gave 25
percent reservation to women. It also gave the Zilla Parishad president the status
of a Minister. The law was matched by several bold administrative decisions. On
the fiscal side, the functional assignment was matched by a carving up of the state
budget into district and state sectors. A State Finance Commission was set up. The
Deputy Commissioners of Districts were divested of their development
responsibilities and officers senior to them were posted as “Chief Secretaries” of
the Zilla Parishads. With approval from the Government of India (GoI), District
Tanvi Bhatikar1 Uthara Narayanan1
Rural Development Agencies (DRDAs) were merged with the Zilla Parishads. The
Tanvi Bhatikar & Uthara Narayanan Chief Secretaries of ZPs were squarely accountable to the ZP; their Confidential
are Consultants with Accountability Reports were written by the ZP Adhyaksha. The system resulted in a radical and
Initiative, CPR, New Delhi. fundamental shift in the power structure, both amongst politicians as also
bureaucrats.
PadmapriyaJana
kiraman leads 2. Following the 73rd and 74th amendments to the Indian Constitution, Karnataka's
C P R - 1983 Act was replaced by the Karnataka Panchayat Raj (KPR) Act 1993, which
Accountability established a three-level elected system, comprising Zilla Panchayats (ZPs) at the
Initiative's district, Taluka Panchayats (TPs) at the intermediate and Grama Panchayats (GPs) at
research in the 1
Views expressed are personal.
areas of 2
One of the foremost architects of this design was Mr. Abdul Nazeer Sab, the then RDPR minister,
Padmapriya Panchayat who is still revered in Karnataka. It took four years for the legislation to secure the assent of the
Janakiraman1 Finances and President of India. In January 1987, elections were held to Zilla Parishads and Mandal
Panchayats.
Decentralisa 3
There was an intermediate tier, the Panchayat Samiti, but this was not directly elected and
tion. consisted mostly of Presidents of Mandal Panchayats.
 The 'Paisa for Panchayats' Study; measuring fiscal flows within the jurisdiction of Grama Panchayats in Karnataka. 14

the village levels. Through this Act, the state devolved several Panchayats. For instance, the activity mapping effort of 2003
activities pertaining to all 29 matters listed in the Eleventh was followed by a realignment of the District Sector budget to
Schedule of the Constitution, to the three levels of Panchayats. match the former. First, scheme-bound fiscal transfers were
The KPR Act 1993 was further amended in 2003 to strengthen rationalised by merging small with the larger ones, reducing the
structures to enhance accountability and catalyse peoples' number of plan and non-plan line items from 658 to about 330.
participation in governance. In 2003, the state-issued through a This simplified the fund transfer mechanism and gave greater
government order, an activity mapping framework clarifying flexibility to panchayats to address their priorities. Second, in a
the devolution of functions to panchayats. detailed exercise undertaken during 2004-05, all schemes and
funds that dealt with those functions devolved to Panchayats
3. Since 1987-88, the Karnataka government has been that still continued in the State Sector were transferred to the
operating a system of listing out the budget streams that are District Sector. This process culminated in changes in the
earmarked for transfer to the tiered Panchayat system. This district sector of the budget for 2005-06, which addressed the
system comprises of a 'District Sector' budget, which mismatch then existing, between functional devolution as per
comprises of such earmarked allocations. The District Sector the Activity mapping order, and fiscal devolution as enabled
budget is further elaborated through a 'Link Book', which sub- through the District sector budget and the link book.
divides each such transferred head of account into allocations
made to each Zilla Panchayat. As regards the fiscal streams that 5. In order to ascertain whether any further mismatches had
flow to the Taluk Panchayats, a system of a having taluka level crept into the fiscal devolution framework for devolution of
link books was put in place subsequently. There is no link book funds to the Panchayats of Karnataka, a study of the financing
system that indicates the break of allocation to each Grama structures and fiscal flows in Kolar district was conducted in
Panchayat. 2015-16 by the Accountability Initiative (AI), a wing of the
Centre for Policy Research (CPR), New Delhi. The study
From the very outset of fiscal devolution in the wake of the covered an examination of the fiscal flows pertaining to 2014-
1983 Act, departments have by and large resisted the transfer of 15, allocated, released and spent in the jurisdictions of the Kolar
their responsibilities to the Panchayats. In tangible terms, this ZP, the TP of Mulbagal Taluk and the 30 GPs into which the
resistance was focused on the transfer of schemes from their villages of Mulbagal Taluk are divided. The study commenced
departmental budgets into the district sector, where releases to with a threadbare analysis of the functional assignments to the
the District and sub-district level Panchayats were undertaken Panchayats, as manifested in the Karnataka Panchayat Raj Act
by the Finance Department. Thus, departments tended to 1993 and the Activity Mapping order of 2003. This was
recentralise schemes through the strategy of shifting them back followed by a detailed analysis of the State and the District
from the District Sector to the State Sector, whereby they Sector budgets, to ascertain the allocations made to finance
gained control and supervision over what they considered their various activities devolved to the Panchayats. Expenditures of
rightful technical domain. Such re-centralisation happened these allocated funds were also studied, to understand whether
through two prominent strategies. First, line departments began the allocations were actually released and spent. The final
to make additional financial outlays pertaining to functions objective of the research was to ascertain how much money was
assigned to Panchayats in the State plan. This meant that setting being allocated and spent within the jurisdiction of each GP by
priorities and making investment decisions were increasingly all development entities that pertained to functions devolved to
being wielded by line departments, overriding or ignoring the Panchayats. As a study that went into the details of fiscal
Panchayat decisions. Second, departments began to set up devolution, this was a unique effort that went beyond looking at
parallel institutions to the Panchayats. These were prompted by what a GP alone spent, to examining what the broad spectrum of
two inducements, namely, the GoI, several ministries of which Government agencies were doing in the jurisdiction of each GP.
mandated the setting up of parallel societies ignoring the For the purposes of the study, the term 'budget envelope' was
functions devolved to the panchayats and Multilateral lending used to describe the expenditure plus unspent allocated money
agencies which were equally ignorant of Panchayats, which pertaining to all departments of the government within the
pressurised the State to ring-fence their donor funds from the jurisdiction of a GP. Thus, the budget envelope signified the
State and Panchayat budgets. amount of money that the voters of the GP – the Grama Sabha –
needed to keep watch on, if they were to hold the government
4. However, it was not as if the State was not aware of the
accountable for its development efforts in every GP.
problem and did not take steps to rectify the growing mismatch
between functional assignments and fiscal transfers to the
 15 Aarthika Charche - Vol 2 No.1

6. The methodology of the research was as follows:

(a) Undertake a study of the KPR Act and related rules and (f) Where such releases and expenditures were not done on
orders (including the Activity Mapping order), to map a GP wise basis, work out, department-wise and
out the functional assignments to the Panchayats at all scheme-wise, methodologies of attributing bulk, or
levels; indivisible expenditure, to each GP.

(b) Study the historical trends of the growth of the 7. Some of the key findings of the study are presented
Karnataka State budget, to ascertain the commitment below:
of the State to matching functional devolution to the
Panchayats with fiscal assignments; 7.1. Functional devolution
Analysis of the KPR Act and related orders show that a
(c) Based upon the activity mapping, study the State Sector range of powers and responsibilities in respect of all the 29
of the budget to ascertain the budget streams that ought matters listed in the Eleventh Schedule of the Constitution have
to have been devolved to the Panchayats, but which been devolved to the ZPs. In the case of TPs, devolution
were still retained by the State; extends to 28 matters and for GPs, to 25 matters. Thus, there is a
high degree of functional devolution to all levels of panchayats,
(d) Identify all departments and entities that implement
schemes and programmes in the rural areas of 7.2. Trends in fiscal devolution for panchayats
Mulbagal taluk and divide them into those that Fig-1 provides budget allocations in Karnataka from FY
function under the control and supervision of the 2001-02 to FY 2014-15.The Karnataka State budget grew by
panchayats and those that function autonomously; 463 percent. (Plan funds - 545 % and non-plan - 412 %). During
the same period funds devolved to PRIs grew by 446 per cent
(e) Obtain through field research, details of actual releases (Plan - 471 %, non-Plan - 430 %).
and expenditures of funds, both in the District and the
State Sector, within the jurisdiction of each GP, by all
such identified departments and autonomous
institutions;

Fig 1: Budget allocations in Karnataka; 2001-02 to 2014-15 (B.E.)

State + Central Plan State + Central Non Plan Devolved Plan Devolved Non Plan

100,000
90,000 86,218
80,000
70,000
68,552
60,000
50,000
40,000
30,000
20,000 16,854 15,862
10,000
10,622
2,994 10,481
-
1,834

Source: For plan funds: Economic Survey of Karnataka 2014-15 & Department of Planning, Government of Karnataka (GoK),
for data for FY 2012-13 to FY 2014-15. For non-plan: Accounts at a Glance, 1960-2014, Finance Department, GoK.
 The 'Paisa for Panchayats' Study; measuring fiscal flows within the jurisdiction of Grama Panchayats in Karnataka. 16

However, funds devolved to the Panchayats under Plan as a cent in 1991-92 to 16 percent in 2014-15 (Fig 2).
percentage of total state Plan allocations declined from 35 per
Fig 2: Trends in devolution of Plan funds to the Panchayats as a percentage of State Plan funds
50%
40%0.348477026
30% 0.236660929
0.190942218 0.19638579
20% 0.146063951 0.156255591
0.122024367
10%
0%
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Plan Based Devolution

Source: Economic Survey of Karnataka 2014-15 & Department of Planning, GoK, for data for FY 2012-13 to FY 2014-15.

A sizeable share of the funds devolved to the Panchayats these deputed employees has declined, as State government
under both Plan and non-Plan heads, comprises of salary departments have centralised transfer and placement decisions.
transfers. Panchayats have little discretion in expenditure of If salary payments from the Plan allocations are added to the
these funds as they are pass through payments to State non-Plan allocations, the percentage of funds devolved under
employees placed on deputation with the Panchayats. Over Plan heads declines even further, to about 12 percent of the State
time, the control and superintendence by the Panchayats over budget (Refer Table 1).

Table 1: Allocations of funds in 2014-15 (B.E.)

1 Total State Plan Budget (Rs. Cr) 67076
2 Total State non-Plan Budget (Rs. Cr) 83303
3 Total State Budget (1 + 2) (Rs. Cr) 150379
4 District Sector Plan Budget (Rs. Cr) 10481
5 District Sector Non Plan Budget (Rs. Cr) 15862
6 Total District Sector (4 + 5) 26343
7 Plan Devolution % (District Sector Plan/Total Plan) 15.63
8 Non-Plan Devolution % (District Sector non-Plan/Total non-Plan) 19.04
9 Total Devolution % (District Sector/Total State Budget) 17.52
10 Of Item 4, Plan funds earmarked for salaries (Rs. Cr) 2447
11 Net plan allocations, excluding salaries (4-10) 8034

Percentage of non-salary Plan allocations to Panchayats, against total Plan outlay of

12 11.97
State
 17 Aarthika Charche - Vol 2 No.1

The study went into the allocation of non-Plan and Plan salaries and non-plan allocations were 78 and 87 percent
allocations across the three levels of Panchayats. This revealed respectively; these institutions were largely salary paying
that significant proportions of the total allocations going to the machines, with very little discretionary funding to implement
ZPs and TPs comprised of salary heads of account. In the case of their plans and programmes (Refer Table 2).
the Kolar ZP and the Mulbagal TP, the total allocation of plan

Table 2: Cumulative effect of non-plan and plan (salary) heads, on ZP and TP budgets
Total non- % of non- Plan allocations % of non-plan +
Fund Total Total Plan
plan plan in total With Without % of salary salary plan, in total
Description allocation Allocation
allocation allocations Salaries Salaries allocations allocations

District
Sector , 26343 10481 15862 60.21 10481 8034 23.35 69.50
Karnataka

Kolar 598 187.23 410 68.56 187.23 131.5 29.77 77.88

Mulbagal 72 14.2 58 80.56 14.2 9.4 33.80 87.22

Clearly, over the years, there has been an erosion of the panchayats in Schedules I, II and III of the KPR Act clearly
discretionary funding that is available to the Panchayats for reveals that from the stage of allocating budget heads itself
carrying out their devolved functions effectively. This is further fiscal devolution does not mirror functional devolution. This is
confirmed through examination of both the Link book and the regardless of the fiscal allocations being made under these
State budgets. A mapping of the budget heads in the Link Book heads (Table 3).
for allocations against the functions devolved upon the

Table 3: Heads of Account contained in the link book, for devolved functions
Description ZP TP GP

# of subjects of Eleventh Schedule functionally devolved 29 28 25

# of subjects fiscally devolved and have budget heads assigned to them 24 17 3

# of subjects that do not have funds allocated though budgets heads exist NIL 2 3

There were 269 schemes with a cumulative allocation of Rs governance, all expenditures incurred by any department of the
22,596 crores pertaining to devolved activities, that were state government, its parastatals, the ZP, TP and their
retained in the State Sector and implemented through state line implementing offices, end up in the jurisdiction of one or the
departments, parastatals and agencies as state sector schemes. other GP. The GPs could therefore perform a watchdog role on
This results in further mismatches between the functional behalf of the Grama Sabhas, to keep track of allocations and
assignments and fiscal transfers to the Panchayats. Many State expenditures of all other departments (including the ZPs and the
Sector schemes have descriptions similar to schemes in the TPs) in its jurisdictions. Keeping this potential in mind, the
district sector thus leading to overlaps. Rs. 6357 crores worth of study ascertained how much money is allocated and spent
allocations were found to be “overlapping” with district sector through government departments, autonomous institutions,
schemes. These trends indicated a strong and un-hindered ZPs and TPs, in the geographic jurisdiction of a GP. This, of
tendency of State departments to dilute devolution through course, was apart from ascertaining what the GP itself was
recentralisation. spending, through its own budget.

7.3. Public expenditure at the gram panchayat level The study found that in FY 2014-15, the average budget
In the spectrum of local governance, GPs are the closest to the envelope for a GP in Mulbagal Taluk amounted to about Rs. 6
people and carry several key responsibilities relating to crore. The highest budget envelope for any GP was Rs. 7.3
essential services for the people. As the first mile of crore, and the lowest, just under Rs. 4 crore. However, 97 per
 The 'Paisa for Panchayats' Study; measuring fiscal flows within the jurisdiction of GP in KA. 18

cent of these allocations and expenditures were incurred by a jurisdiction, as government departments and autonomous
spectrum of entities other than the GP. Of the total budget institutions did not maintain allocation, release and expenditure
envelope of Rs.179.37 crore, allocated and spent by all details on a GP wise basis. It goes without saying that GPs are
agencies put together, the budgets of GPs alone only comprised largely unaware of the planning process underlying the design
of 5.76 crore. Not only did the GPs not control the expenditures and implementation of schemes of other entities, within their
of other entities within their jurisdictions, they were also jurisdictions. Details are in Fig 3:
oblivious of the nature and extent of funds spent in their

Fig 3: GP wise Budget Envelope details for 2014 - 15

Utthanur 16 737
Devarayasamudra 29 704
Amblikal 26 703
Gummakallu 34 685
Avani 23 674
Kappalamadagu 16 671
H Gollahalli 4 669
Byrakur 24 663
Mallanayakanahalli 28 649
Mudigere 6 635
Sonnawadi 25 633
Nangali 33 622
Balla 20 618
Hebbani 17 616
Pitchaguntlahalli 22 609
Mudiyanur 15 583
Kurudumale 11 575
Emmenatha 20 559
Thimmaravuthanahalli 14 541
Alangur 29 540
Mothakapalli 27 527
Mustoor 5 507
Angondahalli 23 492
Agara 15 488
Hanumanahalli 14 479
Oorkunte Mittur 18 464
Gudipalli 8 462
Thayalur 18 449
Rajendrahalli 22 411
Dulappalli 18 396
0 100 200 300 400 500 600 700 800
Panchayat Account Expenses Other Entity Expenses
Source: Primary data collected by Accountability Initiative from various sources in FY 2015-16
 19 Aarthika Charche - Vol 2 No.1

7.4. Other Key Findings: Panchayats to meaningfully plan for and carry out their
Other key findings were of skewedness in allocations and responsibilities. Panchayats are configured as agencies of
expenditure across departments, and across GP jurisdictions. higher level governments to implement top down schemes with
Some illustrative findings are as follows: little autonomy in planning, designing and implementing
Ÿ 52 per cent of the expenditure incurred in a GP were of the expenditure programmes. Fiscal devolution is the true measure
Education department and the subsidies through the of the State's political intent to devolve and by that yardstick,
public distribution system. Karnataka's record is tarnished and its reputation as a leader in
Ÿ There were significant shortfalls in expenditure by devolution, considerably eroded.
departments, even on those services that were accorded a
high priority by Grama Sabhas and GPs. For example, The a-priori allocation of funds through a District and Taluk
only 70 per cent of its annual allocation was released for Link Book, while a good practice, reveals considerable scope
Rural Water Supply and only 39 per cent was spent. This for improvement. Of the 320 schemes in the District Sector, 205
was in spite of Mulbagal taluk suffering from chronic schemes have allocations of Rs 1000 lakhs or less. The inter-
water shortages. Only Rs. 10 Lakh was spent across only governmental fiscal transfer system could be considerably
5 out of the 30 villages under the Pradhan Mantri Gram simplified by eliminating schemes with small allocations.
Sadak Yojana. No money was released under the Chief
Minister Gram Sadak Yojana. Local area development There is poor knowledge about the existence of Taluk Link
(LAD) funds spent by MP, MLA and MLC amount to books and therefore, this reform has had little impact on
only 1 per cent of the spending. No MP LAD funds were transparency of allocations at the Taluk level. There is no GP
expended in Mulbagal Taluk in FY 2014-15. Link Book that breaks down allocations of all schemes in the
Ÿ Departmental expenditures across GPs was skewed. The district sector to the granularity of each GP. The absence of GP
Horticulture department spent anything between Rs. 50 level link documents makes it difficult for the GPs to hold the
lakhs to Rs 10 Lakh in a GP. The Minor Irrigation ZP and TP accountable for their performance even though all
department spent 20 per cent of its budget (i.e. Rs. 64 expenditure of the latter takes place within the jurisdiction of
Lakh out of Rs 330 Lakh) in just two GPs. 12 GPs had no one or the other GP.
expenditure by the Minor Irrigation department. 3 GPs
accounted for 25 per cent of MGNREGA expenditure in Given that the panchayats and their limited organisational
the taluk, while 11 GPs accounted for just 10 per cent of capacities (comprising of State employees deputed to the
the expenditure. Similarly, Swachh Bharat Abhiyaan Panchayats) are burdened with agency functions, they have
(SBM) saw high expenditure in 3 villages, while on the very little motivation or capacity to plan or financially
other hand, 3 GPs recorded zero expenditure. Similarly, contribute to the performance of their devolved responsibilities.
the Watershed department spent its allocation only in 10 Their own sources of revenue such as property tax are left
out of the 30 GPs in Mulbagal. uncollected. Schematic transfers are soft budget constraints that
Ÿ 77 per cent of the GP budgets, were comprised of Central provide little incentive for panchayats to collect their taxes and
Finance Commission grants. However, these allocations make up the deficits. These trends result in a downward spiral
provided little discretion to the GPs, as these funds were that makes Local Governments (LGs) more and more
allocated to pay bills for electricity supply by the dependent on higher levels of government for meeting their
Bangalore Electricity Supply Company Limited financing needs.
(BESCOM). Expenditure on this account for streetlights
Regardless of whether local expenditures are through
and water supply installations of the GPs, constituted
centralised or decentralised schemes, releases and expenditures
about 4 per cent of the total budget envelop for GPs in
are lumpy and inefficient. Centralising schemes by including
Mulbagal.
them in the state sector has not solved this problem; it has only
8. Summary and Recommendations made local expenditure dependent on an equally convoluted
Karnataka's political vision of democratic decentralisation centralised process of prior approval, involving the state line
in rural areas has not been adequately and rationally department concerned, the Planning department and the
operationalised through the process of fiscal devolution. While Finance department.
at the state level, total plan and non-plan allocations have grown
multifold, the proportion of allocations made to panchayats has It is evident that in practice, planning and plan
fallen. Furthermore, these are nearly entirely comprised of implementation follows a top-down approach. Irrespective of
salary transfers, or rigid schemes that offer little scope for the the district or the state sector, there is a flow-down of fund
 The 'Paisa for Panchayats' Study; measuring fiscal flows within the jurisdiction of GP in KA. 20

allocations that are finalised centrally by the state Finance

department. The granularity of local level budgeting stops at the Ÿ Data management and reporting – It is recommended that
taluk level. Therefore, GPs are unaware of the enormous all public expenditure by an entity in a district must occur
expenditures undertaken by the ZP, TP and the state through the Treasury.
departments within their jurisdictions; they are hence unable to
monitor such expenses, to either alert people of such Ÿ For data reporting, a centralised monitoring unit, akin to a
expenditures or place details before the gram sabhas. Decentralisation Analysis Cell, needs to be created at the
Rural Development & Panchayat Raj (RDPR)
Though ultimately, the strength of democratic department. The cell should be tasked with publishing
decentralisation depends upon the political will to walk the talk, monthly reports of GP-wise expenditure from the
several systemic and operational changes can be undertaken in Treasury and ensure these reports are circulated by the
Karnataka to make the intergovernmental fiscal transfer system respective ZP Chief Executive Officers (CEOs) across
rational, simple and transparent. The important GPs in their jurisdiction. This would help in kick-starting
recommendations are: a system where the ZPs and TPs see themselves as
information providers for GPs. It would also enable the
Ÿ Review of roles and activities – All state line departments GPs to share such information with Grama Sabhas, so
need to review the activities assigned to the LGs to ensure that all government expenditure at the GP level is open to
role clarity and avoid duplication of administrative and public scrutiny.
implementation efforts. Based on such review, financial
allocations to the panchayats needs to be realigned so as Ÿ Progress reports of implementation against allocated
to ensure that no LG responsibility remains unfunded. releases and expenditure should also be published on a
This will help track performance and assign quarterly basis by the district, block, state line
accountability across all levels of government for departments and parastatals to ensure accountability and
assigned activities. clarity amongst all actors.

