The states and the Centre may have crossed the first hurdle of evolving a consensus on the long-pending issue of division of control over taxpayers in the ninth meeting of the Goods and Services Tax (GST) Council, but the decision on cross empowerment — a key feature aimed at negating the possibility of an assessee being approached by the tax administrations of the Centre and the respective state — might end up being restricted to just the processes of scrutiny and audit. For other processes under GST such as refunds, export rebates, remission and recovery of arrears, the possibility of ‘dual control’ looms large, which could translate into higher compliance costs and uncertainty for assessees.

On Monday, the Centre and the states managed to hammer out a broad consensus over the contentious issue of division of administrative control over tax assessees in the ninth meeting of GST Council, with 90 per cent of tax assessees below the annual turnover threshold of Rs 1.5 crore under the control of states and the remaining 10 per cent under the Centre’s jurisdiction, while for a turnover of Rs 1.5 crore and higher, an equal division of assessees between the states and the Centre was agreed to.

Among the other divisions of powers, the Council had decided that follow-up work emanating from a scrutiny or audit — such as issuance of demands, adjudication of cases, appeals, review or revision — would be handled by the same authority that conducted the detailed scrutiny or audit, while intelligence based enforcement powers will rest with both state and Centre’s assessing officers, government officials said.

The biggest disadvantage of not having cross empowerment for the entire value chain under the proposed indirect tax regime will be that the taxpayer would not know which administration to approach in case of difficulty, a view which has been cited by the Centre in the Council’s meetings since the discussion on dual control began in the second meeting in September. Also, it was felt that the Centre may find it difficult to verify credit flows across the entire value chain of transactions, if the need arises.

The cross empowerment model under the proposed GST was essentially envisaged to avoid multiple administrations approaching taxpayers that would have also resulted in higher compliance costs and uncertainty. Under the cross empowerment model, it has been proposed that audit will be capped at 5 per cent of the total number of taxpayers. At the beginning of the year, the Centre and state will separately prepare a list of taxpayers to be audited in descending order of risk for detailed scrutiny or audit and the list will be merged based on agreed protocol or on a computer programming-based selection.

It has been proposed that the process of allocation of a taxpayer to either the Centre or the state will be reviewed only after three years to avoid frequent rotation of taxpayers between the two authorities and avoid any malpractices by the assessing officers at the same time.

The arrangement between the Centre and the states to break the deadlock on division of control is being seen as a compromise on part of the Centre, as it has lost out on the maximum share of taxpayers under the threshold of Rs 1.5 crore. Currently, 93 per cent of service tax assessees and 85 per cent of the VAT taxpayers have a turnover below Rs 1.5 crore. Under the proposed GST, taxpayers having a turnover of over Rs 1.5 crore are estimated to contribute almost 90 per cent of the revenue.

According to the updated figures shared by the Centre with the states, the likely taxpayer base in GST would be 107 lakh, out of which, states account for 67 per cent (71.7 lakh) and Centre is estimated to account for 33 per cent (35.3 lakh). There are around 81.4 lakh VAT dealers, out of which active dealers are 66.5 lakh. For service tax, there are 38 lakh assessees, out of which 26 lakh are active assessees, while there are around 4 lakh assessees for excise. Around 4 lakh taxpayers are common to the Centre and the states.

For the process of refund, the states and the Centre did not converge on cross empowerment as there were legal issues relating to Consolidated Fund of India being operated by a state government official and a central government official and the corresponding modalities of audit of such refunds. Also, after consultation with the law ministry, the GST Council agreed against cross empowerment on Integrated GST (IGST), citing Article 296A of the Constitution, which vests the power to levy and collect IGST with the Centre. Thus, it was felt that cross empowerment for IGST, the tax on movement of goods and services across states, was not legally permissible.

It was discussed that place of supply would be a major issue in administration of IGST and due to potential conflict of interest between the states, this tax should be handled only by the Centre.
The states and the Centre zeroed in on scrutiny and audit for division of control since these two processes require maximum human interface as most of the other processes under GST shall be automated. For other processes such as registration, the model GST law itself provides single interface model, wherein registration or cancellation by one authority shall be deemed to be done by the other authority as well.