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Looking at the final shape of the GST Bill, ideated with all good intentions, one is reminded of the quote: Good intentions are simply not enough. Our character is defined and our lives are determined not by what we want, say or think, but by what we do. - Michael Josephson

By now the potential pitfalls and inconsistencies are well known, but still merit repetition Presumption of “Mens Rea” or Guilty Mind:

As per Indian Legal jurisprudence,  while determining an offence the court always takes the premise of ‘Innocent till proven Guilty’. The penal provisions of the GST Bill seems to have been drafted with the assumption of ‘Guilty Mind’. When prosecuting an GST offender, as per the GST Bill, the court shall assume that the accused had a guilty mind or the law was broken with the intention to break it. The accused shall  have the onus to prove it otherwise.

GST Bill presumes the existence of a state of mind (i.e. “culpable mental state” or mens rea) required to commit an offence as it cannot be committed without such a state of mind. While committing an act, a “culpable mental state” is a state of mind wherein

l  the act is intentional,

l  the act and its implications are understood and controllable

l  the person committing the act can overcomes hurdles to the act committed

l  the person believes or has reasons to believe that the act is contrary to law.

Whether the GST Dealer can be accused of the above presumptions in all cases of prosecution under
GST Bill ?

Tax Integration? Lack of Clarity – Lawyer’s delight

The basic purpose of GST was to integrate taxing of goods and services into one tax rate. The first feature of the GST design was to have a comprehensive base i.e. GST should apply to all goods and services. However proposed GST is riddled with number of different rates.

The traditional approach of exempting basic necessities and items consumed by the low-income strata (e.g., food, medicines, health care and education) have been found to be ineffective in helping those in need. They give rise to classification disputes and make the new tax system administratively difficult to implement. Excessive differentiation of rates across various goods and services evidently adds to the costs of administering and complying with the tax - the lawyers, of course, are delighted.

Inflation may increase for a short span of time due to increase in tax rate which might further lead to tax evasion.

Perceived Offences (Companies & Other Persons):

Since entities such as companies, firms or trusts, entities do not have a will of their own or the “culpable mental state” (for want of mental faculties), in case offences are committed by such entities it is assumed that every person who is in-charge of the affairs of such entities, or is entrusted with the responsibility of administering or managing the affairs of these entities, is prime mover or the person who actually committed offence that has been attributed to the said entity. GST Bill recognizes the aforesaid assertion and provides that every person who was in-charge of or responsible to a company for the conduct of its business shall, along with the company itself, be liable to be proceeded against and punished for an offence committed by the company while such person was in-charge of the affairs of the company.

If any offence committed by the company has been committed with the consent/connivance of, or is attributable to negligence of any officer of the company then such officer shall be deemed to be guilty of the said offence and liable to proceeded against and punished accordingly.

The above provisions relating to any officer, director or manager, etc. of a company shall also apply to the
partner, managing partner, karta or trustee in the case of any offence is committed by a partnership, LLP, HUF, or trust, as the case may be.

If the person charged with committing an offence while being an officer in-charge of, or responsible for the conduct of the business of, a company, partnership, LLP, HUF, or trust shall be liable to prosecuted unless he is able to establish that:

l    the offence was committed without his knowledge, or

l    that he took all steps to prevent the commission of the offence

Compounding of offences:

Section 320 of the Code of Criminal Procedure defines “compounding” as to forbear from prosecution for consideration or any private motive. Law Lexicon defines it as “arranging, coming to terms; condone for money;”. Compounding is thus is a legally recognized arrangement whereby the person charged with an offence is offered the option of avoiding prosecution and imprisonment in lieu of monetary considerations by way of penalty; compounding is essentially a contract between the State and the offender whereby the State secures revenue and the offender secures immunity from prosecution.

However GST Bill  provides that several offences are not eligible for compounding:

Negative Impact on Industries

The proposed high Revenue Neutral Rate (RNR) has the potential to send the industry into a spin. It is imperative that the tax structure of the infrastructure supply chain is carefully thought out under GST. Given that the underlying premise of a GST is widening  tax base while minimising exemptions, the key issue is the continuity of current concessions and exemptions under GST and its plausible impact on credit chains and costing. This aspect needs to be resolved through active engagement between stakeholders and the Government.

Infrastructure

There are several skews in infrastructure sectors. In the mining sector, VAT is generally applicable, whereas excise duty is not leviable on most products arising out of mining. For roads, VAT is generally applicable on goods used for construction, whereas service tax is exempt on the actual construction of road. Furthermore, in the railway and port sector, construction, erection and commissioning services are exempt from service tax. On the contrary, rail travel services are partially taxable and port services are fully taxable. Thus, it would be critical as to how each of these sectors is handled under GST.

Services

Services will be negatively impacted, as it is currently taxed at 14%. Services account for nearly 60% of India’s GDP and a steep rise in the sticker price of Services will almost certainly adversely impact consumer spending in India.

Conclusion:

Ambiguous and unclear rules can pose bigger problems for the GST  trader, as the low-level law enforcement officials can misuse the rules to harass the businessman. Even if one needs these provisions, can they be made more humane,  simple and transparent so that there isn’t any scope for discretion and harassment. We are witness to the fact ‘Sweeping powers given to officials with discretion and subjectivity, result in misuse of authority’.

Therefore before implementing the harsh provision of punishment, there should be lighter penal provision for offences for at least two years as GST is a new tax regime and traders would need time to understand the implications of  law.

If designed properly, even within the given constraints, GST can bring about tremendous stimulus, simplify com- pliance and contribute to the Prime Minister’s mission of “Make in India”. However if the proposed GST is riddled with large number of different rates the avowed goal of ‘Non-cascading tax structure’ may not be achieved.  Similarly if the impact on various industries unless well taken care of, may result in a negative impact on growth. Harsh Penal Provisions also need to be reviewed and made benign for better compliance.

Concentrated power is not rendered harmless by the good intentions of those who create it.
— Milton Friedman

—  The Author is Vice President, Srei Equipment Finance Ltd