Ÿ Increase the true fiscal capacity of panchayats – While 9. Conclusion

the volume of fiscal transfers is large, discretionary funds The 73rd Amendment aimed to lay down in the Constitution
are a small proportion of these. These need to be certain essential features of PRIs to enable them acquire the
considerably increased. status and dignity of viable and responsive peoples' bodies.
More than two decades after the passage of this amendment,
Ÿ Simplification–The burgeoning number of schemes need there is a clear indication that decentralisation did not end up
to be rationalised by integrating the small allocations achieving the objectives it had visualised.
with the big, thus minimising accounting burdens and
giving greater discretion at local levels. Implementation of the suggestions mentioned above will
help Karnataka move closer to effective devolution and hence
Ÿ Data measurement and reporting–All implementing ensure effective, transparent and inclusive use of scarce public
entities need to break down their allocations down to the resources. In summary, the vision of the 73rd Amendment is not
granularity of each GP, as far as possible and make these distant. We urge relevant stakeholders to seriously reflect on the
details publicly accessible through GP level link books. results and recommendations of this research (which we believe
is not unique to Karnataka) and deliberate on what can be done
Ÿ The Treasury department's Khajane system, now to strengthen the process of decentralisation given the
undergoing an upgradation, can be tuned to capture the circumstances of their states.
location details of all expenditures, whether of
centralised or decentralised schemes, by mandating that
all vouchers carry a unique location code for each
habitation. This will enable the future possibility of
automatic consolidation of expenditure in real time
across all habitations. That in turn will automatically
enable GPs to monitor programmes of departments in
their respective jurisdictions, greatly facilitating
effective monitoring by Grama Sabhas.
Goods and Services Tax:
How will it Play Out
1
-R. Kavita Rao
Abstract

The introduction of Goods and Services Tax in July 2017 is presented as

a major game changer for the Indian economy. This paper attempts to
identify some of the major changes that the new regime would bring in
both for the tax payer in complying with the tax regime and on the
economy. It attempts to identify the kinds of changes one might expect from
the reform and the likely time frame to see the impact manifest in the form of
higher growth in the economy. It suggests that while GST could transform
the economy, these effects would take time to be realised, more so in the
present context.
Dr. R. Kavita Rao is a Professor at NIPFP, New
Delhi. Her research areas include Design and
Implementation of Goods & Services Tax
(GST), Value Added Tax, tax reforms, tax
exemptions and revenue mobilization. She
has published many articles in national and
India is poised to implement the much awaited Goods and Services Tax.
The rapid pace of developments in the last few months has made this a
possibility. The GST Council has been working diligently to discuss all
the contentious issues and arrive at decisions by consensus to take this reform
forward. So far, the CGST and IGST bills have been finalised by the Council,
international journals. She was a member,
Study Group on Special Economic Zones, which can now be presented to the Parliament for discussion and enactment.
Directorate General of Export Promotion, The discussions on the model SGST bills are on and are expected to be
Government of India and Member, completed soon. Each of the states needs to adopt the model bill and enact the
Committee on Revenue Neutral Rates for same. Once the bills are approved, the corresponding rules too can be
State GST and Central GST and place of formalised and notified.
supply rates, Empowered Committee of
On the other side, as a precursor to implementation, the registration for GST
State Finance Ministries.
has been initiated in the GSTN. Going forward, it is important to understand the
* * * changes that this reform is going to bring in, both for the taxpayers and for the
economy as a whole. Some of these issues are being identified in the following
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
discussion.

To understand the impact of GST, it would be useful to first recall the important
features of this regime. The GST regime proposes a composite levy of CGST and
SGST on all transactions of supply of goods and services in the economy. These
taxes are organised in the form of value added tax where the supplier can claim credit
for any input taxes that might have been paid against the taxes payable on supplies.
The central tax – CGST would accrue to the central government while the state tax –
SGST – would accrue to the state government. Since there are multiple state
governments in the country, it is important to define which transaction will be taxable
in which jurisdiction. The place of supply rules clarify this picture. Further, since the
GST is meant to be a “destination based” tax regime, i.e., the tax should accrue to the
jurisdiction where the good/service is consumed, the regime defines when a transaction
would be considered as an inter-state transaction. On all inter-state transaction, in place
of the CGST and SGST, an IGST would be chargeable in the exporting state and in the
importing state, the dealer can claim input tax credit of IGST against taxes payable on

1
Views expressed are personal.
 Goods and Services Tax: How will it Play Out 22

sales, thereby transferring revenue from the exporting state to thirty jurisdictions. This requires service providers to register in
the importing state. Some commodities/transactions have been each of the jurisdictions they make supplies in. Further, they
kept out of the base for GST: these include petroleum crude, need to dis-entangle their business organisation into state wise
petrol, diesel, aviation turbine fuel, natural gas, alcoholic components so that corresponding returns can be filed and all
beverages for human consumption, electricity and some real relevant tax credit can be claimed. In this context, for centrally
estate transactions. And finally, on the rates of tax, the GST procured goods and services, they would have to use input tax
Council has adopted a multiple rate regime – with four rates credit distributor to allocate the credits to the registered units
other than exemptions and special rates: 5 percent, 12 percent, located in different tax jurisdictions. While this provision
18 percent and 28 percent. For some commodities like tobacco existed in the earlier regime as well, the need to avail and utilise
products, it is proposed that there would be some additional this provision is more under GST since the organisations would
surcharges over and above 28 percent and similarly for luxury have undergone changes to comply with state level
motor cars and aerated drinks. On the other hand, it is expected registrations.
that for gold bullion and jewellery, there might be a special rate
below 5 percent. A third change is implicit in the way the GST Act defines the
valuation of taxable transactions and incorporates provisions to
Changes for the tax payers control profiteering. In the existing regimes of value added tax
There are a number of fairly major changes that the in the states, the invoice value of transactions has been
taxpayers would be facing when the indirect tax regime of GST considered the basis for levy of the tax. The GST Act, however,
replaces a myriad of indirect taxes present today. Some of these introduces a distinction between transactions between related
changes could make compliance easier while others might need parties and transactions between unrelated parties. In the latter,
some changes in the organisations themselves. To highlight the tax would continue to apply on the invoice value while in the
some of the changes that would make compliance easier, it is case of the former, the law proposes to prescribe the manner in
proposed that there would be considerable streamlining of the which value will be determined. Interestingly, the definition of
tax administration, in routine parts of taxation, i.e., registration, related parties is considerably wide to include cases such as
returns filing and payment of taxes. All these processes would “together they directly or indirectly control a third person”. In
be centralised and organised through the GST network. Further, addition to the above, the bill contains an “Anti-profiteering
since in the new regime, for most commodities, the central sales clause” which allows the tax department or an authority
tax regime would not exist, there will be no need for the C- constituted by the government to question the taxpayer on
forms and F-forms as well as the corresponding rules for whether benefits from lower taxes or input tax credit have been
compliance. In other words, some of the forms and procedures passed on to the consumer in the form of lower prices. In other
in the present regime would be reduced or even eliminated. words, with all these provisions, it would be important in the
Further, the agreement with the GST Council has ensured that new regime for taxpayers to formally document the mechanism
while there would continue to be two tax departments, there by which they have determined their prices on a periodic basis.
would be considerable cooperation in the way they work so that Invoices would no longer be adequate to justify the price
the taxpayer would face a single tax administration. This has charged on a transaction and for determining the base for the tax
been achieved with bifurcation of the tax base into taxpayers to payable to the government.
be administered by the state governments and those to be
administered by the central government. The laws propose to Another significant change proposed in the GST regime is
cross-empower the administrators so that decisions taken the uploading of invoice-wise data for both purchases and sales
would be applicable to both taxes. The only element of by all GST registered dealers in the country. It is proposed that
uncertainty is if the assignment of taxpayer to one or the other the system would cross-validate all claims of purchases with
administrator would change over time and if so, how frequent reported information on sales to ensure that fraudulent input tax
this would be. credit claims are eliminated. This system is already in operation
in 11 states and hence, dealers in these states would be familiar
On the other hand, there would be changes in the structure of with the system and already equipped to deal with the
taxation and administration which alter the present scenario to compliance requirements. In all the other states, this would
increase cost of compliance for a few sectors/activities. For mean a big change in the way the taxpayer is complying with the
example, for taxpayers who were supplying services, all of tax regime. The costs of transition as well as the costs of
India was a single jurisdiction and therefore there was a single compliance to provide all this additional information would
registration and integrated tax credit rules. But within the GST have to be factored in by the taxpayers and their tax consultants.
regime, the country is not one tax jurisdiction but more than
 23 Aarthika Charche - Vol 2 No.1

The multiple rate structure of GST, it is expected, would distortion is eliminated and this could generate incentives
bring in at least initially, a series of classification disputes, even for setting fewer and larger factories thereby allowing
if the government proposes to ask for invoices to be drawn up on companies to benefit from economies of scale. Second, it
the basis of HSN codes. In this context, it is interesting that the could allow for the redesign of the supply chain with
GST Act proposes to have an Advance Ruling Authority which fewer larger warehouses instead of having one in each
can be approached to give a ruling on a variety of issues state. These would mean new investments both in
including on the classification of activities. This could provide a production capacities and in redesigning supply chain.
degree of predictability/certainty to the taxpayer provided these With economies of scale, it is argued that the cost of
authorities, to be constituted one in each state are not swamped production of goods/services would be lower, which if
by requests for clarification in the initial period after the passed on could further stimulate demand.
introduction of the tax. Further, it would be interesting to see
whether the rulings so provided can be placed in the public iv. GST regime is also expected to eliminate the incentive
domain to serve as guidance for similar other taxpayers. regimes that have associated with the erstwhile indirect
tax regimes, whether there are in the form of area based
Likely Changes in the Economy exemptions or in the form of incentives to specific
sectors. Through these incentives, governments have
The GST regime is expected to bring in a significant change attempted to influence the choice of investment location
in the functioning of the economy – these changes, some have and/or the sector for investment. These initiatives can be
argued, would contribute up to 1.5 percent to GDP. While the viewed in two ways: first, that they bring investment into
quantification of the gains is an interesting intellectual exercise, areas where investment was not forthcoming and hence
it is more important to ask where and how these gains are contributing to better regional distribution of economic
expected to be realised. There are broadly six channels through activity. The alternative way of looking at these incentives
which the change in the tax regime can bring about increase in is to recognise that the fact that the incentives are not
economic activity in the economy. reaching certain locations/sectors is evidence of
i. A shift to GST from the present regime of indirect taxes is commercial non-viability of these activities when
expected to reduce the amount of cascading in the tax compared to alternatives available within the economy.
regime. Since cascading could result in some price build- By providing these incentives, one is therefore reducing
up, a reduction in cascading can imply a reduction in the the returns to investment in the economy. By eliminating
final price. The former could imply some expansion in these incentives, the distortions to investment decisions
demand, if demand is sensitive to the changes in prices. resulting from these incentives will be eliminated and
This could have implications for exports as well, if hence investment would be more productive and could in
exports from India are sensitive to changes in prices. turn attract more investment.

ii. If the benefits of reduction in cascading are not passed on v. Rationalising of the rates of tax in the new regime, with
in the form of lower prices, it should result in an increase some commodities/activities benefiting from lower rates
in the profits of sectors where these gains are visible. This of tax compared to the existing regime is expected to
in turn should attract investments into these sectors. stimulate economic activity in these sectors. In the
present regime, manufacturing sector faces higher taxes
iii. One major change in the GST regime is the elimination of when compared to agriculture and services. With
CST for commodities under GST. Apart from the effect rationalisation of the rates of tax, these differences should
through a lower level of cascading, the removal of CST be reduced thereby providing a level playing field and
can have two other kinds of effects. First, it has been possibly attracting more investment into manufacturing.
argued that the CST regime encourages fragmentation of
economic activities in the country – setting up branches in vi. Apart from the effects that stimulate economic activity,
different states allowed companies to send goods on GST could bring in business from the informal sector to
consignment transfer which were not subject to CST. the formal sector. These could be activities which are not
While these transactions did suffer some taxes, since the reporting their transactions for taxes in the present
exporting states denied part of the input tax credit regime.
attributable to these transactions, the overall tax liability While conceptually, all of the above factors could be at work
could be lower. With the elimination of CST, this in the economy subsequent to the introduction of GST, it would
 Goods and Services Tax: How will it Play Out 24

be useful to temper our expectations by examining the

likelihood of each of these channels playing out. Finally, the formalisation of the informal sector is an effect
that is widely expected to be realised rather quickly. This effect
While the first channel focuses primarily on the demand depends on the agents in the informal sector perceiving costs to
side, the other channels work through the supply side. The remaining informal and benefits to moving to the formal sector.
demand side channel depends on the prices being lowered to Invoice wise data capture is one of the features that is expected
pass on the benefits from lower cascading to the consumer. This to induce such a movement. Informal sector could be viewed in
process could be realised with or without the government's two ways: first, those agents who would like to be part of the
intervention in the course of a few months. Experience in other formal value added networks and, second, those who operate
countries suggests that the initial spurt in prices with an only within the informal segment – buying from and selling to
introduction of a VAT regime dissipates within a few months. In the informal economy. The former would benefit from moving
other words, given time, this channel should be realised. to the formal sector while the latter might need more
persuasion.
Turning to the other three channels, these are all based on
supply side. At the present juncture in India, these channels Some Conclusions
might be difficult to activate immediately for a number of From the above discussion, a few important points emerge.
reasons. First, from available information, it appears that many First, introduction of GST would require taxpayers to adapt to a
sectors in the economy are operating at excess capacity, new regime, where compliance costs for some segments of
suggesting that expansion in capacity might not be high on taxpayers could be higher than in the present regime. Second,
priorities. Further, the mounting NPAs and the stress on the the argued gains from GST could take some time to be realised,
balance sheets of corporate India too might suggest that finding apart from any formalisation of the informal sector that could be
resources for investment in the short run might be a problem for induced in the initial months of the new regime. A third issue
the potentially large investors. And finally, turning to the supply relates to the relative benefits from growth resulting from GST:
chain re-engineering, it is likely that efforts on this front might implicit in the above discussion is the notion that location of
be related to the perceived quality of infrastructure on the investment might be different after the introduction of GST.
alternative designs. For instance, if a company chooses to locate How this would affect the distribution of economic activity
a central warehouse in central India, would it find adequate road across states in the economy is not yet certain. This could have
infrastructure to connect with the markets it intends to supply consequences for employment generation as well as tax
to. Further, if warehousing requires refrigeration, the choice of collection in different states. These effects too should be closely
location could be constrained by the availability of adequate, monitored in times to come.
reliable power supply. In other words, the benefits from the
supply channels might not be stimulated immediately upon the
introduction of GST. These benefits might be realised a few
years into the introduction of the new regime.

The effect of rates of tax on the economy is not expected to

be realised in the short run, since the proposed structure of taxes
is being designed to closely mimic the rates that exist at present.
The rationale for this choice of rate structures is to ensure that
there is no major clamour for changes in the rates of tax thereby
delaying the implementation of the new regime. This, however,
means that boost to the economy from rate rationalisation too
might have to wait until the rationalisation which can be
undertaken after the taxpayers and the governments settle into
the GST system.

Turning to the impact of elimination of industrial

incentives, it may be mentioned that governments might choose
to replace the existing tax based incentives with incentives
through other fiscal instruments such as explicit subsidies or
transfers. In this case, these benefits might not be realised.
The Goods and Service Tax -
A saga of cooperative and
contesting fiscal federalism
-V Bhaskar1
Abstract

This article examines the design of the proposed Goods and Service Tax
(GST) against the parameters essential for a vibrant fiscal federation.
These are establishment of trust amongst all the federating units, adoption
of common goals by all the federating units and the provision of credible
commitments by all the federating units. These three parameters have been
used as touchstones to examine the design of the proposed GST. The
agreement between the Centre and the states on the implementation of the
GST is indubitably a high watermark for cooperative fiscal federalism in
India. However, much more work needs to be done on the GST design in
Dr. V Bhaskar retired from the IAS with respect of all these three parameters before the Indian economy can fully reap
international, national, and state level the benefits of this tax.
experience of issues relating to public finance,
federalism, taxation, and energy regulation
including policy formulation and Introduction
implementation. He has worked as the
Chairman, Andhra Pradesh Electricity
Regulatory Commission. Earlier, he was the
Special Chief Secretary in the Finance
Department of the Government of Andhra
F
Cooperative
iscal federalism in India can be defined as a constitutionally
entrenched mechanism for the territorial distribution of legislative
power amongst the Union and the twenty nine federating states.
fiscal federalism enhances this process of self-rule and shared rule
Pradesh. He has a PhD in Economics from by enabling all the federating units to work together to achieve common and
the Hyderabad Central University, mutually agreed goals. Contesting federalism involves the federating units
Masters in Public Administration from aiming for different and often conflicting goals and, thus, diffusing and retarding
Harvard University and Masters in the national drive towards previously agreed objectives.
Science from St Stephens College Delhi. The proposed implementation of the Goods and Service Tax from 1st July,
His professional interests include fiscal 2017 is a shining example of cooperative fiscal federalism at its best in India. For
federalism, taxation, public finance, the first time since 67 years, despite having different fiscal perspectives, the Union
governance and energy sector and States have voluntarily come together to share a common tax base to
regulation on which he has published a implement the Goods and Service Tax. The agreement on the implementation of the
number of papers. GST is thus a high watermark for cooperative fiscal federalism in India. However,
the process of forging a consensus in the GST Council on the nature of the GST to be
* * *
implemented and its operating framework has brought forth strands of competing
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯ federalism into the national polity. This raises cause for concern as this trend is likely
to diffuse the emphasis on one nation, one market and one tax which is the hallmark of
the GST.

This article examines the GST framework through the prism of fiscal federalism
and analyses how this cooperative enterprise of the federating units can be made
sustainable and vibrant in the long term. It also analyses the threads of contesting fiscal
federalism, which have emerged during the national debate and its impact on the
sustainability of the GST. The purpose of this exercise is to identify areas and steps to
strengthen cooperative federalism and dampen contesting federalism in GST

1
Views expressed are personal.
 The Goods and Service Tax - A saga of cooperative and contesting fiscal federalism 26

implementation. Towards this end, we adopt the artifice of decisions compounds this problem. Ideally, the definition
examining the GST design against three touchstones which should have read 'goods and services tax means a destination-
form the desideratum of a successful cooperative federation. based, consumption-type, value added tax on supply of goods
We seek to determine as to what extent they have been or services or both, levied as per the framework recommended
integrated into the design of the GST. These three hallmarks are by the GST Council'. The present open ended definition of GST
trust, common purpose and credible commitment. How much reflects over-trust in the design.
do the stakeholders of GST trust each other? How much
confidence do they have in the credibility, integrity and Over trusting- Allowing Payment in Instalments
Another example of over-trust is the recent proposal 'in
reliability of the other stakeholders? Are all the stakeholders
order to mitigate any financial hardship being suffered by any
aiming for the same (or mutually consistent) goals? Do the
taxpayer, Commissioner has been empowered to allow
incentives of the stakeholders converge? Finally, do the
payment of taxes in instalments'. The CGST and SGST laws
stakeholders provide credible commitments to each other? Can
already incorporate provisions for late payment of taxes with
the commitments made by them be expected to be honored
interest. Unlike income tax, GST is a tax already collected from
under all circumstances, come hail or shine? This article seeks
the buyer, which is held in trust by the seller for the government.
to address these questions by testing the proposed design and
The question of allowing instalments to dealers without
operational structure of the GST against these three
imposing additional interest obligations should not normally
benchmarks.
arise. Allowing payment of instalments without penalties is
Trust thus an unnecessarily over-trusting stance.
The dictionary defines trust as 'Firm belief in the reliability,
truth, or ability of someone or something.' There are five Mistrusting – Criminal Liabilities for fraudulent behavior
In a unique move, criminal liability has been attached for
stakeholders in the GST environment - the consumers who will
default of GST payment. Both the CGST Act and the SGST Act
pay the tax, the dealers/ manufacturers/ service providers who
specify offences which can be penalized with a prison term of
will collect the tax, the twenty nine state governments and the
up to five years apart from levy of a fine. These offences include
Central Government and who will levy and appropriate the tax
evasion of tax through non-issue of invoice, issue of fraudulent
and the respective tax administrations which will oversee the
invoice and subsequent availment of ITC, falsification and
implementation of the tax. It is vital that all five of these
tampering of records, non-payment of collected tax, dealing
stakeholders trust each other, if the GST is to be both effective
with non-tax paid goods and services. Abettors will also be held
and efficient. The GST system should be so designed so that it is
liable. Most of the violations listed above come under the
difficult for the stakeholders to breach such trust. This requires
category of misappropriation, forgery, embezzlement, which
that a fine balance be maintained between over trusting and
are independently recognized as crimes under the Indian Penal
mistrusting in designing the GST. Examples where this balance
Code. The tax administration has recourse to filing complaints
does not appear to have been maintained described below.
under the IPC against such defaulting dealers. Also, given the
Over trusting - Definition of GST workload in our courts, speedy determination- a prime
Article 366(12A) of the Constitution defines the goods and condition for deterrence, is unlikely. While it is always
service tax as 'any tax on the supply of goods, or services or both necessary to take a firm stance against tax evasion in all its
except taxes on the supply of alcoholic liquor for human forms, incorporating penal clauses in the CGST/SGST Act
consumption'. The critical words are 'any tax'. Any tax could reflects a high degree of mistrust in the dealers - one of the
mean not only a GST but also the former multi-point sales tax, important stakeholders of the GST process, with little
the present VAT or excise or service tax or even a turnover tax. consequential benefit.
This definition in the Constitution has not been restricted in the
downstream CGST and SGST laws to be passed by the Centre Mistrusting - Anti Profiteering measure
As part of the transitional provisions, a section entitled 'Anti
and the States respectively. Thus, the definition of the GST as it
Profiteering Measure' in the CGST Act reads
stands, is presently very broad and provides unnecessary (1) Any reduction in rate of tax on any supply of goods or
incentives to the Central and State governments to adapt the services or the benefit of input tax credit shall be passed
GST design to suit their political and economic concerns, either on to the recipient by way of commensurate reduction in
now or subsequently. The fact that the recommendations of the prices.
GST Council are only endorsements and not enforceable
2
The seven union territories of which only two have legislative assemblies and the consequent power to enact the GST bill are also
stakeholders of the GST process. However, for simplicity, they have been ignored in this paper.
 27 Aarthika Charche - Vol 2 No.1

(2) The Central Government may, on recommendations of the compliance burden.

