An enigma called GST

If one is a follower of current news in India, one must have come across the strange/political bonhomie/time/money wasting play acting by various politicians (usually state level) on the issue of imposition of Goods and Services Tax or the GST in India.

For a long time Indian tax system was considered complex and inefficient; to change this attitude/outlook there were many committees formed and many reports passed around. Some of the notable ones are Chelliah Tax Reforms Committee, 1991, Bagchi Report, 1994, Task Force on Indirect Taxes, 2002, Kelkar Committee Report, 2004. Almost all these reports without fail reported on the huge number of hurdles on calculating the correct figure of tax. The laws were complex, more than one law had jurisdiction on the same subject leading to confusion, add to that the bureaucratic apathy and no wonder India brought up the rear in the list of countries in providing an efficient tax system.

One of the best ways to have an efficient tax system is to follow the four principles of equity, certainty, convenience and economy in taxation as described by Adam Smith in 1776. Over years this has been modified by scholars to suit variations and to get a better adage (look at the table below as sourced out from a working paper).

Criteria for an Efficient Tax System
Author	Criteria	Title	Source
Adam Smith 1776	Equality, certainty, convenience of Payment, economy in collection	Canons of taxation	Smith A, An Inquiry into the Nature and causes of the Wealth of Nations (selected ed, 1993) p 450.
Carter Report – Canada 1966	Equity, Neutrality, Transparency and Accountability, certainty, Simplicity, Flexibility	The Use of the Tax System to Achieve economic and Social Objectives	Canada, Report of the Royal commission on Taxation (‘carter Report’) Vol 2, The use of the tax system to achieve economic and social objectives (1966) ch 1.
Asprey Report – Australia 1975	Fairness, efficiency, Simplicity, growth, Stabilization	Criteria for Tax Systems	Taxation Review committee (‘Asprey Report’), Full Report (1975) 13.
Meade Report – United Kingdom, 1978	Incentives and economic efficiency, distributional effects, International Aspects, Simplicity and costs of Administration and compliance, Flexibility and Stability, Transitional Problems	Characteristics of a good Tax Structure	A Report of a committee chaired by Professor Meade Je (‘Meade Report’), The Structure and Reform of direct Taxation (1978).
HMSO green Paper Report – United Kingdom 1981	Practicality, Fairness, Accountability, cost of Administration, Fiscal dimensions, Financial control	Requirement of a Local Tax System	HMSO 1981, Alternatives to domestic Rates, cmnd 8449.
O’Brien Report – Ireland 1982	Equity, efficiency, Simplicity, Low Administrative and compliance costs	Criteria For a Tax System	A Report of a committee chaired by O’Brien Mh (‘O’Brien Report’), 1st Report of the commission on Taxation – direct Taxation (1982).
Ridge and Smith 1991	Administrative Feasibility economic efficiency equity and Accountability	Criteria for Local Tax	Ridge M and Smith S, Local Taxation: The Options and the Argument (1991) IFS: Report Series No 38.
Jackson 1994	equity or Fairness, certainty, convenience of Payment, economy in collection and compliance, Transparent	Characteristics of an efficient Tax System	Jackson PM, ‘efficient Local government Finance: The Never ending Story’, in Terry F (ed) Towards Restructuring: The dimensions of change in Local government, (1994) 55-62.
OECD (Ottawa) 1998	Neutrality, efficiency, certainty and Simplicity effectiveness and Fairness, Flexibility	Taxation Framework conditions (for electronic commerce)	Committee on Fiscal Affairs, ‘electronic commerce: Taxation Framework conditions’ (1998) (‘Ottawa Taxation Framework conditions’).
ICAEW Tax Faculty 19991	Statutory, certainty, Simplicity, easy to collect and calculate, Properly Targeted, constant, consultation, Regular Review, Fair and Reasonable, competitive	Principles for a Better Tax System	ICAEW Report 1999, Towards a Better tax System, Tax Faculty: Tax guide 2/00.
James and Nobes 1997	efficiency, Incentives, equity, macroeconomic considerations	Principles of Taxation	James S and Nobes c, The economics of Taxation: Principles, Policy and Practice (updated 7th ed, 2004).
American Institute of certified Public Accountants 2001	Equity and Fairness, certainty, convenience of Payment, economy in collection, Simplicity, Neutrality, economic growth and efficiency, Transparency and Visibility, Minimum Tax gap, Appropriate government Revenues	Guiding Principles of good Tax Policy	American Institute of certified Public Accountants, Inc Tax Policy, (‘AICPA’) concept Statement 1. ‘Guiding Principles of good Tax Policy: A Framework for evaluating Tax Proposals’ (2001) 6.

