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How GST is marred by the ‘residence principle’; a vital role for Centre in new regime is essential

April 7, 2017

(Published in Financial Express 7th April 2017)

 

The Cabinet has approved four GST draft Bills for presentation in Parliament. The final draft legislations and GST Council recommendations considerably alter the original idea of GST. The concept of residence in determining the territorial jurisdiction of the states has been used in the taxation of services in GST, and knowing that residence principle of assigning tax jurisdiction generates intense competition between claimant tax regimes (i.e., the base erosion issue in income tax), the Government proposed to ride over the problem by keeping the responsibility of collection of GST on services with the Centre.

 

The GST Council, under pressure from the states, has assigned the collection of GST on most goods and services to state tax departments; so much so that it seems to them that the Centre need not have any role whatsoever. Disturbing as it is to legal experts, the GST Council has gone ahead and made a retro-fitting in the original proposed GST laws, and inserted the concept of residence in the taxation of goods. The principle that residence of a business entity decides which taxing authority will collect tax from it has become a feature common to GST taxation of services and goods. It is a serious question of how much is the new GST plan conducive to cooperative federalism and the degree of revenue security inhering in it.

 

In today’s indirect tax laws, jurisdiction of a tax administration is not dependent on any action that parties in a transaction may undertake. Territorial jurisdiction can be determined by verifiable evidence. In levy of customs duty, the taxing event is the entry of goods into India, verifiable from the Import General Manifest of conveyances. In central excise, the place of physical removal of goods from factory gate decides jurisdiction. Similarly, in VAT, the place of delivery of goods determines which state gets to tax VAT on the transaction. There is no room in these tax laws by which disputes on jurisdiction of a tax department can be raised by making innovative interpretation of the law. This comfort is absent in the levy of service tax, but the problem is limited to transactions between an Indian entity and a foreign entity. The residence principle notoriously lends itself to interpretation, and by artful devices, territorial jurisdiction over taxable transactions can be shifted away from one tax department to another as has happened in income tax with birth of tax havens.

 

 

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