Council, by notification, constitute an Authority, or
empower an existing Authority constituted under any law For various reasons, which will not be gone into here, the
for the time being in force, to examine whether input tax GST design approved by the GST council does not meet these
credits availed by any registered person or the reduction requirements. It treats goods and services differently, has a
in the tax rate have actually resulted in a commensurate truncated tax base, incorporates six rates and provides for dual
reduction in the price of the goods or services or both administrative controls with cross empowerment. While the
supplied by him. consequential repeal of select state and central tax laws is a
distinct advantage, there seems to be little other difference
The basic intent of this section is to be commended. It seeks between the proposed GST and the present VAT framework.
to ensure that sale prices of goods which suffer a lower India has the dubious distinction of probably being the only
incidence of tax in the GST regime are correspondingly passed country in the world which is planning to implement GST with
on to the end consumers. The question arises- how is this dual administrative authorities in control. This 'dual control'
concern to be best addressed and how is this provision to be framework itself is, regrettably, a poignant demonstration of the
enforced? There will be about 70 lakh GST dealers. Even existing mistrust between the Central and State Governments.
assuming that only about 5 lakh dealers will trade in goods The proposed GST is, therefore, often seen as a 'sub optimal'
whose tax rate is lowered in GST, it will be extremely difficult GST.
to monitor their sales related activity on a continuous and daily
basis. This provision may merely end up generating rent The process of design of such a sub optimal GST has also
seeking opportunities. Here too, alternative legislation exists created a wedge between the incentives of the state
which can be invoked in lieu of this provision – The governments and the Centre. The state governments are
Competition Act, 2002, which has established the Competition ensured of 100% compensation in case of shortfall in their GST
Commission with a mandate to 'prevent practices having collection for a period of five years after factoring in an annual
adverse effect on competition, to promote and sustain revenue growth of 14%. Their incentive to implement an
competition in markets, to protect the interests of consumers efficient and effective GST during the first five years is diluted
…..' It is the Competition Commission's obligation to address by the award of such compensation. The Central Government,
anti profiteering concerns. The Consumer Protection Act 1986 given its commitment to pay compensation, and in its effort to
also requires the Central and State Councils to protect the seek revenue neutrality, has almost mirrored the present VAT
consumer's “…. right to seek redressal against unfair trade rate structure in the GST. Additionally, it proposes to levy GST
practices or restrictive trade practices or unscrupulous compensation cesses on some specified supplies to the extent of
exploitation of consumers”. Thus the need for creation of a 15% of the tax with higher rates for some sin goods. The levy of
separate Authority to do so under the CGST Act is debatable. cesses is antithetical to a GST regime, but revenue
The case for inclusion of this anti-profiteering clause in the considerations appear to have demanded their imposition.
CGST/SGST Bills has not been effectively made. The Thus, the incentives of two of the stakeholders- the Central
provision only seems to unnecessarily demonstrate the level of Government and the State government do not converge in the
mistrust of the dealers- who are important stakeholders in the design of the GST – a situation which dilutes the requirement of
GST framework. common and shared goals in a vibrant federation.
Common goals Council Proceedings
The GST Council has approved the design of the GST, as
GST design
The GST should be designed to leverage the efficiency of mandated by the Constitution. The deliberations in the Council
the tax such that it accelerates the growth rate of the economy. A are, therefore, of some interest. As per press reports, the Council
study by the National Council of Applied Economic Research has consciously ensured that all its decisions are made on the
estimated that an 'ideal' GST could accelerate the growth rate of basis of consensus. Article 279(A) of the Constitution provides
the economy by between 0.9 % and 1.7%. Such an ideal design the broad parameters for the conduct of GST Council meetings
would incorporate a broad base, not distinguish between goods including the voting procedure. It is, indeed, remarkable that in
and services, provide for minimal exemptions, levy a single the process of designing the GST over twelve meetings, the
rate, be administratively simple to implement and impose a low voting procedure has not been resorted to even once by the GST

3
Press Information Bureau, Government of India Ministry of Finance 4th March 2017
 The Goods and Service Tax - A saga of cooperative and contesting fiscal federalism 28

Council for reaching any decision. All the decisions appear to aggregate GST ( both Central part and State part) will now be 40
have been made by consensus. The question then arises - in a percent against the 28 percent envisaged earlier.
widely disparate federal country like India, is consensus the
best form of decision making for the design of a national It has been reported that such a change will not result in any
consumption tax? We must guard against the possibility that the change in the tax slabs already decided. However, such a
efforts for generating a consensus may result in the tyranny of change has diluted the credible commitment of both the states
the minority in the GST council proceedings. Such a tyranny and the Centre on what the maximum rates chargeable under the
may result in a dilution of the GST design to the least common GST will be. Both the governments have armed themselves
threshold in an effort to satisfy even the unreasonable demands with the power to generate an aggregate GST of 40%,which far
of some states. This may then make grave inroads into the exceeds the 27% rate being levied now (VAT 14.5 % plus Excise
efficiency of the tax with little benefit to the either the 12%). This step seems to point towards the GST Council's
demanding states or the remaining stakeholders. It is, therefore, expectation that the maximum slab in the GST(40%) may need
essential that the ideal GST design be framed after agreeing to be put in place at some time in the future. This rate will
upon the common goals sought to be achieved by the exceed the maximum slab under the present proposals(27%).
implementation of such a consumption tax even if necessary, by Such a proposal dents the credible commitment of the Central
the exercise of a vote in the Council. Further, there is a strong and State governments that the GST is a growth inducing
case for improving transparency of the deliberations of the GST taxation structure which will transform the economy and bring
Council by publishing its minutes after every meeting. into play a lowered tax regime in the future.

Credible Commitments Conclusion

Credible commitments made by all the federating units We have examined the structure of the Goods and Service
form the third pillar of a successful federation. With the GST tax against the three pillars of a sustainable fiscal federation –
Council's recommendations not being enforceable, it is trust, common goals and credible commitments.
essential that all the stakeholders commit to a specified course The Union Government needs to be congratulated for
of action (for example, fully accepting and implementing the providing the leadership and guidance for the introduction of
recommendations of the Council) so that all the stake holders the GST. This is indeed a shining example of successful
secure in this confidence, will indulge in cooperative behavior. cooperative fiscal federalism in action. However, to discourage
The fact that the Government of India in the past has resiled strands of contesting fiscal federalism which have appeared in
from its commitments to the state governments for payment of the national polity, more work is needed on the GST design to
CST compensation indicates a lack of credible commitment on enhance trust amongst all stakeholders, forge common goals as
the part of the Centre. This has led to the states demanding that well as enable credible commitments to be made. We must
provision for compensation be included in the Constitutional recognize and accept that the present GST design is only an
Amendment Act, which it was. intermediate position and the country must move forward to put
Credible Commitment – maximum tax rates in place a flawless GST to fully reap its benefits. The Fifteenth
The GST Council, in one of its recent meetings, raised the Finance Commission due to be constituted in December 2017,
maximum rate in the charging sections of the CGST and the should be tasked with providing a road map for this forward
IGST from 14 percent to 20 percent. Simultaneously, the movement on the design of the GST.
maximum rate in the charging section of the IGST Act was
raised from 28 percent to 40 percent. This is in addition to the
cesses leviable on luxury goods as well as the cesses for
generating compensation.

The GST Council had, after its fourth meeting in November,

agreed on a six rate system – exempt, zero rated, low rate of 5%,
two standard rates of 12% and 18% and a high rate of 28%. In
addition, cesses on luxury and sin goods were to be levied.
Effectively, this implies that the individual rates of CGST and
SGST would have been each 2.5%, 6%, 9% and 14%. This
maximum rate has been raised in both the CGST law as well as
the SGST law to 20 percent implying that the maximum
Should Revenue and
Capital Account be
Shown Separately
in the Union Budget?
1
-Charan Singh
Abstract

Should India retain the distinction between revenue and capital

classification in its Budget format? There is a constitutional provision for
distinguishing between the two expenditures, revenue and capital, and
various committees appointed by the Government of India have expressed
their opinion to retain distinct classification.

International experience does not suggest that distinction of expenditure is

Dr. Charan Singh is a RBI Chair Professor of an absolute necessity. In fact, many advanced countries that were earlier in
Economics in IIMB. Earlier, he was visiting the emerging/developing stages maintained a distinction between revenue
Fellow with Harvard University and Stanford and capital account to allow for better resource allocation. Some of these
University and served as a Senior Economist at countries continue to maintain the distinction, while others have discontinued
IMF from 2009-12. His current interests are the practice of having separate classification.
mainly fiscal and monetary policy, including
debt management, international reserves and The distinction between revenue and capital budget helps in providing
sovereign wealth funds. transparency in the amount that is being borrowed by the Government. As
different departments of the Government are involved in receipts and expenditure,
a clear demarcation helps in independent estimation of different variables in the
Budget.

T he Government of India, on September 21, 2016, announced in its

annual Budget Circular that Plan and non-Plan Expenditure budgets
would be merged in the Union Budget 2017-18. Over the years,
expenditure on schemes sponsored by the Planning Commission was covered
under the Plan expenditure as also public expenditure on asset formation in the
Devi Prasad 1
economy. Thus, a view emerged among policy-makers and analysts that Plan
Mr. Devi Prasad, IES was former
expenditure is good and non-Plan is bad, like good and bad cholesterol, given the
Economic Advisor to Ministry of
fact that expenditure is an essential component of any budget exercise.
Finance, GoI and Former Director,
Fiscal Policy Institute, GoK, Consequently, both the Centre and state governments started recording higher
Bangalore. Plan expenditure over the years. This led to non-Plan expenditure such as
maintenance of assets, health and education services being neglected. In view of the
abolition of Planning Commission, the distinction between Plan and non-Plan would
generally be dispensed in case of Central Government2. However, the issue is if the
budgetary practice that makes a distinction between revenue and capital account
should be discontinued.

There is a historical precedent for conception and use of capital budgets which
record only capital expenditure and incomes in a country's national budget – “Golden
K K Sharma 1 1
Views expressed are personal. The authors would like to thank Ajay U. Pai for his research
Mr. K K Sharma, IPoS is an
assistance.
Advisor and Faculty at Fiscal 2
However, state governments can continue with Plan and non-Plan distinction, as Economic and
Policy Institute, GoK, Social Planning is in the Concurrent list (7th Schedule, Item 20), and all states continue to have
State Planning Boards. Further, Plan expenditure for SC/ST for major schemes is a statutory
Bangalore.
requirement unless the relevant Acts are amended. However, some kind of planning is critical in the
form of medium term budgeting.
 Should Revenue and Capital Account be Shown Separately in the Union Budget? 30

Fiscal Rule” (GFR) – stating that any borrowed fund must be component of the budget and the forward costs of budgeted
dedicated solely for capital-spending projects. The GFR, projects help in analysis of budget, even if shown in an annex to
however, was a late 1930s European development which led to the budget, or in summaries. Similar arguments were also
bifurcation of expenditure into revenue and capital spending. presented by a Report of GoI (Chairman: A.K. Mukherjee,
The budgets of various countries that implemented GFR 1972) and another report of GoI (Chairman: Ashok K. Lahiri,
continue to retain a classification like capital and recurrent3 2004). A proper distinction between revenue and capital
budgets. While the colonial powers of Europe extended this expenditure is based on the criteria laid down in Classification
practice to their colonies, by the 1940s, most countries followed of Government Transactions in Accounts and Plan report,
the distinction. which defined capital expenditure as expenditure on
acquisition of assets of material with permanent character. This
However, after the Second World War and contraction of classification is also provided to recognize the Union
defense budgets, advanced countries have slowly reverted to Government as transferor and states as transferee, as well as to
the older format of creating a unified national budget that has analyze the details for policy prescriptions.
both recurrent and capital expenditure. Research indicates the
pitfalls of arbitrary classification of expenditure and need for The World Bank (1998), and Stevens (2004), suggest that
better resource allocation and implementation of capital there should be a clear distinction in planning process, which is
projects as the benefits of integrating the two kinds of not particularly observed in developing economies. A failure to
expenditure. This development, however, has not been link planning with budgeting results in poor macro, strategic
generally adopted by developing countries. and operational outcomes in developing countries. The narrow
separation between planning (on investment activities) and
The Study is presented in the following 4 sections, apart budgeting (on allocation of funds and resources) generates
from the above introduction. In Section II, a brief review of unpredictability of funding and dual budgeting where
literature is presented. In Section III, the cross-country budgeting is not treated as policy-based exercise. In case of dual
experiences with respect to the classification are discussed. In budgeting, separating development and recurrent budgets
Section IV, India's position in the context of distinction between usually leads to development budget having a lower hurdle for
revenue and capital expenditure is highlighted. Finally, in entry. In view of this dichotomy in preferences, a unified
Section V, some conclusions and recommendations are structure is more preferred.
presented.
Sarraf (2005) notes that dual budgeting originated first in
Section II: Brief Review of Literature European countries and lasted for a short period during the
The Asian Development Bank (1999) defines dual
World Wars. It was introduced in the late 1930s in order to help
budgeting as the dual process of budget preparation, whereby
governments to allocate borrowed funds specifically for capital
the responsibility for preparing the investment or
expenditures as per the golden rule. However, soon after the
development/capital budget is assigned to an entity different
Second World War, the two budgets were integrated as the
from the entity that prepares the current budget.
governments in advanced countries reduced use of borrowed
According to Planning Commission (2012), there should be funds as a result of massive postwar reconstruction work and
a classification between revenue and capital expenditure for increased recurrent expenditures, along with the growing
attaining greater control over public debt and its utilization in relevance of the Keynesian model of linking government
compliance with FRBM (FRBM Act, 2003). Also, because of spending, size of budget deficit and borrowing requirements to
transparency that separation brings in budgetary operations, a both fiscal and monetary policy. Existing dual budgeting,
distinction between expenditure encourages proper allocation accounting, and reporting systems do not provide for a
of borrowed funds. In a similar vein, the Government Financial comprehensive analysis in the planning and budgeting of
Statistics Manual (2001) of IMF also recommends separate government operations or in the evaluation of their outcomes
disclosure of capital and current grants. and results. Government accounting and banking rules may
differ not only between recurrent and capital budgets, but also
Similarly, OECD (2001), and Salvatore and Daniel (1999) between two recurrent budgets, one financed from domestic
recommend that a clear distinction between current and capital and the other from external sources. Most country-specific
expenditures is necessary, for the purposes of analysis and public expenditure reviews by the World Bank and individual
efficient policy decision-making. The capital expenditure technical assistance reports by the IMF strongly advise

3
Similar to revenue budget in India.
 31 Aarthika Charche - Vol 2 No.1

integration of the recurrent and development budgets in client Jacobs (2008) explains that dual budgeting in African, Latin
countries. American and Middle-Eastern countries is largely credited to
the national planning process that was existent in France, Spain
However, donor practices have tended to reinforce dual and Belgium, who were the strongest colonial powers in these
budgeting practices. Since donors have traditionally focused on regions. Spackman (2002) suggests that Ministry of Finance in
capital investments, desire to attract donor funding gives a developed countries prepare both the revenue and capital
country a strong incentive to maintain a separate development budgets as it is familiar with the spending unit's activities. And
budget process. This explains that dual budgeting leads to weak Jacobs (2009) shows that there is international uniformity when
public finance management in developing countries. it comes to an opinion on measurement of capital expenditure.
Shah (2007) observes that capital budgets in governments Capital spending pertains to purchase, improvement and/or
have multiple objectives: as instruments of compensatory fiscal rehabilitation of physical assets with a useful life of more than
policy; as windows on the net worth of public bodies; and as one year.
vehicles of development, particularly in the area of economic III. Cross-Country Experience
infrastructure through greater reliance on debt than on The development of public finance and expenditure
conventional sources of financing. Therefore, governments in management compelled countries to prepare separate revenue
the past have introduced one or more of these practices, and capital budgets and record the expenditure and incomes
depending on the context. In the developing world, however, under two categories separately. The application of GFR would
where many governments still are on the edge of financial also encourage countries to assign borrowed funds only for the
instability, debate continues about capital budgets and their use of capital-spending projects which furthered the demands
equivalents. Thus, it may be more useful to have capital budgets for preparation of separate budgets.
at local rather than central levels of government as the main
problem with the capital budget has been that its The dual budgets mainly started after the Great Depression
implementation was never in line with the conceptual (Figure 1).
framework.
4
Figure 1: Six Stages of Capital Budgeting

Sixth Stage
Birth of accrual accounting and
outcome-based budgeting in
Australia and New Zealand

Fifth Stage
Revival of debate on capital budget
in USA and Sweden's review of
capital budgets

Fourth Stage
Program budgeting and zero-based
budgeting along with quantitative
investment appraisal

Third Stage
Birth of development budgets and
Soviet-style five-year plans

Second Stage
Colonial governments began using capital
budget to fight budget deficit
First Stage
Great Depression and Sweden introduces
capital budget

4
Compiled by Ajay U. Pai based on Jacobs (2008)
 Should Revenue and Capital Account be Shown Separately in the Union Budget? 32

The budgetary practices of countries differ on the basis of i) Difference between capital and revenue expenditure is
preparation, presentation and accounting techniques adopted often arbitrary and subjective;
by the respective governments. Some of the categories are as ii) Effective resource allocation is possible with a single,
follows:5 unified framework.

a. In the first category, accrual accounting and budgeting New Zealand, United Kingdom and Norway have
has replaced cash accounting and therefore, there is a developed highly sophisticated strategies to manage capital
distinction between operational and investment budgets. assets and their expenditure as well as the revenue expenditure
Australia, Chile, and New Zealand are some examples, associated with these assets. Another important development
including the United Kingdom which has adopted has been the shift of focus from cash-based to accrual-based
resource accounting and budgeting since fiscal year accounting of assets and their expenditure8.
2000-01.
b. In the second category, countries show current and capital In other developed countries, although capital and revenue
transactions in national accounts but under accrual expenditure are classified separately in annual government
system. The budget, however, does not make any such budget as well as in reporting and accounts, they are broken
distinction. The United States falls into this category and down into several program items. Presentation, debate and
the distinction is used for analytical purposes and approval of these items on the budget are done as a whole in the
extensive data are presented on capital formation. Parliament, without making distinctions between the two broad
c. Denmark falls into the category of countries that now kinds of expenditure, that is, revenue and capital7.
have investment budgets in place of capital budgets.
Countries such as Jamaica, Namibia, Papua New Guinea,
Japan, the Republic of Korea and Southeast Asian
Sierra Leone, Gambia and others have arranged separately
countries have special investment budgets that display
prepared revenue and capital budgets in unified documents for
selected features of capital budgets.
d. In many developing countries, governments have presentation to their legislatures7.
developmental budgets of a hybrid character which forms
In Guyana and Lesotho for example, there are two separate
the next category. Only some capital outlays are included
sections, one for the recurrent budget classified on a program
in these budgets; the receipts include loans received for
and expenditure basis and second for the development budget
both capital and current spending.
classified on a program basis, that is presented in a single
e. India forms another category of countries that have a
unified budget document. However, there are many countries
capital budget as well as a revenue budget.
where different budget documents are forwarded to the
Over time, other types of budgetary practices have evolved. legislature that lack specific program or expenditure object
For example, the UK government reintroduced the GFR in classification. There are still others such as Tanzania and
1997 of limiting capital expenditures to the size of borrowing to Uganda that have integrated the recurrent and development
manage budget deficit. But this did not create any type of dual budgets in many aspects, but with a separation in presentation
budgeting. However, the rule was abandoned in 2008-09.6 and recording in documents.9

In the United States, periodic recommendations were made IV. Practice in India
for the introduction of a separate capital budget. Expectations In the 1930s, the government of undivided India introduced
that resource allocation may favour “bricks and mortar” have a capital budget to reduce a revenue deficit by shifting some
stalled these recommendations. However, the budget items of expenditures from the current budget. It was believed
documents presented a special analysis of investment (capital) that the burgeoning budget deficit did not reflect well on the
expenditures.7 creditworthiness of the colonial government. The introduction
of a dual-budget system provided a convenient way to reduce
Current International Techniques of Budgeting revenue or current account deficits while providing a rationale
Most OECD countries operate on integrated capital and for borrowing.
revenue budgets (Webber, 2007). The reason they do so is:
5
Closely follows Shah, 2007, p. 5.
6
Truger, 2015, p. 34 for more on the abandonment of GFR by UK.
7
Premchand, 1983, p. 302.
8
Jacobs (2009)
9
Sarraf (2005), p. 14.
 33 Aarthika Charche - Vol 2 No.1