However if we again look at the prevailing indirect tax system we would have to conclude that we are a far shy from anywhere near a perfect tax system. Look at our professional tax regime, if one is a professional one needs to pay professional tax but if the same service is provided by a non-professional then there is no tax except for the service tax. Also the very number of tax statutes to cover the gamut of over a 2 tier government structure is mind boggling.

In the Central Level there are:

• Custom Duty

• Central Excise Duty

• Service Tax

• Central Sales

• Telecom License Fee

• Countervailing Custom Duty

In the state level there are:

• State VAT

• State Excise on few products

• Luxury tax

• Entry tax/octroi

• Tax on consumption

• Other ancillary taxes

Some sighed in relief when VAT or the value added tax was sought to be introduced in 2000. However the relief was short again partly due to piecemeal nature of the legislation. There was serious holes in a legislation which sought to uniformize the indirect tax system. However the VAT system with its dual state VAT and CENVAT had scores of deficiencies namely:

• High Compliance and Administrative cost;
• Adverse impact on competitiveness of indigenous goods and services;
• Complex tax structure in the presence of several taxes e.g. excise, customs, service tax, state vat, octroi etc;
• Cascading impact of Taxes- CST/Octroi/Entry tax etc. are not allowed as input credit- reversal of input tax credit in case of branch transfer to other state; it encourages setting up separate warehouse/depot in consuming states to avoid CST thus lead to unsustainable high cost distribution models;
• Over-lapping of tax base in case of several taxes in operation- certain goods are subject to VAT as well as service tax;
• The taxes on inter-state movement of goods create tax barriers within India. It holds back India from becoming a single national market;
• Separate and independent tax legislations increases litigation, uncertainty and harassment;
• Multiple rate structure of different taxes in the state leads to severe tax distortion. The wide spread taxation of inputs at different stages encourages vertical integration of firms only for tax purpose and not based on economic consideration

To explain with an example, say a person in Kerala manufactures candle and he wants to sell them in West Bengal, so he first pays excise duty in Kerala and when he passes each state boundary he will pay octroi, after reaching West Bengal and locating a dealer once he sells the candle to the end consumers he will have to pay sales tax and will get no input credit for the excise and octroi under the current system. So the end cost of the candle would be many times higher than the original production cost. Under GST these interstate taxes would be abolished and there will be provision for input tax credit even when the material is sourced outside of the buying state. This would lead to the true economic integration of India as envisaged by the Constitution. Thus there was need for an upgrade, it came in the form of proposed Goods and Services Tax (GST). The first decision by the Joint Working Group (JWG) on GST was to propose a dual GST with all its pit falls it would have been nothing better than the existing VAT with availability of credit at all levels. However recently the JWG has proposed a three tiered system which would enable GST in India. From experience we know that one of the major problems of indirect tax system in India has been the multiplicity of laws and VAT sought to cure it but even a dual VAT was inefficient and so would be the proposed three tiered GST.

The proper model in India for implementation of GST would have been the Kelkar-Shah Model: This model of a unified GST, it is based on a grand bargain to merge central excise, service tax and state VAT into one common base. Two different rates of tax are to be levied by the Centre and the states. The collection may be by the Centre and then proportionally divided between states and centre. This is like the GST model in Canada. This system would mean one authority both for collection and implementation. The rate can be fixed by an empowered committee and thus would pay deference to the Constitution of India which has provided a provision for a dual taxing structure. Also a single authority would reduce obsufication and multiplicity of jurisdiction, also it would lead to one window clearance. Thus we would have all the advantages of VAT and none of its present disadvantages.