Later, the Constitution also incorporated the need for formulation and execution. There was a desire to ensure that
revenue and capital expenditures to be shown separately in the economic classification is adopted by not only the Central
budget. Article 112 (2) requires that “The estimates of Government, but also by State Governments, public
expenditure embodied in the annual financial statement shall undertakings and the private sector for better accuracy in
show separately – forecasts to support the formation of a “national budget”.
(a) The sums required to meet expenditure described by this
Constitution as expenditure charged upon the The committee, Team of Reforms in the Structure of Budget
Consolidated Fund of India; and and Accounts (Chairman: A.K. Mukherjee, 1972) established
(b)The sums required to meet other expenditure proposed to the criteria that continue to define the current system of
be made from the Consolidated Fund of India, and shall classification between revenue and capital expenditure, where
distinguish expenditure on revenue account from other capital expenditure leads to ownership of capital assets.
expenditure.”
The General Financial Rules of 2005 and the Government
The Expert Group constituted by the Government of India Accounting Rules also define capital expenditure as
on 'Classification System for Government Transactions' “Expenditure incurred with the object of increasing concrete
(Chairman: Ashok K. Lahiri, 2004) observed that distinct assets of a material and permanent character.”12
exhibition of expenditure on revenue and capital accounts
“cannot completely” be given up even though this distinction The High Level Expert Committee on Efficient
leads to dispersal of program costs. Management of Public Expenditure (Chairman: Dr. C
Rangarajan, 2012) expressed that it is in favor of continuing the
Constitutional Assembly discussions on the separation Revenue-Capital classification. Capital expenditure should
of expenditure relate to creation of assets and be determined by ownership
Some of the earliest Constitutional Assemblies of criterion. The Committee noted that separation provides greater
independent India had sparked off spirited debate on the control over public debt and its utilization. The implementation
Constitutional necessity to separate revenue and other of the GFR, a rule followed by many countries, requires that
expenditure. The following was pointed out by B. Das10 from current account is balanced over a period of time, such as an
Orissa's constituency in the Assembly held on June 8, 1949 with economic cycle, and Governments borrow only to invest in
respect to two major aspects behind the idea of separate capital spending projects. This would mean that debt financing
expenditure documents – of capital expenditures results in intergenerational equity. The
Committee noted that this distinction would facilitate strategic
Ÿ Government borrowing was ₹ 26 crore to run its normal
allocation and create a framework for use of borrowed funds for
expenditure for the year 1949-50. That meant that every capital expenditure. Consequently, the disclosure of
year a crore of Rupees was being added to the interest expenditure in separate documents would facilitate efficient
charges which under the article were going to be charged economic analysis of spending and generate information on
on the Consolidated Fund of India. Loans and borrowings capital formation.
were the only way to mitigate normal expenditure
necessities. The Fourteenth Finance Commission also stressed that it
was important that Central and State governments follow the
Ÿ Public debt in India rose by ₹ 20-30 crore annually since general definition for revenue expenditure. The Commission
1938-39 and it was still extensively high in 1949. went on to state that the “existing classification of revenue and
capital expenditure cannot be disturbed in an ad-hoc manner”,
Evolving Practice of Budgeting
also recommending a comprehensive study on the need for
The Government of India's Estimates Committee
classification. It concluded that there would be widespread
(Chairman: Balvant Ray G. Mehta) in its Twentieth Report11 in
implications for Central and state governments' finances in the
1958, expressed a viewpoint on the system of classification that
event of any disturbance to the said classification.13
was being followed at the time. The system conformed to the
needs of accountability but did not assist in program

10
For more, please refer to Constituent Assembly of India - Volume VIII, Parliament of India.
11
Estimates Committee Budgetary Reform, April 1958
12
Rule 291(1), General Financial Rules, 2005.
13
Government of India, 2014, Fourteenth Finance Commission Report, p. 198.
 Should Revenue and Capital Account be Shown Separately in the Union Budget? 34

Current Budgeting Approach in India country. In initial stages of development and growth, capital
In the recent budget circular,14 the Ministry of Finance noted expenditure would be high for developing countries, and lower
that a clear distinction between capital and revenue than the earlier years in advanced and developed countries.
expenditures is essential for analytical purposes, transparency, That, probably, is the reason that investment as proportion of
and efficient policy decision-making. The distinction is GDP is much lower in advanced countries than in emerging
fundamentally important for assessment of operating costs of countries. Further, unlike private sector, because government
government and investments made by it, along with measuring has an important and infinite revenue tool called taxation, it
the efficiency of government activities. Moreover, developing a would be difficult to prescribe a standard ratio for Government
performance-oriented approach requires separation of running budget. Similarly, Government is the only agency in the country
costs from capital expenditures. that can provide lead in high investment public utility projects
like dams, hospitals, educational institutions. Hence, a
Moreover, the Fiscal Responsibility and Budget
restrictive prescription may not be in the interest of national
Management Act, 2003 (FRBM) clause 2(e) indicates two
welfare and economic growth, because government capital
components of expenditure of the Government – (a) the revenue
projects, after a gestation period, yield an income stream that
expenditure, and (b) those which result into increase in assets of
adds to revenue receipts of the government.
the Government. FRBM aims to ensure inter-generational
equity in fiscal management and long-term macro-economic In India, the ratio of revenue to capital expenditure has been
stability by achieving sufficient revenue surplus. Hence, rising since 1956-57 but the volatility has been the largest in the
FRBM appears to imitate the opinion of the GFR on borrowed last decade (Figure 2). Similarly, the ratio of revenue to capital
funds and implicitly aims at balancing the current and capital receipt has generally been stable except in the last two decades
sides of the budget. reflecting the trend in government borrowings. The trend in
plan expenditure which is assumed to be oriented towards
A logical corollary to this is what the ratio of revenue and
capital formation has been lower than the non-plan expenditure
capital expenditure is. This is indeed a difficult policy issue and
(Figure 3). However, the classification between Plan and non-
would change with time and state of economic development,
Plan expenditure has generally not been very transparent.15
and therefore, would be difficult to predict for any specific

Figure 2

Source: Government of India and Reserve Bank of India

14
Budget Circular 2017-18, dated Sept 21, 2016.
15
It must be noted that the classification between Plan and non-Plan expenditure is blurred, especially with respect to defence expenditure.
Defence expenditure in India does have an element of planning and the medium term budgetary framework is used for purchase of defence
equipment. Illustratively, the discussion in Fourteenth Finance Commission Report on Defence Expenditure, GOI, 2014, p. 70.
 35 Aarthika Charche - Vol 2 No.1

The increase in capital receipts and revenue expenditure is significantly larger than revenue receipts and capital expenditure (Table 1).
Table 1: Five-Year Averages of Inflation-Adjusted Growth Rates of Revenue and Capital Accounts

Year Revenue expenditure Capital expenditure Revenue receipts Capital receipts

1951-56 6.8 33.3 6.4 47.3

1956-61 8.7 12.1 7.9 31.4
1961-66 13.5 9.5 15.5 1.6
1966-71 3.6 -0.6 1.3 1.4
1971-76 8.3 7.7 9.8 7.4
1976-81 7.5 1.9 1.4 7.5
1981-86 10.2 9.0 9.2 11.1
1986-91 8.0 2.5 5.8 6.7
1991-96 3.4 -6.1 4.9 0.7
1996-01 9.0 0.1 6.2 14.8
2001-06 5.5 7.6 8.5 2.6
2006-11 11.9 16.0 11.5 14.6
2011-16 3.2 3.8 4.1 5.0
Source: Government of India and Reserve Bank of India

Figure -3

Source: Government of India and Reserve Bank of India

 Should Revenue and Capital Account be Shown Separately in the Union Budget? 36

Further, there seems to be a divergent trend in Budget capital expenditure and Plan Capital expenditure over the years (Figure 4).
Figure -4

Capital Expenditure and Plan Capital Expenditure

3000.00
Total Expenditure ( ₹ in Billion)

2500.00
2000.00
1500.00
1000.00
500.00
0.00
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Capital Component (of Total Plan Expenditure) Capital Expenditure

Source: Government of India and Reserve Bank of India

Another relevant issue in this context is sustainability of The Government, because of transparency, has to resist the
borrowings over a period of time. This aspect which pertains to temptation of channelizing borrowings to payments of
placing limit on borrowing is covered under debt sustainability pensions, salaries and subsidies or other items of revenue
literature for which there has been substantial but inconclusive expenditure which are popular but do not lead to long term
research.16 The most simple, useful and intuitive formula is to capital formation.
ensure the growth rate of the economy is higher than the rate of
As different departments of the Government are involved in
interest payments made through the budget, following the
preparing receipts and expenditure budget, a clear demarcation
famous Domar Rule of 1944.
helps in independent estimation of different variables in the
V. Conclusion and Recommendation Budget. However, a clear definition of variables would help in
In conclusion, the distinction between revenue and capital uniformity of classification of expenditure. Capital and asset
account is important and should be retained in India. The creation is one segment of the Government budget which is
Constitution (Article 112 (2) (b) for the Union and Article 202 prone to leakages and corruption. Therefore, this component of
(2) (b) for States) points to the distinction between revenue and expenditure has to be regularly evaluated and audited and hence
capital expenditure. International experience also suggests that should be kept separate. To achieve the clear demarcation of
the distinction is useful. Empirical evidence of advanced revenue and capital expenditures, program-wise budgeting
countries reveals that when they were in emerging/developing with the help of modern budgeting tools is necessary as is being
country stages, they had a distinct categorisation of revenue and done by Australia and USA. An independent agency to carry out
capital account. The distinction helps in clearly showing to the continuous assessment of expenditures, particularly of Capital
public as to how much is being borrowed by the Government items, may go a long way to support the legislature and other
and with what maturity levels – when it comes to treasury bills, stake holders in the exercise.
securities, external and domestic borrowings.

The distinction also provides transparency as to how much

of the borrowed amount is being redirected into asset building.

16
Kaur and Mukherjee, 2012; Singh, 1999. Continued at page no.64
 Gram Panchayat Finances
in Karnataka:
A Regional Perspective
1
-K.Gayithri
Abstract

The vision of decentralised governance from the 73rd constitutional

amendment gave legitimacy to the Panchayat Raj Institutions.
Karnataka's journey in this process has been commendable yet not
complete in terms of curbing the intra state disparities. This article seeks to
study the regional imbalances by analysing the revenue and expenditure
details of all the Gram Panchayats for FY 2014-15 and 2015-16 using the
Panchatantra database. Having made an in-depth study of the data the
K. Gayithri is a faculty member in the CESP, paper highlights some of the weaknesses of the data and the need strengthen
ISEC, Bengaluru. She specializes in the area of the same. The study emphasizes on the need to correct for the large-scale
Public Economics, Industrial Economics and persistent regional imbalances based on a critical review of the progress made
Public Policy Studies. till date and frame informed policy decisions to make good the uneven
development prevailing in the state for long. While the efforts to create the
Panchayat finances data are laudable, given the large-scale booking of data
under 'other items' there is an imminent need to build the capacity, especially of
those in the backward districts in data entry and management as this data can
help a great deal in corrective policy measures.

Introduction

Vijeth Acharya1 Swati Singh1

Vijeth Acharya & Swati Singh are Master
of Public Policy students from National
R esearch evidence on the fiscal decentralisation in Karnataka has
highlighted Gram Panchayat level variations in the revenue and
expenditure with affluent districts like Udupi having much larger per
capita expenditure as compared to those of Bidar, the least affluent district (World
Law School of India University, Bank, 2004). Due to lack of data, the referred study had arrived at these findings
Bangalore. based on a sample selected for the purpose. Similar findings revealing
considerable regional variations have been highlighted in the Third State Finance
Commission report. It also revealed that districts raising larger own resources are
also the ones that are spending larger sums on developmental works.

Studies analysing the financial performance of the Gram Panchayats (GPs) have
been largely based on sample study of select GPs owing to the non-availability of
reliable data on Panchayat finances. The Panchatantra initiative for the maintenance
of Panchayat accounts has helped in the creation and maintenance of Panchayat-wise
data to enable an understanding of the working of the panchayats. The present paper
makes an attempt to analyse the Gram Panchayat finances using the comprehensive
Nagesha G1 Panchatantra database that provides panchayat-wise data albeit with limitations. While
Nagesha G is a faculty member at surfing for the relevant data for the present paper, it has been observed that entry of the
the Post-Graduate Department of data in the standard format created for the purpose has significantly varied across the
Economics, Government First Gram Panchayats, the developed ones providing more systematic recording of the data.
Grade College, Yelahanka,
Bangalore. This paper seeks to examine the disparities in the Gram Panchayat revenue and

1
Views expressed are personal.
 Gram Panchayat Finances in Karnataka: A Regional Perspective 38

expenditure patterns. Regional imbalance, in terms of redesigned the Panchayati Raj system providing a modern
development in Karnataka, has been one of the issues of major outlook in the early 80s. This system was taken as the model
concern since the origin of planning and development by the system for Panchayati Raj and, subsequently, the 73rd
government. The issue of imbalance persists even after six amendment gave constitutional status to Panchayati Raj
decades since the separate state of Karnataka was created in Institutions (PRI) at village, block and district levels. This
1956. Though many boards, commissions and committees were formalized the system of regular election and provision for
formed by the Government of Karnataka, the recommendations regular flow of funds through finance commissions to the Gram
were not effectively implemented. In the present time, one of Panchayats. Karnataka Panchayat Raj Act came into force in
the major reasons for regional conflicts is intra-state disparity in 1993 as a comprehensive act replacing the act of 1987 to
development. The major development indicators, recognized establish a three tier PRI system at the village, taluk and district
by the United Nations Development Programme (UNDP), level in the state.
which include employment, poverty, health, education, safety
and security, and good governance in all the areas can only be Government of Karnataka, in its note on own source
achieved by balanced development programmes across the revenue generation, has reported that the focus of the
state. Improvement in the quality of life is dependent on these government lies in capacity building at the village and block
targeted programmes. This has been one of the main objectives level. Karnataka is one of the very few states in India which
of India's developmental programmes for progressive reduction introduced Karnataka Local Fund Authorities Fiscal
in regional disparities which was aimed by the economic Responsibility Act, 2003 to mandatorily follow fiscal
planning commissions (Narain et.al, 1997). responsibility norms which involve optimal allocation of
resources, preparation for future and avoiding debt.
The remainder of the present paper is structured in the
following manner. A brief outline of the Panchayati Raj system It is to the discretion of the state government, the extent to
in Karnataka is outlined in section 1 followed by a quick review which the powers, functions and finances are devolved to Gram
of the issues concerning data entry and management by the Panchayats (Rao, et.al. 2004). It is only the Gram Panchayats
Gram Panchayats in section 2. An analysis of GP resources, which are entrusted with the responsibility of tax collection and
analysed by own sources of revenue and state grants, is making bye-laws. This provision, if used in a disciplined way,
discussed in section 3. A district wise analysis of GP can be an important tool for own revenue generation.
expenditure is presented in the penultimate section followed by
The GPs can levy tax on land and buildings within the limits
some conclusions. The data for this analysis is collected from
of their respective geographical area that are not subject to
the Panchatantra website www.panchatantra.kar.nic.in during
agricultural assessment. The GPs can also levy water rates and
the period November 2016 to January 2017.
some other taxes including entertainment tax, taxes on vehicles
Panchayati Raj in Karnataka other than motor vehicles, advertisement taxes and hoarding
The efforts put in towards local self-government in the tax, pilgrim fee, jatra fee, market fee, registration fee for cattle
existing structure of cooperative federalism have been on sale at market and fee for grazing cattle subject to the
acclaimed as the empowerment of the 'third tier' of the exemptions and maximum shows.
government (deSouza, 2000).Decentralized system of
government is followed across the world for better service Data and Maintenance of Accounts
For long, non-availability of GP finance data has been an
delivery, be it in a democratic or autocratic government setup
issue. However, with the Panchatantra initiative, there has been
(Dillinger, 1994). One of the major objectives of
an attempt to fill the gap. Due to this effort data is available
decentralization is devolution of administrative, political and
online, thus enabling easy access to the GP finance data, but
fiscal responsibilities to lower levels of government. The
Gram Panchayat expenditure provided in the RDPR website
factors leading to such action as opined by many experts
reflects large-scale inconsistencies in the entry of the data by all
include the advent of market economy, deepening of
the GPs. The total number of expenditure heads is well over 100
democratic values, dissatisfaction with centralized service
and only a few gram panchayats follow a detailed data entry
delivery and recognition to social, economic and political
process. The expenditure heads are divided in four major
diversities within the country (Rao, et.al, 2011). It was also
categories – expenditure from own funds, expenditure from
expected that strengthening of Gram Panchayats across the
scheme funds, expenditure from other funds and grants. The
state will curb regional imbalances.
classification has complicated the data entry process and also
In Karnataka, Abdul Nazir Sab was the visionary who one has to invest a lot of time in searching for the actual
 39 Aarthika Charche - Vol 2 No.1

expenditure head to enter the value in the data base. There is considerable need to build the capacity and train the
data entry operators at the taluk level on how the accounts have
Water supply and supply of potable drinking water is a to be maintained. It is interesting to note that the Gram
major responsibility of gram panchayats. It is also one of the panchayats from the better off districts maintain records in a
actions in the Eleventh Schedule of the Constitution. The better way when compared to Gram panchayats from the
expenditure head for one of the water related expense is backward districts. Entries from the website by a Gram
Depreciation of Bore Wells. Website maintains this head in four panchayat of Gadag district are shown in Image-1. Here, the
categories, i.e. Depreciation of bore well (Scheme funds), details of state government grants are not available and other
depreciation of bore well (grants), Depreciation of bore well expenses (Scheme) constitute the major percentage of the
(others) and Depreciation of bore well (own funds). This kind of expenditure component. The budget head “Others” is used
segregation will not be feasible to maintain or to analyse when loosely, thus constituting the largest share in the total and
there are large number of other expenditure heads to be creating problems in the meaningful analysis of panchayat level
maintained. Further, the scheme name and the grant using expenditure.
which the account is maintained are not specified which will
inevitably create confusion among the data operators.

Image 1: Income and expenditure heads. Source – RDPR, Panchatantra

The image from a Gram panchayat which has maintained data in a better way is shown in Image-2:
Gram Panchayat Finances in Karnataka: A Regional Perspective 40

Image 2: Income and expenditure heads. Source – RDPR, Panchatantra

 41 Aarthika Charche - Vol 2 No.1

Maintaining over 100 heads for entering expenditure details 2015-16, showing a marginal improvement. Nevertheless, the
can be difficult and this is clearly reflected in the bulk of amount expenditure that continues to be accounted under other category
being entered under “other expense (scheme)” and is substantial and unless they are classified under the respective
“miscellaneous expense”. The data shows that these two heads heads, it becomes difficult to assess the nature of spending by
constitute the major chunk of the expenditure details of many the GPs. Summary of districts in these ranges is presented in
Gram Panchayats. Their percentage share in the total ranged Table 1 and a detailed district wise picture is given in T1 of
from 8-70% of expenditure for FY 2014-15 and 20-58% for FY appendix.

Table 1: Share of “other expense (Scheme)” and “miscellaneous expense” in total district expenditure.

Year 1-20% 20-40% 40-60% Above 60%

Bagalkote, Bengaluru Urban, Bengaluru Rural, Gadag, Ballari, Vijayapura,

Belagavi, Chamarajanagar, Hassan, Haveri, Kolar, Mandya, Chitradurga,
2014-15 Bidar Chikkamagaluru, Mysuru, Raichur, Tumakuru, Davangere,
Dakshina Kannada, Uttara Kannada, Chikkaballapur, Dharwar,
Kodagu, Udupi Ramanagara, Yadgir Kalaburgi, Koppal

Bagalkote, Bengaluru Urban,

Ballari, Vijayapura, Chitradurga,
Bengaluru Rural, Belagavi,
Davangere, Dharwar, Gadag,
Bidar, Chamarajanagar,
Kalaburgi, Hassan, Kolar,
2015-16 Chikkamagaluru,
Koppal, Tumakuru,
Dakshina Kannada, Haveri,
Uttara Kannada, Chikkaballapur,
Kodagu, Mandya, Mysuru,
Ramanagara, Yadgir
Raichur, Shivamogga, Udupi

Source – Computed by the authors using the RDPR – Panchatantra database

The accountability is lost when a large amount is shown in less than 50 percent of the demand being collected. Dakshina
other expense and miscellaneous expense and also the breakup Kannada is the district with the least amount of deficit of 27.39
of these two heads is not available. This kind of data entry percent. Incidentally, according to the data presented in the
reiterates the need to build the capacity of the officers Third State Finance Commission, Dakshina Kannada had not
concerned in the entry of data and maintenance at the Gram revealed any widening in its financial deficit. There are as many
panchayat level. as 6 districts that have over 90 percent of their collection falling
short of the demand (Bidar, Vijayapura, Chamarajnagar,
Financial deficiency of the Gram Panchayats: Chitradurga, Kalaburgi and Yadgir). Majority of the districts
Collection efficiency defined as the percentage of tax
(13 districts in all) have a deficit ranging from 80-90 percent,
collection to tax demand is an important indicator of the
which are largely the low income districts. This clearly
revenue performance of the Gram Panchayats (World Bank,
accounts for a precarious financial condition of the Gram
2004). It was further observed that revenue collection from four
Panchayats in collecting their revenue especially the backward
districts (Bagalkot, Bidar, Mandya and Udupi) was 69 percent
districts in the state. Table 2 presents the range wise deficit
of the demand in 2000-01. Widening financial deficit during the
percentage in demand to collection for FY 2014-15 and FY
time period 2001-02 to 2006-07 at the Gram Panchayat level
2015-16 by the districts that fall in each of the ranges. District
has been an important observation made by the Third State
wise details are given in table T2 of appendix. The collection
Finance commission report (2008). This is in particular more
charges include only revenue from “Tax on building”, “tax on
visible for the backward districts such as Bidar, Bagalkot,
land” and “street light charges”.
Gulbarga, etc. The 2014-15 data reveals that the situation has
worsened across all the districts in terms of financial efficiency
as all the districts have deficits at much higher and varied levels
(refer Table-2). It is observed that only 4 districts (Bengaluru,
Dakshina Kannada, Kodagu, and Udupi) have a deficit level
 Gram Panchayat Finances in Karnataka: A Regional Perspective 42

Table 2: Collection Deficiency: Percentage of uncollected tax to tax demand

Year less than 50% 50-60% 60-70% 70-80% 80-90% above 90%

2014-15 Bengaluru Bengaluru Shivamogga Chikkamagaluru, Bagalkote, Bidar,

Urban, Rural Dharwar, Belagavi, Vijayapura,
Dakshina Hassan, Ballari, Chamarajanagara,
Kannada, Ramanagara Davangere, Chitradurga,
kodagu, Gadag, Kalaburgi,
Udupi, Haveri, Yadgir
Uttara Kolar,
Kannada Koppal,
Mandya,
Mysuru,
Raichur,
Tumakuru,
Chikkaballapur

2015-16 Dakshina Bengaluru Bengaluru Ballari, Bagalakote, Bidar,

Kannada, Urban, Rural, Chikkamagaluru, Belagavi, Vijayapura,
Udupi, Kodagu Shivamogga Hassan, Chamarajanagara, Chitradurga,
Uttara Mandya, Davangere, Kalaburgi,
Kannada Ramanagara Dharwar, Gadag, Koppal, Yadgir
Haveri,
Kolar,
Mysuru,
Raichur,
Tumakuru,
Chikkaballapura

Source – Computed using the RDPR, Panchatantra.

Sources of revenue for Gram Panchayats 10.5% and 10% respectively of the total expenditure of the
Major sources of revenue for the GPs include State and respective districts for FY 2014-15 and FY 2015-16
central government grants with their own sources having a very respectively. Secondly, there is a huge fluctuation in the grant as
small share in the total revenue. some are as low as 1% and some are as high as 55% of the total
expenditure of the district for FY 2014-15. For the FY 2015-16,
Grants from the State Government:
The data for State government grant for taluks under section the state grant under section 206 ranges from 1.3% to 28% of
206 has been collected from the RDPR website for FY 2014-15 the total expenditure for the respective districts. In view of
and FY 2015-16.The database reveals that the data is not classification of grant details in the miscellaneous category,
maintained properly by all the Gram Panchayats. The state caution has to be exercised in using this data.
grants data for 1409 and 1672 Gram Panchayats is missing for The better off districts like Udupi and Dakshina Kannada
FY 2014-15 and 2015-16 respectively which is 25% of the are getting relatively more grant when compared with the worse
Gram Panchayats in 2014-15 and 30% of the Gram Panchayats off districts like Vijayapura and Bagalkote which get the least
in 2015-16 have not recorded the funds received under income from the state government grant. The share in grants obtained
head 'State Government Grant U/S 206'. The median by top 5 and bottom 5 districts categorised based on per capita
percentage has been calculated for these grant which stands at income is presented in Table 3.
 43 Aarthika Charche - Vol 2 No.1

Table 3: State government grant: percent share in district income and state total grant

Per capita Share of grant

Bottom 5 Per capita Share in
District Rank in Rank Rank
Income Districts Total grant
Income District Income

Yadgir 69177 30 8.02 20 1.45 22

Bidar 70339 29 55.16 1 5.94 4
Kalburgi 71085 28 10.91 15 3.28 14
Koppal 75598 27 9.38 18 2.97 15
Vijayapura 75754 26 0.96 29 0.34 28
Top 5 Per capita
Income districts
Bangalore Urban 286198 1 1.95 28 0.80 26

Dakshina Kannada 22554 2 23.91 3 6.19 3

Udupi 185721 3 25.02 2 4.86 6

Chikkamagalur 164598 4 5.6 24 1.32 24

Shivamogga 135582 5 13.47 10 4.19 9

Source - Economic Survey of Karnataka 2016-17 & RDPR, Panchatantra.

The Spearman's Rank correlation coefficient has a negative per capita income tend to get smaller grant and vice versa.
sign implying that the district per capita income and state grant However, the coefficient is not significant.
are negatively correlated. This means that districts with larger

Spearman's rho = -0.269

Pearson's Coefficient = -0.402
30

25
Rank(Per capita)

20

15

10

0
0 5 10 15 20 25 30

Rank(Grant)

Source – RDPR- Panchatantra

 Gram Panchayat Finances in Karnataka: A Regional Perspective 44

Own Resource Mobilisation: land as own revenue generation. Table 4 presented below
It is further observed that districts with lower per capita provides information relating to own revenue generation
income also have lower own revenue mobilization capacities. classified by per capita income for the top five and bottom five
For this study, we have included tax from building and tax from districts for the year 2014-15.

Table 4: Own revenue generation by district income

Per capita
Bottom 5 Per capita Share of resource mobilisation
District Rank
Income Districts in District Income
Income

Yadgir 69177 30 1.5

Bidar 70339 29 5.4

Kalburgi 71085 28 3.3

Koppal 75598 27 2.7

Vijayapura 75754 26 2.7

Top 5 Per capita

Income districts

Bangalore Urban 286198 1 55.7

Dakshina Kannada 22554 2 14.1

Udupi 185721 3 8.7

Chikkamagalur 164598 4 8.2

Shivamogga 135582 5 5.1

Source - Economic Survey of Karnataka 2016-17 & RDPR, Panchatantra.

Several reforms have been taken up to improve the tax income is generated by these two taxes for FY 2014-15 and
revenue of the country but at the micro level, this has not yet 2015-16 respectively, which proves that if GPs exercise this
achieved the purpose. The focus at the Gram panchayat level is provision judiciously then revenue generated can be of higher
more on the revenue collection aspect from land and building as value. But for other districts, the numbers are very low in terms
GPs are the only lawfully recognised authorities to levy taxes, of revenue collection, thus, exposing the gap in the system and
but not much progress has been made. The major tax revenue scope for major tax reforms. The percentage of these two taxes
source at GP level is tax on building and tax on land. The details for all the districts for both the years is displayed below in Table
of tax revenue were collected and for this study, the percentages 5. It is seen that out of the total district income (calculated at GP
calculated with respect to total district income. Looking at the level from the RDPR data), Gadag and Raichur districts'
data, it is found that, for Bengaluru district, 55% and 46% of the collection is less than 1% from these taxes.
 45 Aarthika Charche - Vol 2 No.1

Table 5: Percentage of Tax revenue (building and land tax) with the respective district income.
District %-FY 2014-15 %-FY 2015-16 District % -FY 2014-15 % -FY 2015-16
Bagalkote 4.0 3.6 Hassan 7.7 6.1
Bengaluru 55.7 46.5 Haveri 7.5 5.1
Bengaluru Rural 20.5 29.9 Kodagu 8.1 8.7
Belagavi 8.2 7.0 Kolar 7.3 5.6
Ballari 4.7 5.0 Koppal 2.7 3.1
Bidar 5.4 4.9 Mandya 5.8 2.3
Vijayapura 2.7 2.7 Mysuru 8.6 10.6
Chamarajanagara 5.6 5.0 Raichur 0.5 0.2
Chikkamagaluru 8.2 6.7 Shivamogga 5.1 4.4
Chitradurga 5.7 4.6 Tumakuru 6.1 6.9
Dakshina Kannada 14.1 12.5 Udupi 8.7 15.5
Davanagere 2.5 6.3 Uttara Kannada 3.2 3.9
Dharwar 2.5 3.7 Chikkaballapura 6.4 3.7
Gadag 0.7 0.7 Ramanagara 8.9 9.8
Kalaburagi 3.3 3.3 Yadgir 1.5 1.7

Source – RDPR – Panchatantra

From Table-5, it can be inferred that most of the districts are 2014-15 is Rs 921788 Crores and the share of total expenditure
not performing well in terms of revenue collection. For many in the GSDP for FY 2014-15 was 0.26%.Belagavi and
districts, the collection has dropped except for Mysuru, Udupi Tumakuru were the top districts in spending for the FY 2014-15
and Bengaluru Rural districts. It is very important to work on and 2015-16 respectively with respect to state total expenditure.
increasing the revenue generating capacity of the districts
which are performing poorly like Raichuru, Gadag and Yadgir. The analysis of the expenditure details clearly indicate the
Requirement of tax reforms is evident and need of the hour as it gaps in spending among the districts. The worse off districts
will not only increase the revenue generating capacities of the with lower development index still show low expenditure when
GPs but will also ensure better developmental activities taken it comes to GP expenditure. Bidar, Kalburgi, Belagavi and
up at the GP level as the data shows deficit spending in more Yadgir have been in bottom five positions in expenditure for
than 80% of the GPs. both the years. Bengaluru Urban and Rural districts which are
better off districts with more developmental activities feature in
The income details in the Panchatantra website list one of top positions when it comes to Gram panchayat expenditure. It
the income head as “Miscellaneous income (others)”. The is also noted that the data maintained by worse off districts is of
break-up details and components of this particular head are not poor quality when compared to better off districts.
mentioned on the website. But, this head contributes anywhere
between 30%-60% of the total income of the respective Per capita expenditure at the Gram Panchayat level widely
districts. It is seen from the data of Panchatantra that for Raichur varies across the districts, ranging from Rs 1266.08 in
district “Miscellaneous income (others)” generates 85% of the Bengaluru Urban to Rs 227.83 in Bidar during 2014-15. The per
revenue. This kind of opaqueness asks for more capacity capita expenditure is recorded as Rs 1155.86 in Bengaluru
building and training for the data entry and maintenance Urban and Rs 241.31 for Kalaburgi as highest and lowest
officers at the GP level. respectively for FY 2015-16. These disparities seem to be
prevailing for long. The sample districts in Karnataka analysed
Expenditure by the Gram Panchayats: in the World Bank report on fiscal decentralisation to rural
The total state expenditure (total of all the GP expenditure) governments in India (2002) reveal that the per capita
for FY 2014-15 was INR 2382.78 crore and for FY 2015-16 was expenditure incurred at the Gram Panchayat level is lowest of
INR 2484.72, i.e. increase of 4.1%.GSDP recorded for FY
 Gram Panchayat Finances in Karnataka: A Regional Perspective 46

all the three tiers, with an average (for four sample districts had per capita expenditure more than Rs 60, as opposed to Bidar
namely Bagalkot, Bidar, Mandya and Udupi) of Rs 68.48 as which has a figure of Rs 36. The Third State Finance
opposed to Rs 649.42 and Rs 483.95 incurred at the taluk and Commission has yet another interesting observation that the
the Zilla Panchayat levels respectively. It is further observed Gram Panchayats with financial surplus revealed 10 percent
that sharp differences prevailed in per capita expenditure for higher development expenditure than the ones with financial
both aggregate expenditure and major components of deficits.
expenditure among the districts corresponding with their
affluence i.e. 88 percent of Gram Panchayats in Udupi district

Table 6: Per capita expenditure at GP: Top and Bottom five districts
FY 2014-15 FY 2015-16
Bottom five districts Rank Bottom five districts Rank
(in Rs) (in Rs)
Bidar 227.83 30 Kalaburgi 241.31 30
Kalaburgi 460.44 29 Belagavi 351.65 29
Belagavi 477.49 28 Bidar 410.95 28
Yadgir 498.67 27 Yadgir 487.75 27
Ballari 525.92 26 Ballari 494.65 26
Top five districts Top five districts
Benagaluru Urban 1266.08 1 Bengaluru Urban 1155.86 1
Bengaluru Rural 882.3 2 Gadag 1086.40 2
Gadag 874.26 3 Bengaluru Rural 1038.60 3
Ramanagara 805.57 4 Ramanagara 923.99 4
Uttara Kannada 803.57 5 Chikkamagaluru 868.35 5
Source – Computed by the authors using the RDPR - Panchatantra

Table 7: Top and bottom five districts in terms of expenditure.

% Contribution of district % Contribution of district
Ranking Ranking
Top five Districts expenditure in state total Top five Districts expenditure in state total
2014-15 2015-16
expenditure 2014-15 expenditure 2015-16
Belagavi 7.39 1 Tumakuru 5.66 1

Tumakuru 5.43 2 Belagavi 5.27 2

Mysuru 4.88 3 Mysuru 5.17 3

Bengaluru Urban 4.78 4 Hassan 4.56 4

Vijayapura 4.17 5 Bengaluru Urban 4.23 5

Bottom Bottom
five districts five districts
Bidar 1.26 30 Kodagu 1.32 30

Kodagu 1.33 29 Kalaburagi 1.79 29

Dharwar 2.03 28 Yadgir 2.01 28

Yadgir 2.11 27 Dharwar 2.18 27

Udupi 2.27 26 Bidar 2.2 26

Source – RDPR- Panchatantra
 47 Aarthika Charche - Vol 2 No.1

When looking at the data of state total expenditure, which is References

a summary of total expenditure of all Gram Panchayats, it is 1. Chowdhury, Samik. 2014. “Regional Disparity in
found that for FY 2014-15 it is INR 2382.78 crore.It is clear India–A Study of Three Decades Using a Comparable
from the data that Belagavi and Tumakuru stood strong and Database.” Rotterdam, The Netherlands. Retrieved from
were the top districts in spending for FY 2014-15 and 2015-16 http://www.iariw.org/papers/2014/Chowdhury2Paper.pdf
respectively with respect to state total expenditure.
2. Dillinger, William. 1994. 'Decentralization and its
The bottom districts in expenditure for both the years were Implications for Urban Service Delivery'. Urban Management
Bidar, Dharwar and Yadgir. The top districts in expenditure for Progam Discussion Paper 16, World Bank, Washington, D.C.
both the years were Tumakuru, Hassan, Mysore and Bengaluru
3. Government of India. 2014. Fourteenth Finance
urban districts which clearly says the need to bridge the gap
Commission Report. Government of India.
between the districts which are doing well and the ones which
are not. Table 7 shows the top and bottom expenditure districts. 4. Government of Karnataka. 2008. Third State Finance
The analysis also throws light on the need to train not only the Commission Report. Government of Karnataka.
GP officials but also the data entry operators on how to maintain
and input data into the RDPR server since the data maintained 5. Government of Karnataka. 2015. Report of the
by the worse off districts is of poor quality. The better off Comptroller and Auditor General of India on Local Bodies.
districts maintained data for expenditure in variousrelevant
6. Government of Karnataka. 2015. Own Sources Revenue
heads while for the worse off districts, the expenditure data is
Generation by Panchayat Raj Institutions Capability
available only for few heads and the majority of expenditure is
Development and Institutionalization in Karnataka.
entered in Other expenses (scheme) and miscellaneous
expense. 7. Institute of Public Auditors of India. 2016. Budget &
Accounts Manual of Panchayat Raj Institutions in Karnataka.
Conclusion and Recommendation
The poor fiscal performance of the GPs in Karnataka with Government of Karnataka.
reference to revenue raising capabilities and consequential 8. Institute for Development and Empowerment. 2014.
heavy dependence on grants from higher levels of government Study of Panchayat Finances in Karnataka. Government of
well after two decades of the local self-government operation in Karnataka
Karnataka is a matter of serious concern. In addition, the
continued regional disparities despite a long proclaimed policy 9. Narain, Prem, S. C. Rai, and V. K. Bhatia. 1997.
intervention are yet another issue for concern. As we have “Regional Pattern of Socio-Economic Development in
observed from the data and tables listed above that the Karnataka.” J. Ind. Soc. Agril. Statist 50, Pp380–391.
backward districts continue to remain at the bottom positions
and hence, it is time for active intervention from the 10. Rao, Govinda, HK Amar Nath, and B. P. Vani. 2004.
government for much required reduction in backwardness. The “Fiscal Decentralization in Karnataka.” Fiscal Decentralization
indicators like per capita income grant received, tax revenue to Rural Governments in India, Pp43–106.
collection and per capita expenditure gives a clear picture of the 11. Rao, M. Govinda, T. R. Raghunandan, Manish Gupta,
regional disparity which exists in Karnataka. Based on the Polly Datta, Pratap Ranjan Jena, and H. K. Amarnath. 2011.
recommendations of the high powered committee on regional “Fiscal Decentralization to Rural Local Governments in India:
redressal headed by D.M. Nanjundappa, Karnataka Selected Issues and Reform Options.” National Institute of
government has been focusing on curbing regional disparities. Public Finance and Policy, New Delhi.
It is time to review the progress made towards this end and
reconsider strategies for more effective intervention. Prime 12. Ronald, deSouza Peter. 2000. Multi-State Study of
focus has to be in reducing regional disparities with reference to Panchayati Raj Legislation and Administrative Reform. Goa
human development, basic services and infrastructure. The University.
State should strive towards ensuring equitable access to the
benefits of development to all the backward regions in the state. 13. World Bank. 2000. 'An Overview of Rural
Decentralization in India', World Bank, New Delhi.

14. World Bank. 2004. 'Fiscal Decentralization to Rural

Governments in India', World Bank, New Delhi.
 Gram Panchayat Finances in Karnataka: A Regional Perspective 48

Appendix
T1: Percentage of expenditure from other expense (scheme) and miscellaneous expense with
total district expenditure.

District % for FY 2014-15 % for FY 2015-16

Bagalkote 35.27 26.99

Bengaluru 25.96 23.44
Bengaluru Rural 40.27 39.85
Belagavi 29.72 30.05
Ballari 61.61 43.96
Bidar 8.65 26.35
Vijayapura 69.87 53.39
Chamarajanagara 27.71 20.95
Chikkamagaluru 37.00 36.15
Chitradurga 61.95 51.47
Dakshina Kannada 29.34 25.99
Davanagere 60.36 45.63
Dharwar 68.00 53.39
Gadag 59.76 48.24
Kalaburagi 62.40 57.27
Hassan 52.51 42.38
Haveri 50.80 33.00
Kodagu 35.73 31.50
Kolar 59.29 52.73
Koppal 70.41 57.21
Mandya 58.63 34.79
Mysuru 50.41 38.56
Raichur 46.39 38.54
Shivamogga 39.71 31.66
Tumakuru 57.20 45.80
Udupi 29.06 27.34
Uttara Kannada 59.68 46.84
Chikkaballapura 59.27 50.12
Ramanagara 53.38 48.25
Yadgir 59.36 51.77
Source – RDPR – Panchatantra.
 49 Aarthika Charche - Vol 2 No.1

T2: Demand vs. Collection details of Gram Panchayats

2014-15 2015-16
Demand Collection
District Name Demand(In Cr) Collection(In Cr) Deficit % Deficit %
(In Cr) (In Cr)
Bagalkote 18.13 2.92 83.89 20.15 3.09 84.66
Bengaluru Urban 139.98 78.23 44.11 132.66 62.16 53.14
Bengaluru Rural 51.05 20.95 58.97 63.32 20.63 67.41
Belagavi 91.98 13.33 85.51 92.30 13.95 84.88
Ballari 21.67 4.30 80.17 21.09 5.68 73.05
Bidar 19.85 1.40 92.93 22.48 1.34 94.02
Vijayapura 27.98 2.72 90.29 27.64 2.39 91.35
Chamaraja Nagara 18.71 1.83 90.23 19.94 2.19 89.01
Chikkamagaluru 23.42 5.69 75.72 25.03 7.00 72.04
Chitradurga 44.22 3.35 92.43 48.79 4.11 91.59
Dakshina Kannada 18.27 13.26 27.39 17.45 12.47 28.56
Davanagere 30.71 5.36 82.53 33.51 6.02 82.04
Dharwar 11.14 2.30 79.31 11.68 1.78 84.75
Gadag 9.39 1.48 84.20 10.81 1.32 87.82
Kalaburagi 35.05 1.82 94.80 40.04 0.57 98.58
Hassan 31.99 8.69 72.84 34.01 9.10 73.23
Haveri 33.72 5.63 83.31 35.22 5.69 83.83
Kodagu 6.60 3.52 46.64 6.73 3.27 51.38
Kolar 29.27 3.48 88.10 30.76 3.14 89.79
Koppal 17.74 1.96 88.95 19.63 1.76 91.05
Mandya 47.40 8.52 82.02 52.62 10.63 79.81
Mysuru 70.28 8.16 88.39 78.30 8.54 89.10
Raichur 13.82 1.90 86.27 13.98 1.48 89.42
Shivamogga 16.50 5.77 65.06 16.06 5.99 62.69
Tumakuru 53.59 8.88 83.44 56.60 9.57 83.09
Udupi 16.79 9.60 42.82 16.71 10.93 34.62
Uttara Kannada 7.88 5.46 30.68 7.16 5.02 29.83
Chikkaballapura 21.11 3.59 83.00 22.74 3.46 84.77
Ramanagara 30.10 8.61 71.41 28.91 8.36 71.09
Yadgir 14.66 1.00 93.20 15.53 0.86 94.46

Source – RDPR, Panchatantra.