A Dummies Guide to opening a law school in India

In one of my earlier posts I had discussed on the high rate of new law schools that are being opened in every nook and cranny of India. In this post I try to list out ten main points the education czars who may want to enter this lucrative segment of Indian education business sector.

• Infrastructure: Find out a 10,000 square feet building within 30 KM (preferably 20 KM) from a well established law school (False click syndrome). Make sure that the institute is residential and all students have to stay at university hostels (or arranged guest houses). For library ask one of the retired judge of the neighborhood to donate few books and then buy second hand books from flea markets of Delhi, Kolkata etc. and say that the library has collection of rare law books from so and so judge. Get someone to copy GrandJurix and manupatra CDs from a law school and claim that you have a fully equipped modern IT enabled library. Set up an understanding with the local book seller that he would get a monopoly over books to be sold to the students and in return the institute would get 25% of the sale proceedings.
• Name of the institute: It must contain ‘national’ or ‘international’, ‘law school’ (optionally one may also add the name of any of the past prime ministers, chief minister, MLA, councilor or the local strongman to the institution; look around for examples) (Barnacle marketing). Do not use your surname or your father’s name or any caste name or religion name, gives negative vibes, may use regional state name e.g. ‘XYZ [state] National Law Institute’.
• Competition: Use your dominance in one sector to enter the legal education sector. It is difficult for an ‘educationist’ to break even in short term in legal education field, thus it is advisable to foray in other areas first (preferably engineering or medical) and then open a law school (examples abound like a world renowned institute on technology in India known for producing reputed engineers for USA at the cost of Indian taxpayer’s money entering into management, law and medicine or an institute mainly known for management starts opening university on every kind of subjects etc.). So its an added bonus if you have strong brand perception in one field then its time to diversify.
• Advisory Board: Hire around 10 people for your advisory board. 2 should be judges (any kind of judge preferably from appellate courts, but in these days of scarcity even trial courts would do but for sake of prestige 1^st class judicial magistrate should be the bar) one sitting and one retired, 2 should be local politician from 2 different and opposite political parties (this would ensure that both sides of the bread are buttered), 2 local influential bar member, 2 retired govt. personnel (preferably IPS, IAS but minimum state service may vary as per budget) and 2 academicians (preferably ex VC/Director of any of the law schools). Make sure that the advisory board meeting takes place at the nearest 5 star hotel with buffet lunch and pick & drop services; negotiate hard on the fees payable to the members of board (always remember there is a huge pool of potential board members).
• Faculty and Administration: Make your relative who has a degree in law (if not get a law degree from any of the correspondence courses available and once the school opens award an honorary PhD degree) the director of the institution (never hire the top man, he costs most and is most unreliable). Install a professional dean (preferably a retired pocket judge or administrator, never appoint an academician, they interfere with business). Poach some 5 teachers from any of the national law schools with 2 years experience (there are many dissatisfied teachers around, some can always be hired) call them professors, ask the lawyers and judges to give one lecture each week (so we get minimum of 4 assured lectures) call them visiting faculty, befriend some retired judges (at least 2 years into retirement and who has not gone into practice) offer them post of research associates, get few LLM students and appoint them as teaching assistant and aggressively ask for applications for post of assistant professors (mention in the advertisements that only those with distinction marks from class I to PhD will be considered, must have 10 publication in peer reviewed journal, must have attended 10 conferences in past 6 months, must have qualified NET etc.) and then don’t take any candidate who may have such qualities/qualification, but take the worst 4 rejected candidates in equal gender ratio (this will lead to higher retention rates). Also get some firang faces (if nothing works out ask the casting directors of Bollywood to arrange for few firang extras for few days, the cost should come to around Rs. 150 per day, Polish or Russian faces make good photo-session). Outsource cleaning jobs, security jobs, auction off canteen, appoint only 6 peons and 6 data entry operator and buy 20 computers from any garage sale network them and claim that you have paperless administration, god willing you may get some eco friendly award. Employ most of the support staff on 2 years negotiable non-renewable contract.