 Recent Research Work from FPI

Fiscal Policy Institute undertakes a number of original research studies through its faculty, research consultants
etc. A few of the recently completed studies are introduced below while a complete listing along with the report is
available on our website.

Report on Selected Agricultural Commodities for Karnataka

Since 2014-15, the Fiscal Policy Institute, Bangalore has been bringing out the monthly 'Report on Selected
Agricultural Commodities for Karnataka'. The report mainly focuses on examining the price trends and arrivals from
the APMC markets of Karnataka for twenty major agricultural commodities based on the data available from various
published government sources. The report is made available on our website at the

URL:http://www.fpibangalore.gov.in/english/agricultural_year.asp.

Urban Local Bodies in Karnataka: Structure and Finances

Urban Local Bodies in Karnataka: Structure & Finances is a research work undertaken at FPI. In the context of
rapid urbanization in Karnataka, this report has examined the structure and finances of Urban Local Bodies in
Karnataka. The study has examined financial requirements of the urban areas particularly urban infrastructure and
analysed whether the existing spending meets the requirement. The report also stresses on the newly available
avenues for financing infrastructural requirements like 'Public Private Partnership' and 'Bond Financing'. The report
is made available on our website at the URL:

http://www.fpibangalore.gov.in/docs/ULB_Karnataka_report.pdf

Status Report on Externally Aided Projects (EAPs) in Karnataka

Status Report on Externally Aided Projects (EAPs) in Karnataka is a research work undertaken at FPI. This report
analyses the loans availed, project wise and donor wise, by the Karnataka State. It also elaborates department and
sector wise back to back assistance received. The report provides details of donor agencies and their general terms
and conditions. Report examines the impact of currency fluctuations and its effect on payment in Indian rupee. The
report is made available on our website at the URL:

http://www.fpibangalore.gov.in/docs/Status%20Report%20on%20Externally%20Aided%20Projects-
Karnataka.pdf

An Assessment of Social Pension Schemes in Karnataka

The report examines the social pension schemes prevailing in Karnataka. The report analyses in detail number of
social pension schemes, number of beneficiaries, trend in budgetary allocation towards these schemes etc. The study
lists out the lacuna in pension administration system and also provides certain policy suggestions to address some of
these issues. The report is made available on our website at the URL:

http://www.fpibangalore.gov.in/english/technical_report.asp

Fiscal Architecture of India: A Comparative Study of Finance Commission Reports (13th & 14th)

This report compares and examines the differences in the recommendations proposed by the 13th and the 14th
Finance Commissions in ten different areas, namely: (i) sharing of union taxes (ii) local governments (iii) grants-in-
aid (iv) pricing of public utilities (v) public sector enterprises (vi) co-operative federalism (vii) disaster management
(viii) goods and services tax (GST) (ix) public expenditure management and (x) financial roadmap for fiscal
consolidation. The report is made available on our website at the URL:

http://www.fpibangalore.gov.in/english/technical_report.asp
 Goods and Services Tax
Implementation-
Issues and Challenges
-S. Venkataramani 1
Abstract

The Central Government has taken all possible steps towards the
implementation of the country's most ambitious tax reform of Goods and
Services Tax. The 4 legislations / 9 draft rules have been passed by the
Parliament / GST Council and the country is now on the threshold of
migration from July 1, 2017 to the new tax regime. The most important
challenges on implementation of GST would be pricing, supply chain
management, establishing procurement patterns, transition, input tax credit
claims, e-governance, IT frame work, cash flow management and optimising
the very input claim itself. Understanding the new law and training of people
Mr. S. Venkataramani is a partner in M/s. and other stake holders would be a very huge challenge. Classification &
Singhvi, Dev & Unni, a Chartered Accountant Valuation of goods and / or services, uploading of data and credit matching
firm in Bangalore. He is the Chairman of the would be an area which deserves special attention. All in all the much awaited
State Taxation Committee, Bangalore tax reform now appears to be reality and India Inc cannot ask for a more
Chamber of Industry and Commerce. He is a significant tax reform.
member of State Level Advisory Board - VAT
Committee appointed by the Government of
Karnataka. He is member of the GST I. Preamble:
committee of the All India Federation of
1. GST is a significant tax and game changing reform for the Indian
Tax Practitioners and Member, indirect tax
economy. From an origin based taxation system to a destination based
committee of ASSOCHAM. He has
one, businesses have to overcome the challenges to avail / gain the
published many papers and also authored
benefits that the GST regime proposes to extend. Importantly, the
books on Indirect Taxes.
countenance of the transition involves many seen and unseen challenges
having an impact on the cash-flow, profitability, revenues and policy frame
* * *
work which require businesses to devise a process to embrace GST from the
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
appointed day.

2. Issues and challenges in a GST regime can be broadly classified into three
parts – from the perspective of the Government, the Stakeholders and the
common man.
ü The Central and State Governments are grappling with the challenges of
design aspects, rates of levy, drafting the law, rules, forms, notifications,
constitutional framework, laws relating to Union Territories, date of
introducing GST, education and training of their own staff and officers;
ü The stakeholders are to come to terms with the complexity of almost 11 laws
merging into one single legislation;
ü The common man is buoyed to believe that there will be a “one nation one tax'
regime and is not in the know of how the GST law is being implemented.

This article briefly provides an insight into the issues and challenges in GST
implementation.

1
Views expressed are personal.
 Goods and Services Tax Implementation- Issues and Challenges 52

II. Implementation challenges: goods and / or services, etc. This would enable various
divisions of the business to understand the potential
1. GST would be a single tax on goods and / or services and impact of GST which may consequentially require
would be implemented on the principles of being a process / policy changes to optimise benefits of GST.
destination based consumption tax. These are This measure would largely depend on the nature of
significant deviations from the current scheme of business, geographical area, volume of operations and
taxation. Under the current scheme of taxation, there are the manufacturing cycle.
multiple transaction taxes including but not limited to
Customs duty / Special Additional Duty (SAD) / 4. Impact on cash flows:
Countervailing duty (CVD), surcharges and cesses on
import of goods, Central Excise on manufacture of 4.1. To perceive the impact on cash flows, the real time
goods, Service tax on provision of services, Value transactional data for the previous year should be
Added Tax (VAT) / Central Sales Tax (CST) on sale of considered as the base. While the cash flows under the
goods, Local body levies such as Octroi / entry tax on current tax laws could operate as a base, GST ought to
causing entry of scheduled or notified goods in a local be super-imposed on the same to analyse and
area for consumption, use or sale therein, luxury tax on understand its impact. For instance, while stock
providing luxury and lastly entertainment tax on transfers in a VAT regime does not envisage any tax
amusement, taxes on lottery, betting and gambling etc. outflows (other than input tax credit restrictions) it
The new law must also take within its ambit the various could well be subjected to IGST, envisaging huge tax
exemptions granted to units either under the Excise or outflows.
under the State Level VAT laws. 4.2. Each of the impact areas must be analysed and the tax
2. The current scheme of transaction tax works on the cost should be determined for different situations
principles of origin based tax viz., where the tax is levied (alternatives). The incremental administrative cost and
and retained in the jurisdiction / State where the taxable outflow in terms of capital including the cost of process
event is triggered. However, GST would be a destination / policy changes should also be analysed and worked
based consumption tax where the tax flows to the State out. The simulation exercise and the cash flows impact
where the goods and / or services are finally consumed. would form the basis for decision making
Accordingly, the challenges lie in implementation notwithstanding business compulsions.
which involves ascertaining design changes, policy 4.3. Since, the decision is based on the transactions for
changes, procedural changes, process changes, impact previous years, there may be challenges to consider
on cash flows, compliance requirements etc. An attempt and one needs to analyse and understand the
is made in this paper to explain a few challenges. repercussions in relation to external factors viz.,
3. Procedural and policy changes: impact on allied laws, customer behaviour,
competition, price fluctuations, market demands, etc.,
3.1. In a GST regime, there will be no business or sector that post the appointed date.
will not be impacted. It appears that there are likely to
be several greenfield sectors which will get into the tax 5. Planning and implementation:
bracket for the first time. It is therefore, essential that 5.1. The decision proposed to be taken based on the
the implementation process is well planned, executed simulations would form the basis for designing the
and timed appropriately. The challenge lies in planning implementation plan which should also define the
the process of effective implementation in a timely preparedness, timelines, etc. The plan should clearly
manner. outline the changes to be implemented in the pricing,
3.2. The process of implementation involves forming a inventory, procurement patterns, supply management,
committee of all the functional areas including but not business processes, communication protocols, legal
limited to procurement, pricing manufacture, requirements to be addressed, infrastructure re-
inventory, human resources, contracts, finance, tax, alignment (man power, ERP changes), knowledge
legal departments, logistics including supply chain, management, reporting protocols, monitoring process,
information technology, customers and vendors of etc. The implementation plan should be flexible
enough to accommodate unforeseen situations with
53 Aarthika Charche - Vol 2 No.1

predicted impact on primitive simulation including but manufacturing locations, credit availability and changes
not limited to external delays, changes in assumptions, in the existing agreements / contracts, etc. Cumulatively,
newer developments on the legal front, testing of it involves strategizing the impact on the pricing of the
ERPs, training and industry positions. goods / services, geographical location of the branches
and benefits arising thereon, monitoring mechanism to
5.2. The methodology of planning should consider the minimise the loss of input tax credit, project
follow ing is s ues to effectively plan the management plans, governance of transaction involving
implementation process: supply of goods and services, etc.
a. Supply chain: The supply chain and distribution, under d. Cash - flow and impact on profitability: The
the existing tax laws are normally designed to save fiscal transitional challenge also lies in evaluating the impact
costs. The proposed transformation of taxation system of GST on cash-flow management and profitability of
from origin based to destination based taxation system is each product, business verticals, units and entity as a
`known to carry certain benefits to the supplier and whole. This would involve performance of simulation
recipient as well'. The supply chain management so exercises of various types and classes of transactions,
designed to save fiscal costs under existing laws would collating data relating to previous periods to credibly
no longer be beneficial to the supplier under GST regime ascertain the liabilities under GST regime. Such
in view of eligibility of a recipient to avail credit of tax evaluation may also form the basis for negotiation with
paid on inter-State inward supply. Therefore, the the vendors in price reduction and the estimated benefit
implementation plan should assimilate the process of that can be passed on to the customers.
analysing the existing supply chain vis-à-vis the savings
in commercial costs. The result of such analysis would 6. Post implementation compliances and reviews:
be considered as the basis for re-designing the entire
supply chain management in view of tax planning and 6.1. Post implementation simulation of GST impact,
further, would also analyse the location of existing decision making and implementation steps would have
warehousing / distribution locations for optimising the involved certain assumptions and expectations. These
benefits under GST regime. assumptions and expectations should be revisited in
the light of newer developments, changes in the legal
b. IT Infrastructure: The IT infrastructure of the business side, industry positions, etc. Appropriate changes, as
needs to be robust enough to identify every kind / class may be required should be done to the business
of supply that are liable to GST. The existing IT system processes. The plan should also incorporate the
should be transfigured to accommodate the accounts, methods to monitor the progress on the assessments or
statements and records viz., electronic credit ledger, litigation matters for the previous years under the old
electronic cash ledger, electronic tax liability register, laws and a real time reporting system for GST
outward supply register, inward supply register, tax compliances.
invoice etc. The changes to IT system involves
understanding the provisions of the GST laws with 6.2. Post implementation, the most challenging issue
reference to the way business is conducted, planning, would be the filing of the first returns in a GST regime.
analysis and requirements, system design, development, This task among others involves:
testing and implementation which is expected to be the ü Uploading of outward supplies based on time and place
most time-consuming process. The desired IT of supplies;
infrastructure should be in place as on the appointed day ü Accepting / downloading of inward supplies;
for effortless transitioning into GST regime. ü Valuation of taxable / non-taxable / exempt supplies;
ü Ensuring availment of transition credits;
c. Policies and procedures: As a part of transition ü Ensuring that input tax credits (including credits
process, business policies and frame work should be relating to ISD / Business Verticals) have been
reconsidered to evaluate the impact of GST on each correctly and completely availed;
class of transactions. Such an evaluation must be carried ü Ensuring optimum tax outflows;
out with an objective to envisage ease of decision ü Proper and timely documentation, recording of entries
making on various outward / inward supplies viz., and maintenance of books and records in the IT
domestic supplies vs. imports, inter-State vs. intra-State, framework;
Goods and Services Tax Implementation- Issues and Challenges 54

ü Ensuring the IT infrastructure works without any identifiable with the goods sent under the existing laws
glitches; to the satisfaction of the Proper Officer. Accordingly, it
ü Ensuring that vendors file their returns and pay their is crucial that the supplier and recipient should forthwith
taxes. record the details, such as - reference to sale invoices,
description of goods, classification of goods, delivery
7. Transitional challenges under GST: challans, transit documents for onward and return
movement, exemption notifications under the existing
1. The Revised Model GST Law, November 2016
laws etc., to facilitate the identification of returned
encompasses several transitional provisions which
goods. This might pose a challenge to a certain extent.
include CENVAT / Input Tax Credit, carried forward
Besides, the provision does not specify the time limit for
into the GST regime, taxability of spill over
processing the refund which would have an impact on
transactions, issues relating to assessments and
the working capital, since existing laws provide for set-
proceedings under the existing laws, refund claims, etc.
off of taxes paid on return of goods. Working capital will
Transitional provisions provide impartial benefits to the
also be impacted in case refund is denied by the Proper
taxable person migrating into GST coupled with certain
Officer subsequent to refund of taxes by the registered
restrictions which would throw up several challenges.
taxable person to the person or dealer returning the
Certain relevant ones are briefly explained here.
goods. Therefore, the sale or purchase order / agreement
2. Credit of taxes under the current laws to be carried to sell, executed should forthwith incorporate the
forward in the first returns: A registered taxable situations where the recipient would be entitled to
person is entitled to claim credit in a GST regime with receive the refund of taxes on account of sales returns.
reference to the credit as declared in the return filed for
4. Assessments, proceedings and consequential refund:
the tax period ending, immediately prior to the
It is specified that the pending refund claims and the
appointed day. Such credit would include CENVAT
refund applications filed after the appointed day shall be
credit of excise duty / service tax (including credits
processed in terms of the provisions relating to the
relating to First Stage and Second Stage in respect of a
existing laws. Further, refund resulting out of appeal,
dealer engaged in trading of excisable goods) , value
assessment etc., would also be processed under the
added taxes and entry tax (only in case the State entry
existing laws. The registered taxable person should
tax law provides for such credits). The only condition for
adopt or take measures in situations where it is
claiming of CENVAT credit is that such credit should be
anticipated that the assessment or appeal or any other
admissible under the GST laws. However, such carry
proceedings would result in refund. The provisions of
forward of taxes under the GST regime would be
existing law would be applicable insofar as processing
provisional, till the time the assessments under the
the amount of refund and as such, the claims of credit
existing laws are concluded on the taxable person. With
should be eligible and supported with the detailed
such an uncertainty, each and every class of transaction
explanations and documents wherever required to
would need to be critiqued to ascertain the admissibility
minimise the probability for rejection of refund. With
of the credit. Subsequent disallowance may result in tax
such an uncertainty, it would, in certain cases, be
liability along with interest and penalty under the
appropriate to claim credit instead of maintaining the
existing laws. Nevertheless, ascertaining the liability
refund application. With the possible multiple options, it
and the risk probability would be a challenging exercise
would become crucial for a detailed analysis to be made
to evaluate the quantum of credit to be carried forward
in the process of decision making.
under the GST regime.
5. Other challenges: There will be several other
3. Spill over transactions and taxability: The Revised
challenges to be encountered such as goods in transit,
Model GST Law contains provisions relating to return
inputs contained in semi-finished goods, credits in
of goods under the GST regime which are sold, removed
respect of a composition dealer who switches over to a
for job-work, further processing, testing etc. The return
regular scheme of taxation under the GST laws,
of goods within 6 months from the appointed day –
advances received, unclaimed credits on capital goods
exempt where exempted goods are returned; and refund
eligible to be carried forward, pending refund claims ,
of duty / tax paid goods are returned. Such exemption
and refund is allowed only if the returned goods are Continued at page no. 60
 GST Network -
A Technical Introduction

-Bhuvan Joshi1
Abstract

GST reform demands a well-designed and robust IT system for realizing

its potential in reforming indirect taxation in India. This paper provides a
glimpse of the technical aspects of the GST System in India. This paper
also elaborates key architectural principles of GST System and its design in
the Indian context.

Introduction

Mr. Bhuvan Joshi is an Enterprise Architect at

GSTN. He has worked on architecture, design
and development of many prominent projects
like VISTA (Automation of Swiss
T he Goods and Services Tax (GST) is one of the major reforms in
the history of India. It will be a broad-based, single,
comprehensive tax levied on goods and services and will replace
the State VAT, Central Excise, Service Tax and a few other indirect taxes. It
will be levied at every stage of the production distribution chain by giving
government Social Security System), MASP the benefit of Input Tax Credit (ITC) of the tax remitted at previous stages.
(Automation of Belgium Government GST is based on a destination-based taxation system, where tax is levied on
Border Revenue Management), Aadhaar final consumption. It is expected to broaden the tax base, foster a common
(World's largest Identity Platform) and now market across the country, reduce compliance costs, and promote exports.
on GST (World's largest Indirect Tax
System). This reform demands a well-designed and robust IT system (GST System)
* * * for realizing its potential in reforming indirect taxation in India. While it is
difficult to cover every technical aspect of the GST System in a small article,
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
however, this article hopes to give readers a bird's eye view of GST System's
Technical aspect. To begin, some of the key requirements from this System
would include:
Ÿ It should be able to handle 8 million plus Tax payers and 1.2 Lakh Tax
officials to start with.
Ÿ It should be able to handle 3.2 billion invoices per month, the approximate
size of each invoice being 1.5 KB.
Ÿ It should be able to integrate with 130+ Systems (Banks, Accounting
Authorities, GSP Suvidha Providers, States Tax Systems and CBDT,
Aadhaar, etc.) for smooth exchange of information.
Ÿ It should be scalable to handle peak loads on last compliance dates.
Ÿ It should be highly secure as it will hold very critical financial information.
Ÿ It should have features to support every kind of tax payer from micro
enterprises having 100 invoices per month to large enterprise having lakhs of
invoices.
Ÿ It should be user friendly as it will have regular interaction with tax payers for
GST compliance.
Ÿ It should be designed so as to be capable of handling frequent / numerous changes
in laws, rule and return forms in the initial years of implementation in a short
period of time.