• Admission: Should have both 5 year and 3 year curriculums (the number of subjects in both are different, the subjects are same). For 5 year course the number of students should be 150 divided in two sections, for admitting these students, take part in CLAT, if the big national law schools does not want to share the admission form sale booty no worry this way would ensure that one fills up entire quota, also there should be 33% NRI quota and 2 free seats given to meritorious students coming from poor family (Make sure that you keep the Class X and XII marks sheet of the students in escrow until the final year). Take 50 students on 3 year course and divide them in two sections and send each section to each of the 5 year classes, these students can be admitted through interview). Offer LLM and MPhil from 3 years after opening of law school.
• Academics: Copy the semester model from any of the top three law schools (NALSAR, NLS and NUJS; NLS follows a trimester model, it is too much work on faculty to check so many copies also the students don’t get to enjoy the law school properly so a bimester model is ideal). Give more emphasis on corporate law subjects (proudly proclaim that you have the best corporate law faculty in the country, no one would challenge given that no one wants to open their corporate law teachers to scrutiny). Organize moot courts, get lawyers from the local bar who want to become judges, to judge such competitions, you may make moot compulsory for the first 2 years and say that you give special emphasis to develop the argumentative powers of the students. Inaugurate a university law journal, copy the font and mast head of Harvard Law Review, make lot of fanfare while launching the maiden copy of the journal, call the local political heavyweights, judges, lawyers, friends of the advisory boards, journalists, circus artists etc. the bottom line is the world must know that you are publishing something and that you are encouraging legal scholarships. Open up various societies which does nothing but has its own office bearers from the students and a faculty advisor, claim that this process inculcates leadership habits among students. Organise conferences, symposiums, workshops, seminars etc. at regular intervals and invite all the local cable channels to cover it, given that the local cable channels don’t have much to cover they would happily take the offer.
• Fees and Finances: Make an average of the money charged by all national law schools per semester and reduce a 1000 use the tag ‘National education in less than average fee’. For NRI candidates the fee would be $4000 + extras. The fees for 3 year course is negotiable but should not fall below 1 lakh p.a. Ask any of the private sector bank to set shop in your campus and promise them tie up and they would be happy to provide student loans (this would secure you against any non payment by students). Also the compulsory hostel fee should ideally be half of the tuition and allied fees. Apart from this charge an annual placement fee which would be paid by students who wish to get internships.
• Tie ups: Tie up with foreign universities, look at Nordic countries where the universities are always on look out for partnership, also look at private UK universities visit your local British Council office and look at the latest UCAS ratings and contact the bottom 10, with luck all 10 would respond; in any MoU mention that the students who would go for student exchange program would have to pay for their fees in the mother university. May also look at the civil law countries of continental Europe, they are always in look out for partnership. Get a center on corporate affairs and get it accredited with NFGC.
• PR: A sound website is a must for a viable starting point of PR, visit various US law university websites and select the motif of one, change the color combination and copy it in toto. All faculty pictures should be suitably photoshopped such that it looks like they are descendants of true blood Indian Aryans (fair face, no crease, contrasting backgrounds etc.). Prominently highlight all the tie-ups with foreign countries, accreditation with BCI, NFCG etc. Also give emphasis on the societies that you have at your university and brag about the excellent library that you have inherited. Have suitable photos of conference, moot courts etc. showcasing student achievements. Also buy a full page ad in one of the journals which come out with law school rankings and barter with the editor to push your university in the top five and a special mention. Have special tie-ups with the CLAT coaching centers so that they allow one of your faculties to address its students once every fortnight in its programs, this would entail that the students know of your university and you get a steady and regular flow of students.