1
Views expressed are personal.
 GST Network- A Technical Introduction 56

Key Architectural Principles of the GST System Manageability and Lights-out Operation
Ÿ Automation of deployment through Devops
The above-mentioned requirements make the GST System Ÿ Usage of advance monitoring tools to provide proactive
one of the most complex IT Systems in terms of scale, size and alerts
functional complexity. The continuously maturing and Ÿ NOC (Network Monitoring Center) connected with
developing laws, rules, return formats make it even more monitoring tools to provide remote monitoring
complex and challenging as one has to design and implement
systems on evolving requirements. Consequently, to achieve Reliability
these objectives, meet these requirements and developing such Ÿ Design for Zero Data Loss
a complex and large system in a flexible manner, it was essential Ÿ Temper proofing of data using hashes ,encryption and
to decide on some key Architecture principles, which would act access control to prevent unauthorized
as guiding principles for this system. A brief introduction to access/modification of data
these principles follows.
Availability
Platform Approach Ÿ No SPOF (Single Point of Failure)
Ÿ SOA based Architecture (all GST System functionalities Ÿ Every component in HA
available as Services) Ÿ Active -Active Data Centre
Ÿ API driven (All services exposed as API) Ÿ Provision of NDC
Ÿ APIs available for developer community to build Mobile
Apps, Portals, Custom Application, etc.
Data Driven Decision Making
Ÿ Platform open for innovation
Ÿ Usage of Big Data Technologies to handle and process
large amount of data
Openness Ÿ Usage of BI and Analytics to provide better services to
Ÿ Use of open source technologies/Frameworks tax payer
Ÿ Use of open API standard (restful APIs)
Reconstruction of Truth
No Vendor Lock in and Replaceability Ÿ All Signed and Important uploaded data is to be stored in
Ÿ Usage of proprietary software/framework only if no original in HDFS/Tapes
equivalent open source framework/component available
Ÿ Usage of software/framework through open APIs only Design Approach of GST System

Security & Privacy GST System has been designed based on layered
Ÿ Security using Symmetric and Asymmetric Architecture. Each layer provides an abstraction to its below
cryptography layer and provides some specific features using principle of
Ÿ Usage of Digital Signature and e-Sign loose coupling. These layers are depicted in Figure 1 and a brief
Ÿ Secure Communication with outside world using description and functionalities of these layers follows.
MPLS/VPN/SSL
Ÿ Advance SOC (Security Operation Center) and Security
Policy

Scalability
Ÿ Massive scaling using SEDA (Staged Event Driven
Architectures), Micro Service Architecture and
Messaging System
Ÿ Stateless APIs
Ÿ Design for Horizontal Scaling
Ÿ Container (Docker) based deployment
Ÿ High level of Automation using automated dev ops
 57 Aarthika Charche - Vol 2 No.1

Figure 1 – Layered Architecture of GST System

End Users Interface Layer

External Stake Holders

Layer

Infrastructure Layer

API Layer

Core API

GST Core System - It is the heart of the system containing function is that it provides all network and communication
all the business logic and business rules implemented. This infrastructure for GST System and interface for external
layer has implementation for Digital Signature solution and stakeholders to connect to GST System.
also has implementation for reconstruction of truth, security of
data etc. External Stake Holders Layer - Through this layer only, all
public API's will be available to outside world. This will be a
API Layer- This layer is the interface of GST Core System layer, which will be hosted mostly by the GST partner, i.e. GST
and abstract and protects the layers above, i.e. the GST core Suvidha Provider (GSP). Therefore, GSP will be securely
System. All security majors like License Key Validation, connected with GST infrastructure. This layer will allow GST
Authentication and Coarse Grained Authorization have been system to provide access to all public APIs to external stake
implemented in this layer. All other things related to API like holders in a more controlled and secure way.
throttling, metering, auditing, access management have also
been implemented in this layer. End User Interface Layer - This layer will be the face of GST
system for the end users like tax payers, tax consultants, tax
Infrastructure Layer - This layer acts as a backbone of the officials etc. This layer would have applications like Web
system since it provides infrastructure support for hosting APIs Portal, Mobile Apps, Mobile based Web Application etc.
and other Applications. It provides a physical as well as Incidentally, GST system will provide some of the applications,
virtualized server along with required deployment like Web Portal, for both Mobile and Desktop. GSP and their
infrastructures (Application Server, Web server, Messaging partners using public APIs are also free to provide any of above
Infrastructure, physical as well as virtual Storage Infrastructure or any other application to end users.
etc.) for API and Application deployment. Another critical
 GST Network- A Technical Introduction 58

High Level Solution Architecture Presentation layer “talks” to the API layer using the API
Gateway component, which is the core component of the GST
Diagram 1 shows different layers with components. The System.
Presentation layer is responsible for interfacing with different
stakeholders like tax payers/ tax officials/TRPs etc. The

Diagram 1 – High-Level Solution Architecture

The API layer uses “Caching component”, “Messaging Banks, etc. However, other systems, which consume GST API,
Component”, “Message Ingestion (Processing) Component”, will come through API gateway only and these systems will use
“Rule Engine” etc. for performing various functions. It is to be same set of API, which are used by GST Portal.
noted that the Enterprise Service Bus component is used for
integration with external systems like Aadhaar, CBDT, MCA,
 59

Tax Payers
Tax Payers Tax Payers Tax Payers Tax Payers

Custom
Company Accounting ERP
Application Package

Desktop Browser Mobile Apps

Prepare
Invoice,
Registration
Data Offline Utility

GSP GSP GSP

Tax Payers
Desktop / Mobile
Browser

API Gateway

GST Common
Portal
Core GST Engine
Tax Payers
Desktop / Mobile
Browser
Aarthika Charche - Vol 2 No.1

Diagram 2 – Interaction Diagram

 GST Network- A Technical Introduction 60

For storage, different type of data sources will be used - GST APIs are also available to the developer community
HDFS & HBASE for storing of invoices data, NFS for storing and various Application Service Providers through GSPs (GST
different documents/Notices/Certificates of Tax payers, Suvidha Providers). Using these APIs, the ecosystem can
RDBMS for storing Cash and ITC ledger and all payment and provide various type of applications like portal/desktop and
registration related information. The Directory Server will be mobile based application. Companies having automated
used to keep user credentials. system can integrate these APIs in to their systems and do GST
compliance activities in an integrated way. GSPs can access
High Level GST System Interaction Diagram these API through secured MPLS lines only.
As explained earlier, GST System interacts with various
stake holders and one of the main stakeholders is the tax payer. Conclusion
GST System is designed to provide maximum avenues to tax It is universally accepted that without a well-designed and
payers for GST compliance. A tax payer can use the “GST well-functioning IT system, the benefits of GST will remain
Portal” directly for all tax compliance activities or prepare his elusive. The framework and architecture of the system as
return on an offline tool provided by “GST System” or “Any described above ultimately tries to achieve the broad aims of the
Third Party” and upload the same on the GST Portal. This can GST itself, i.e. simplicity for taxpayers, respecting autonomy of
be seen in Diagram 2. state, enabling digitization and automation of the whole chain,
reducing leakages and leveraging existing IT investments.

Continued from page no. 54

Goods and Services Tax Implementation- Issues and Challenges

issue of supplementary invoices for upward or and not exhaustive. The challenges in a GST transition
downward revision in prices, debit and credit notes, would depend on the nature of the industry. The process
goods moved out on approvals, treatment of long term of transitioning into GST may involve certain other
contracts, unsold goods lying with agents, branch challenges based on the way the business is conducted.
transfers lying in stocks at the receiving branches, etc. Initiating the process of implementation with an
appropriate plan is the only solution to overcome all the
8. Supply and taxability: challenges in a timely manner and in accordance with
1. Determining the time and place of supply of goods and / law.
or services is one of the most important features in a GST 2. I, for one, am looking forward to this game changing
regime. The IT platform to be created to determine the reform and how it takes shape on the appointed date. It is
time and place of supply of goods and / or services is one a once in a life time challenge for the Government/s,
of the most important challenges. It needs a detailed Stake holders and public at large. As a professional, I can
analysis / study at the time of implementation. only say that while due care must be taken in transition
2. The challenge also lies in maintaining the data / details and implementation process, time alone can tell as to
relating to the goods and services procured under the whether the implementation challenge was as smooth as
existing laws and the status of remittance of tax on each it is made out to be. The Government on its part is doing
supply. The records should incorporate the details such its best for a smooth transition and hoping for buoyant
as date of invoice, date of remittance of taxes, date of revenues. The stake holders, are rising up to the
supply of goods / services, receipt of consideration, challenge and are most certainly looking forward to
point of taxation etc., with related documents which welcoming this game changing reform which will
would need to be corroborated to specifically ascertain greatly reduce the multiplicity of taxes while optimising
as to whether the tax that is liable to be paid under the compliance costs and requirements. The common man
existing laws or under the GST laws. is fairly certain that this change will usher in
transparency while lowering the prices of goods and / or
9. Conclusion: services.

1. The challenges enumerated in this paper are indicative Welcome GST !

Challenges in
Implementation of GST

-Sujit Ghosh 1
He is the Partner and National Abstract
head at Advaita Legal and has
more than 21 years of India Inc. is on the verge of transitioning to its much awaited dream of a
experience in all Indirect 'One nation, One Tax'. The fear of unknown surrounding GST is settling
Taxes. He is an arguing down with every passing day but still the question remains if July 1, 2017
counsel and appears regularly indeed seems a realistic time line – especially since there are various
before Supreme Court, High
additional challenges and issues in the fine print of the GST laws which
Courts and other Judicial
may hinder the effective implementation of GST. Being a transactional tax
Forums on tax and
regulatory matters. He has reform, there is no doubt that GST will have a trickle-down effect till the last
been listed as one of the leading tax litigators of and remote leg of consumption in the seventh largest and second most
India by International Tax Review, as a 'Ranked populous country of the world. Given the preparedness of the businesses on
lawyer' by Chambers and Partners and awarded date, it may be a good idea to introduce GST from September 1, 2017 so that
the “Tax lawyer of the Year, 2016-17” by the the industry gets about two to three months' time to prepare effectively for a
Indian National Bar Association and the “Star smooth transition to GST.
Tax Lawyer of the Year 2017” by Legal Era.
Prologue
He is Partner at
Advaita Legal and
close to 12 years of
experience in
indirect tax advisory,
W hile initial talks for this tax date back to early years of the
millennium, the first discussion paper was out only in 2009. But,
today, the Goods and Service Tax (GST) - touted to be one of the
biggest tax reforms in India Inc., does not seem far from reality anymore. With
tax controversy the enrolments into GST of existing taxpayers commencing, the GST Council
management and concluding fruitful meetings and the smooth passage of all the GST bills into
1
c o n t r a c t legislations, it is apparent that the Government is leaving no stone unturned to
Sudipta Bhattacharjee documentation.
abide by its 'realistic' time line of July 1, 2017 given for the implementation of
He focusses on
indirect tax and allied issues of core GST.
industrial sectors like oil & gas, E
commerce, mining and infrastructure. The Government was very keen on implementing GST by April 1, 2017 - but
missed it due to non-passage of GST bills during winter session of Parliament
owing to disruptions on account of demonetization. Nevertheless, the deadlines can
no longer be shifted casually, since as per the Constitutional Amendment, GST has
to be implemented by Sep 16, 2017 or there will be no transactional taxes at all.

Keeping all this in mind, the first questions that come up is India Inc. indeed ready
for this reform?

1 Given the GST Laws in hand, events related to GST in recent past and the
Abhishek Garg
inferences drawn from the recent GST Council meetings, the road to GST is definitely
He is an Associate at Advaita Legal. not a cakewalk, howsoever rosy the picture of 'One Nation, One Tax' may appear. Even
An Advocate by profession and a if we restrain ourselves from discussions about the macro-economic pros and cons of
member of Institute of Chartered GST, four tier rate structure and consequent issues (since there has been plethora of
Accountants of India, he has close
discussions in print and electronic media on such topics and these aspects are more or less
to 2 years' experience in indirect
fait accompli now), there are various additional challenges and issues in the fine print of
tax litigation and advisory.
the GST laws and the present state of affairs which may hinder the effective
implementation of GST. Some of these issues are discussed below.
1
Views expressed are personal.
 Challenges in Implementation of GST 62

States' GST Laws Further, it is not clear if the present State level Sales tax
The four central GST legislations viz. CGST, IGST, UTGST officers would be under the jurisdiction of Centre or State. This
and States Compensation Act have already received the assent may lead to delegation of power without corresponding
of the President and the next herculean task is to get all the 29 accountability. The Credit Set Off design given under the GST
states (and the union territories with legislatures, viz., Delhi and laws may lead to a situation of withdrawal of money between
Pondicherry) pass the respective State GST Laws to pave way Centre and State's consolidated fund when there is no particular
for smooth transition to a complete GST regime – some States mandate in the constitution.
have already done that. Even though the States have been given
autonomy to pass their GST laws consistent with the Model Though the government says that around 20 lakh sales tax
SGST laws and final Acts passed by the Parliament, there officers are being trained for the new centralized laws, it is
remains a concern as to the smooth framing and passage of difficult to comprehend how the assessments related to services
Laws by all 29 States in a short span of just 2 months from now. will be carried out effectively by bureaucrats who have zero
Another qualm remains of history repeating itself as what experience in assessing services as opposed to goods and vice
happened in VAT era when the intention was to have a uniform versa.
VAT laws throughout India based on Model VAT law released
but owing to specific amendments by States, it resulted in so The Cabinet has also cleared abolition of 14 cesses and
much variation that in reality there was chaos and never a surcharges to facilitate implementation of GST, though the
uniformity of VAT Laws among States. Though the Parliament states are yet to take such steps. The businesses presently
has tried to ensure adequate safeguards like consultations with availing area based and industrial exemptions shall be
GST Council, the autonomy still remains with States and we reimbursed by Centre. Such steps shall put pressure on Centre's
need to look forward to the final State GST laws. revenues to a larger extent.

Is the time line indeed 'realistic'? Challenges envisaged in IT network

Even after the smooth passage of laws, we are still running It is no secret that backbone for successful implementation
against time vis a vis the July 1 deadline since at present, of GST is the robust IT network. 14 of the states have tied up
another gigantic task is of classification of the goods and with GSTN for roll out of GST, rest are developing the IT
services and further zeroing upon respective rate slabs. It is system on their own. It remains a challenge to ensure an outage-
expected that HSN classification will be followed for goods but free synchronization of these different IT platforms. Though the
the classification of services is still not clear. Till such time as government has taken steps such as introduction of GST
the rates and classification of goods and services are clear, it Subidha Provider (GSP) etc. for helping assesses in their GST
will be difficult for India Inc. to analyze and foresee the compliances, its success remains to be tested.
potential impact of GST on their liquidity and working capital. The transition of small and medium businesses is a
Assuming that it will take at least two months for the challenge when they are not even acquainted with using IT in
government to agree and reach a consensus on rates and present State Sales tax laws. Further, the HSN based
classification, it seems a risky proposition to assume July 1st as classification may add to their woes.
the date for implementation of GST. This can be substantiated
by the fact that there has been no pilot running of IT networks GST Rates for Goods and Services and Valuation
and negligible preparedness at ground level for small and Though the government has proposed a four rate tier
medium sector industries at present. structure for goods, yet the statement of Mr. Hasmukh Adhia
regarding the rates has raised an apprehension of rates going up
Difficulties in 'Dual Control' Proposals to as high as 28% for various critical goods. Under the extant
The states and the Centre have finally reached a consensus Service Tax Laws, a lot of services enjoy abatement in their
regarding the framework of control over the assessees. The valuation. The fate of such abatements is still uncertain. It is
agreed ratio of 90:10 for assesses having a turnover of less than expected that these might end up falling in 12%/18% slabs
Rs. 1.5 Cr and ratio of 50:50 for turnover above Rs. 1.5 Cr. may thereby significantly impacting the cash flows of Tertiary
create chaos in the tax departments while carrying out such Sector and thus hampering the growth of this sector. Though the
assessments, given that the assessees will be susceptible to taxes paid shall be available as credit, there is an initial cash
different authorities for different assessment years. The outflow impact and businesses need to examine their working
assessment base expected to be retained with the Centre will be capital requirement on the appointed day. There may be
skewed. ultimate savings in tax cost (factoring credits on tax outflows)
 63 Aarthika Charche - Vol 2 No.1

but the output liabilities of tax need to be monitored closely fact that there may be varied reasons other than taxes that affect
when the actual rates are finalized. There is a high probability the final price of goods/services and does not provide any
that even the excess Credit availed as a result of additional GST guideline to elaborate as to what is commensurate reduction in
may not completely set off the output tax liability. price. It is pertinent to note that similar provisions when
introduced by Malaysia in GST were heavily criticized.
Further, the valuation rules for majority of common
business transactions are still not out and would require a lot Likely miseries of Renewable Power Sector and Oil & Gas
more clarity. Sectors
Though on a technical analysis of the constitutional
Compliance related issues and Impact on Contracts amendments, GST can indeed be extended to 'Power' sector as
GST will significantly increase the compliance work for well, but inclusion of Power is not envisaged under GST Laws.
assesses since there is a concept of three monthly returns, As per the FAQs issued by CBEC on GST, it has been
quarterly returns and annual returns. In short, an assessee may specifically mentioned that Power is outside the purview of
have to file at least 41returns in a year (for each registration) as GST. This will lead to a scenario where there will be significant
compared to 6 to 8 returns at present (per registration). The GST impact on the input side for constructing a power plant but
heart of GST lies in the seamless flow of credit across goods and none of that input GST will be available as a credit/set-off, since
services and across borders of states. However, this depends on there will be no GST on the output side. The government, in the
proper uploading of data related to transactions online at the past few years, in order to promote renewable sources of energy
supplier's end for the buyer to properly and seamlessly take like solar, wind, etc., has given wide range of exemptions under
credit of it. These provisions shall have significant implications Customs and Excise Laws for these sectors. However, these
on the entire spectrum of contracts for businesses. For example, sectors are likely to bear significant adverse impact on account
under GST, taxable event is 'supply' of goods. However, of GST due to exclusion of power from GST and consequent
transfer of title / ownership clauses today are predicated upon blockage of Input Tax Credit as mentioned above. It may affect
taxable events under Excise, VAT/CST Laws. Now that these their profitability and sustainability to a major extent – as per
tax arbitrages are over, contracts may have to be reviewed to some studies, the cost of setting up a solar power plant is likely
agree upon a 'transfer of title' clause that makes greater sense to go up by Rs 45-55 lakhs per MW post GST. The Budget 2017
from a business/commercial perspective. Further, specific also has restricted renewable energy specific exemptions in
clauses may need to be added for capturing indemnities and Customs Duty only for a limited period till July 2017 - this
obligations apropos tax compliances to ensure that there is no coupled with the adverse impact of GST appears contrary to the
leakage of tax credits. avowed objectives of the Government to encourage renewable
energy.
The Service Tax assessees who presently avail the benefit of
centralized registration and assessment will face additional Similarly, there are around five petroleum products which
compliance issues since they will have to take registration in have been kept outside the purview of GST, and they will suffer
every state from where they would supply service. These would the same fate as power (credit blockage - as discussed
not only increase compliance as they will need to file hundreds above).Also,it is not clear at this stage if the exclusion is strictly
of returns but will have to deal with multiple authorities in all for these five specified products or if it extends to the
the states leading to chaos and confusion which may impact derivatives of such products too – for example, 'natural gas' is
'ease of doing business'. Further, there may be issues relating to excluded but it is not clear whether LNG/CNG/LPG etc are also
place of supply. The Audit processes under GST will also excluded; High Speed Diesel is excluded but it is not clear if
become cumbersome and is unclear as to which state shall have Light Diesel Oil is excluded.
jurisdiction over the compulsory audit.
GST – Not Just a 'Tax Reform' but a 'Business Reform'
Anti-Profiteering Provisions There is a lot of uncertainty surrounding the common
The Government in the final GST Laws passed have transaction types like Job Work, Stock Transfers, High Sea
retained the anti-profiteering provisions under Section 171 Sales, etc. On a bare reading of GST Laws, it is clear that the Job
which faced much criticism in the Model draft of GST Laws. Work envisaged under GST is in far more restrictive than 'Job
This provides for constituting an authority to examine if input Work' as under extant laws. The businesses might need a lot of
tax credits have resulted in commensurate reduction in price of restructuring considering this and the time available for them
goods supplied or not. The provisions, drafted in haste and will be insufficient.
suffering from the vice of excessive delegation, overlook the
 Challenges in Implementation of GST 64

The concept of Stock Transfers to Depots may no longer be Conclusion

relevant since it will entail higher cash flow impact and While the implementation of GST is fraught with potential
customers may insist on direct transfers from factories/plants pitfalls, no landmark change can be ushered in without
considering availability of credit to them. The depot model will disruptions in the status quo.
need to be restructured.
However, given the significant open issues and other
High Sea Sale and In transit sales, presently considered as challenges, some of which are highlighted above, it may be a
tools for saving VAT/CST, shall be leviable to GST in future and good idea to introduce GST from September 1, 2017 so that the
these models may no longer remain relevant, if used only from a industry gets about two to three months' time to prepare
tax saving perspective. effectively on the basis of the final legislations, Rules,
notifications and tax rates/classifications for a smooth
transition to GST.

Continued from page no.36

Should Revenue and Capital Account be Shown Separately in the Union Budget?

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Issues in Implementation
of GST Law
-Karthik Ranganathan1
Abstract

While GST Law does away with most problems blighting the present
indirect tax system, it is not free from drawbacks. The present article
addresses the issues that may be faced by authorities and taxpayers, once
GST Law is implemented. The article briefly discusses the impact of GST
on the upcoming sector of E-commerce.

Legislative Framework

Mr. Karthik Ranganathan is a tax and corporate

lawyer providing legal, tax and corporate law
services having offices in Chennai and
Bengaluru. He has around 13 years of
T he laws governing levy and collection of tax in India comprise of
direct tax and indirect tax. The existing indirect tax system is very
complex. It is plagued with various problems such as double
taxation, non-uniformity in tax rates, complex compliance requirements and
experience in litigation and advisory services. the lack of incentives such as the absence of a credit mechanism on inputs
Mr. Karthik holds LL.B degree from across most indirect taxes. The Goods and Services Tax (GST) offers a way to
University of Mysore and LL.M degree on overcome most of the drawbacks in the existing indirect tax laws. GST is
International Tax from New York characterised by a seamless tax credit system, i.e., for example, a
University School of Law, New York. He is manufacturer (who will actually be treated as supplier in GST as there is no tax
a visiting faculty at National Law School, on the activity of manufacturing in GST) can set off his input taxes paid on
Bengaluru since 2013 and teaches tax and goods and services against his output tax liability. In effect, the supplier will be
corporate laws to the LL.B. and LL.M. paying tax only to the extent of the value addition he had made on the goods
students. He frequently writes articles on supplied to him. This, however, is not the innovation of the GST system as it has
tax and corporate laws and gives lectures been followed right from 1986 in the name of MODVAT scheme. GST, however,
at various forums. ensures that almost all input taxes paid to the centre and the states are eligible for
set off.

Since the GST also proposes to subsume indirect taxes such as excise duty,
service tax, VAT, sales tax, luxury tax, entertainment tax (unless they are levied by
local bodies), surcharges, cesses, etc.,it will be overcoming the drawback of non-
uniformity in tax rates. In case of interstate sale of goods, unlike the extant Central
Sales Tax which follows the origin based tax, GST will follow destination based tax,
i.e., under GST, the state in which the goods are consumed will be the state which will
Prerana Dash1 have the right to retain and utilize the taxes.
Ms. Prerana Dash is a tax and Interestingly, a Constitutional Bench of the Supreme Court of India in the case of
corporate lawyer practising in
State of Bombay and Anr. vs. United Motors (India) Ltd. and Ors.,2 in 1953, held that the
Bengaluru. She has completed her
explanation to Article 286(1)(a), read with Articles 301 and 304 of the Constitution of
five year B.A., LL.B. (Hons.)
India prohibited the taxation of sales or purchases involving interstate movements by all
course from School of Law,
concerned states except the state in which the goods were actually 'delivered for
Christ University in 2016, and is
consumption'. This is what we are about to follow 65 years later, in the name of GST i.e. a
currently pursuing CS
destination based consumption tax and where the goods are eventually consumed is the
(Professional level) course from
ICSI. 1
Views expressed are personal.
2
AIR 1953 SC 252.
 Issues in Implementation of GST Law 66

state which should have the right to enjoy the tax. inter-state trade, were usually subject to multiple payments of
indirect taxes on a single transaction. IGST will come as a relief
However, the judgment was subsequently overruled in 1955 to such traders owing to there being only a single tax
by the decision of another Constitutional Bench of the Supreme accompanied by a well-defined seamless credit system.
3
Court in Bengal Immunity Co. Ltd. vs. State of Bihar and Ors.
Further, the Parliament vide the Constitutional (Sixth As far as tax rates are concerned, the GST Council which has
Amendment) Act, 1956 omitted the Explanation to Article been appointed to finalise and ratify the particulars of GST Law,
286(1)(a). Today, after extensive debates and consideration by has fixed five tax slabs for goods at 0% for basic consumption
the Indian Parliament for almost 15 years, we have reverted to items, 5% for mass consumption items, 12% and 18% which are
the destination based taxation on interstate sales. GST has been the standard rates and 28% with additional cess for luxury and
made a reality vide the 101st Amendment Act, wherein Articles demerit goods in their meeting on November 3, 2016. In so far
246A, 269A and 279A are inserted in the Constitution of India, as goods falling under the 28% tax slab are concerned, when
bringing GST within the Constitutional framework. calculated with additional cess, it is estimated to amount up to a
tax rate of 30-31% which is a big leap from the existing 20%
Implementation under existing VAT laws. Therefore, it appears that the tax slabs
The GST Council under Article 279A of the Constitution of under existing VAT laws have been reproduced under GST and a
India has been set up and is empowered to take decisions on all good understanding of VAT would suffice to have a grasp on the
matters of the GST Law including framing of rules, procedures, functioning of GST Law. The tax slabs for services, however,
fixing tax rates etc. Until very recently, the rollout of GST was are yet to be finalised.
expected to commence from April 1, 2017. However, due to
paucity of time, various crucial issues are yet to be addressed by One of the biggest difficulties with respect to registration of
the GST Council and will now come into force from July 1, assessees/ dealers under GST is the requirement under Section
2017. In any case, the Constitution (101st Amendment) Act, 23 of Revised Model CGST/ SGST Law and Section 17 of
2016 will stay in force only for a period of one year since the Revised Draft IGST for enterprises carrying out pan-India trade
date it is enacted (i.e., September 16, 2016). Therefore, the GST activities, to get themselves registered in each and every state as
Laws will have to come into force on or before September 16, well as union territory in which they propose to carry out such
2017. Though bringing into force such important and complete trade. Added to this drawback, is the fact that there is a
overhaul in indirect tax laws makes sense to commence from a requirement of filing various forms and returns on a fortnightly,
new financial year i.e. April 01, 2017, given the unavoidable monthly, biannual and annual basis for regular dealers and on a
delay, July 01, 2017 will be the most ideal date to commence so quarterly and annual basis for dealers availing composition
that the remaining three quarters of the financial will fall in line scheme as under Chapter VIII of Model CGST/ SGST Act, 2016
with this new law. read with the Draft GST Returns Rules.5 When these issues are
analysed in totality, it is evident that most medium and large
Issues in Implementation enterprises with pan-India presence will not only have to be
GST is levied at two levels i.e., at the Centre and the State
registered in multiple states and union territories but also
levels and collected in 3 forms: Central GST, State GST and
appoint professionals in every state to carry out compliance
Integrated GST (CGST, SGST and IGST respectively). CGST
related filings under GST Law. That said, procedural
and SGST are governed by the Revised Model CGST/ SGST
compliance will be made easier by the fact that there exists only
Laws and IGST is governed by the Revised Draft IGST4 Law
a single hierarchy of authorities under GST Law as opposed to
(collectively GST Laws). CGST and SGST take care of taxation
the present complex system of indirect tax.
on intrastate trade. IGST on the other hand, is nothing but the
equivalent sum of CGST and SGST to levy tax on interstate As far as input tax credit is concerned, a problem existing
trade and import of goods and services from outside the country. under Section 16(2) of Revised Model CGST/ SGST Laws is
IGST has, in fact, been one of the biggest achievements of the that in B2B model, input tax credit can be claimed by the
GST Law. Under the present system, traders participating in supplier and the buyer only if the supplier has paid his tax

3
Continued at page no. 70
[1955] 2 SCR 603.
4
Made available in the public domain on 25.11.2016 and is accessible at:
http://www.cbec.gov.in/resources//htdocs-cbec/gst/draft-model-gst-law-25-11-2016.pdf and
http://www.cbec.gov.in/resources//htdocs-cbec/gst/draft-igst-law-25-11-2016.pdf last accessed on March 13, 2017 at 3.57 p.m.
5
The Draft GST Returns Rules stand updated as on 26.09.2016 and is available at: http://www.cbec.gov.in/resources//htdocs-cbec/gst/draft
return-rules-26092016.pdf last accessed on March 13, 2017 at 3.58 p.m.
GST Today-
Have we learnt from
VAT Challenges?
-Madhukar N Hiregange1
Abstract

VAT in the period of 2005- 2009 got implemented in all States. The lack of
real acceptance by the tax administrators led to many aspects of the
erstwhile sales tax being reintroduced including backdoor for assessment.
Over a period, the principles of VAT were diluted and it became a sales tax
with stage wise credit. The drafting of this landmark GST has started with a
number of compromises and dilution due to pressure from States seeking
safeguards to their revenues, leading to a large number of provisions going
back in time.

Madhukar N Hiregange, B.Com., FCA, DISA The major principles of seamless credit, trust on the assesses and
(ICAI) is Senior Partner, Hiregange& accountability of the tax administrators also have not been achieved. However,
Associates having offices in Bangalore, hopefully after GST is implemented the many reforms to make it easy for the tax
Hyderabad, Visakhapatnam, Mumbai, Pune payer would be put in place after the challenges are overcome.
and Gurugram. Hiregange is a Central

V
Council Member of the Institute of Chartered AT/ GST, as used interchangeably across the world, is the preferred
Accountants of India for the term 2010-13 & choice of tax reform with one tax at all stages for goods as well as
2016-19. He was Chairman of Indirect Tax for services. The preference is due to the increased (broad based)
Committee for the year 2012-13 & 2016- coverage of tax payers, use of information technology playing a vital role and
17. He has jointly authored nearly 16 books leading to regional integration in some countries. In India, tax wars between the
on Central Excise, Service Tax, Karnataka States mean that at times businesses migrate not for economic reasons but for
VAT and Excise / Service Tax audit etc. tax reasons.

* * * The distribution of burden of taxes by lowering the tax rates, no cascading,

¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
self assessment, quick refunds, non-intrusive tax administration, focus on those
out of net, makes the law favorable to the compliant tax payer.

The features of an ideal (pure) VAT/ GST are:

1. One tax (multiple taxes avoided);
2. Automatic self policing and control on tax leakages;
3. Paradigm shift from enforcement to trust based tax administration;
4. Simple understandable laws, easy for compliance by All businesses- big or
small;
5. Law designed to make business easy with their active involvement;
6. Stability and certainty of law (frequent changes to be avoided)
7. Unfairness in tax avoided (less discretionary power to tax authorities);
8. Broad basing of tax base (all except those who are very small in tax net);
9. Negligible exemptions/ exclusions;
10. Seamless Credit (Avoiding cascading of taxes);
11. Single Rate (Avoid classification disputes);
12. Quick Refunds (To ensure that tax paid on exported goods/ services does not
become a cost);

1
Views expressed are personal.
 GST Today- Have we learnt from VAT Challenges? 68

13. Use of Information technology to make compliance easy;

and 4. The VAT law was designed by the VAT officers and thrust
14. Clear understanding of the law by all stakeholders, tax is on the tax payer. In time, it became a sales tax law with
payers, public, officers, professionals, service providers stage wise credit for local sale.
and software professionals designing/ developing tools.
The GST model Law of June was again designed by VAT
This form of VAT has been in vogue across the world and and Central Excise/ Service Tax Officers. The June 2016
has helped countries to have a voluntary and high compliance. version& Revised November 2016 version was exposed
In India, we inherited from the British, an indirect tax which had for public comments. Some of the suggestions were
the dual impact of a cumbersome law, i.e. whereby many would incorporated but many having revenue impact were
violate and be open to action on account of breaking the law. ignored. CGST Bill passed by the Lok Sabha seems
Thus, Mahatma Gandhi led a march to protest tax on salt. The nothing new and it is a mixture of various existing indirect
laws being drafted even in independent India suffer from a lot of tax laws and in most of the cases the Government has not
complexity. Service tax law till date has not been understood by considered mitigating the existing problems in the present
even the service providers with a lot of disputes on credit, regime. Trade / Industry and professionals made
valuation, exemption etc. GST law being an amalgam of the suggestions on aspects not rectified as well as provided
VAT, service tax, excise, customs law is much more complex new suggestions. The same have been selectively
than service tax. accepted.

5. The unfairness in the VAT law is that only those in the tax
We examine the above aspects vis-a-vis the State VAT laws
net are subjected to assessment, audit and disputes. The
put in place between 2003 and 2007 across India as well as the
ones who are out of the system are not penalized due to
CGST Bill (passed by the Lok Sabha), March 2017 as under:
complicity of the officers and wide spread corruption. In
1. We see that even post GST, several old taxes will continue GST, those who work outside the system from end to end
to be levied - Sales Tax and Central Excise continue for would still get away due to the same officers being
Petroleum products, State Excise for liquor, central excise responsible.
for tobacco, Stamp duty on registration of immovable
6. Stability and certainty of law was not there in VAT. Over a
property, which is an exclusive State subject, electricity
period of time, it stabilized but only for sales tax with
tax, etc. Many other cesses are still being examined in this
credit for intra state transactions. Frequent circulars,
regard.
changes in every budget ensured that it was only a small
2. Under VAT, the automatic self policing was not a reality improvement on the earlier sales tax regimes. GST comes
even though some procedures for matching of invoices with a large number of problems, many of them not
and identification of blacklisted dealers were put in place necessary due to adoption of poor and disputed concepts
by some States. Under GST, the matching concept borrowed from the VAT, Service Tax and excise laws.
(invoice wise) would work well for organised large GST law therefore is quite complex with large scale
concerns. Smaller assessees would find it extremely amendments expected to be made similar to the Company
difficult to comply or may find the costs of compliance Law.
too high. More than 60% of the expected tax base would
7. Broad-basing of tax base: This was achieved under VAT
resist this concept due to erosion of margins stuck in
to some extent. Further exemptions have been trimmed
unmatched credits which would also lead to customer
under GST. However, excluding major sectors like
loss.
petroleum products, immovable property, liquor and
3. Enforcement to Trust was a misnomer in VAT as the electricity from VAT/ GST levy means that broad basing
concept of self assessment was consigned to oblivion with is limited. The 30-40% in the parallel economy would
audit (backdoor assessment) continuing. Change find it difficult to supply to the organized sector.
management in tax administration failed. The same may
8. Negligible exemption was not a reality in VAT with States
be expected in the case of GST as the same officers will
providing sops. In GST, area based exemption and some
continue to administer the 150+ prescription/
hitherto untaxed sectors are being taxed, end use based
discretionary powers to tax officers with no visible
exemptions reduced and limit on the present exemption
attitudinal changes.
69 Aarthika Charche - Vol 2 No.1

list of goods and services is expected. discretion of officers this aspect may improve. However,
the lack of understandability of GST law and complicated
9. Seamless Credit has not advanced much due to States in procedures even in the transition phase by the
VAT and States and Centre in GST wishing to retain their unorganised sector and uneducated may not augur well
present revenues from 5 major petroleum products, for its acceptability. Widespread chaos is expected from
immovable property, liquor and electricity. Under VAT, the trading community as well as small service providers.
credit within State of VAT is allowed and under GST,
VAT, central excise, service tax, luxury tax, entry tax and Officers used to graft are not willing to lose their
minor levies are subsumed. Some cascading is hence additional income from errant tax payers. Intermediaries
avoided. However, the impact of cascading may continue who have lived off the system of opaqueness, assessments
to the extent of 35% for businesses. and frivolous disputes would be disadvantaged and
therefore, may not be supportive.
10.Single Rate in India is difficult due to its federal structure.
Different rates on different products did not provide While intermediate dealers/ manufacturers would seek to
significant simplicity under the VAT regime. Under GST be in the mainstream, the consuming public would
different rates of 5%, 12%, 18%, 28% plus special levy continue to avoid bills if tax of 18% can be saved. It
for Compensation Cess on luxury/ SIN goods and appears that if sufficient change management exercise is
possible 2 levies for services would not serve the purpose not done (a deficiency observed in VAT), many of the
and would continue the classification disputes. stakeholders may not be ready for this new law.

11.Under the VAT law, quick refunds were a myth. In many The above analysis of the lessons in VAT and expectations
states, dealers do not even apply for refund!!! Under the under GST indicate that basic principles of an ideal GST have
GST law, time limits have been put in place. However, not been forthcoming in the proposed GST. The lessons of
unless time limits are sacrosanct and supervised, refunds limited impact of VAT have not been learnt. Large scale
are not expected to be easy even under GST. compromises from day 1 to bring States on board have been a
common facet now for several years. The pristine GST
12.The VAT laws did not take forward the use of information principles have been diluted quite substantially.
technology (IT) except for some States seeking uploading
of invoices which added costs but curbed fake bills to We continue to make the same mistake including the hasty
some extent. In GST, substantial movement to adopt IT is implementation of the law (by 1st July 2017). As on date the
observed but it could be impossible for smaller tax payers rules are to be finalized and the rates would be final in the 3rd
to comply. week of May 2017.

13.Under VAT, law has became simpler to some extent. But On the positive side, it appears to have the advantage of
the problem was that it was not uniform across States and cross sections credit for the traders, manufacturers and service
frequent changes caused confusion in most registered providers. Lowering of total tax rates would certainly lead to
small tax payers who continued to face harassment. Focus reduction in cost of goods where the law is complied. 25%
on those outside the net was inadequate or compromised. increase in the tax paying base due to other complementary
In GST regime, this position is expected to worsen as measures such as demonetisation, Benami property Act, threat
aspects of service tax, excise, customs and VAT are mixed of seizure of gold stashed away is also a positive outcome. Lack
up and the best practice are not always adopted to ease of certainty may not increase the confidence of the foreign
business. Most choices are based on safeguarding the investments but would certainly help the exporters to be more
revenue. competitive. Therefore, though it may disrupt business
practices, it could at most be an improvement of the VAT regime
14.Understanding and acceptability can only come out of with increased tax revenues and enable the large entities to
joint drafting and real concern for tax payer. Most produce goods at more competitive prices.
exercises of training / awareness on VAT were seen as
sermonizing by the very officers who were part of the Major Challenges in GST Implementation
corruption riddled system in VAT. Tax payers were seen as
an evader by officers and officers are seen as conniving A. Shift from suspicion/ assessment based regime to trust
extortionists. Under GST, due to limitation of interaction/ based tax administration: Law does not demonstrate this
 GST Today- Have we learnt from VAT Challenges? 70

at all. Tax Officers are not expected to embrace this new

concept of faith in tax payer. E. This complex law will need to evolve to a simpler and
B. This GST law provides for the threshold limit of Rs. 20 certain law over a period but it will lead to untold
lakhs but tax on unregistered supplier / dealer purchase uncertainty in the interim.
would be payable under reverse charge. Further, the
hitherto composition schemes in various States would be F. Adoption of automation by 60% smaller tax payers will
almost unusable in GST though a Rs. 50 lakh limit has be a challenge unless funded by Government through tax
been prescribed with stringent conditions. The small preparers.
traders/ manufacturers may not be able to survive the cost
G. There is some doubt over the IT developed by GSTN
of 0.5+ 0.5% or1 + 1% tax rate added to loss of credit.
which will have to bear the load of over 50 billion
C. The matching of credits for all those under normal GST transactions.
(other than composition) on a monthly basis is a
H. The time provided for change management (tax payers,
compliance which may not be easy. Dealers were used to
revenue officers, professionals, tax preparers, public) is
filing the VAT returns on estimated basis and actually
limited. Moreover, the suggestions given by trade and
reconciling their books at the end of the year for the
industry have been incorporated to very limited extent
purpose of final VAT and Income tax payments. The lack
which might pose a huge challenge in GST
of organisation and timely accounting may lead to them
implementation.
losing their customers.
The above challenges are also known to the drafters and it
The loss of credit due to inability to track and reconcile
is hoped that they would be resolved to the advantage of the
can also lead to them becoming uncompetitive.
honest tax payers, as soon as possible.
D. Expecting the parallel economy to become part of the
It is, however, acknowledged that the GST law should have
mainstream inspite of complicated procedures: The
been introduced in India decades back and even in its muddled
shadow economy is firmly entrenched and would test the
form, it is advantageous to the trade and Industry. GST would
end to end provision of goods and services across India.
certainly help in making Indian entrepreneurs more tax
Only those in Business to Business (B2B) commerce may
compliant.
be expected to join.

Continued from page no. 66

Issues in Implementation of GST Law
liability to the appropriate government. This implies that even if finalised that for assessee businesses with turnover of less than
the buyer fulfilled his tax liability, he will not be able to avail INR 15 million, 90% of the businesses would be administered
credit until and unless the supplier deposits such taxes collected by States, and the balance 10% by Central Government. For
to the government. This may result in a lot of innocent buyers assessees having turnover more than INR 15 million, there will
being denied their right to timely credit due to no default on their be 50:50 control between Centre and States with regard to tax
part. This drastic prerequisite to avail credit comes from bad collection. However, a downside to the above basis for
experiences under the VAT laws where bogus invoices were demarcation of control is that almost half the revenue that could
created and excessive tax credits were taken based on them even have been collected by the Centre has been given up in favour of
when no such taxes were paid to the state governments. the States to the exclusive enjoyment of increased revenue by
the States. Since there will be dip in tax collection by the centre
Another drawback under GST Law which the GST Council on small scale suppliers, several officials of Central Board of
was successfully able to address was the issue of dual control. Excise & Customs (CBEC) itself ranging from the
Vide the Council's meeting on January 16, 2017, it has been
 71 Aarthika Charche - Vol 2 No.1

Commissionerate level to the field officers are agitating to Issues peculiar to certain sectors
reverse such mechanism. They fear that the officials will not be
able to meet revenue targets due to the Centre's lowered tax E-commerce
base. Due to the existence of several grey areas in the present
indirect tax system regarding taxability of e-commerce
Another aspect on which the implementation of GST maybe enterprises, it was expected that GST laws would remove most
challenging for the centre compared to the states is the of the difficulties faced by the industry. Under Section 46 of the
inadequacy of resources like manpower, infrastructure, etc., to Revised Model CGST/ SGST Laws, the e-commerce
assess suppliers with turnover less than INR 15 million albeit companies like Flipkart and Amazon will have to withhold a tax
they can collect tax only up to 10% as mentioned in the previous at 1% while making the payments to the actual suppliers. In the
paragraph. This difficulty, especially, to the Centre is because sense, most of the e-commerce companies follow the model
currently there is exemption from central excise duty liability where the payments by the buyers on internet is collected by the
for small scale manufacturers up to INR 15 million. The e-commerce entities and they take their commission and pay the
threshold exemption under GST Law is INR 20 lakhs for all remaining to the actual sellers located across the country. As per
states and INR 10 lakhs for Special Category States (such as section 46, while making such payments by the e-commerce
Arunachal Pradesh, Sikkim, Uttarakhand, Himachal Pradesh companies to the actual suppliers, the companies will have to do
and North-East States). Therefore, the CGST collection a TDS (tax deducted at source) of 1% and then have to pay the
between INR 20 lakhs and INR 15 million by the centre may be remaining amounts to the suppliers. While this is a welcome
a challenge unless the right to collect such CGST is also move to collect details pertaining to the actual suppliers so that
enshrined to the state authorities and then distributed to the it can be ensured that they discharge their proper GST liabilities,
centre on periodical basis. This will lead to a unified GST there are already objections raised by the e-commerce industry
system at least to the extent of INR 15 million. Such unified that such TDS requirement will unnecessarily create burden on
GST is followed by some of the countries in European Union the e-commerce entities and may hamper sales for cash on
and also in Canada where the states/ provinces collect the GST delivery. Further, returns and cancelled orders may create a
and then distribute to the centre. mismatch between the return of inward supplies and that of
outward supplies, thus causing additional tax burden for e-
The next key aspect is carrying forward the CENVAT and commerce companies.
input tax credits which have been generated under the existing
CENVAT credit rules and VAT laws. There are adequate Conclusion
provisions in Chapter XXVII of the Model GST Laws (both While GST Council has been successful to a large extent in
centre and the state laws) for transfer of such credits to the new catering to some of the major loopholes in the present indirect
regime but with certain procedural requirements. It is very tax system by addressing them under GST Law, there still
important that the huge amounts of credits accumulated under remain certain other issues that have remain unaddressed in the
the existing regimes are smoothly transferred under GST so that GST Law. It will be interesting to see how certain post-rollout
the taxpayers do not lose the accumulated credits that they have issues such as inadequate manpower for administration,
paid for. It is very important that the CBEC and all the effective concurrent control of Centre and states etc., are
authorities under central and state GST laws help assessees in addressed.
transferring the credits and permit to be utilized against the
respective GST liabilities once the GST laws come into force.
 Letters to the Editor

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Special Issue on “DEMONETIZATION”

Since November 2017, the concept of demonetization has been under great debate. Impact
of demonetization on the economy, its public reception, implementation, its objectives etc.,
are some issues which require deeper examination and analysis. In this regard, 'Aarthika
Charche' invites original research articles for its July-December 2017 Special Issue (Vol-
2, No-2) on 'Demonetization' and related concepts which could address some of these
issues.
RNI No. KARENG/2016/69380 ISSN 2455-6483

Fiscal Policy Institute

Government of Karnataka, Bengaluru

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