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Cos will be reimbursed for exemptions that currently exist in the VAT regime
June, 30th 2017

It's the mother of all tax reforms; the biggest that India has seen since independence. The indirect tax overhaul is set to begin at the stroke of the midnight hour on July 1 2017. But not all parties are on the same page. Yesterday Mamata Banerjee said that the GST rollout will be an epic blunder. She has raised concerns over the hurry to implement the tax reform. Today the Congress party has also said that they will keep away from the special midnight meeting on June 30. Regardless all states, except J&K have cleared the GST bill. Today the National Conference and other opposition parties in the state met with the state government to evaluate political consensus for a rollout. CNBC-TV18's Shereen Bhan caught up with Karnataka's representative on the GST Council, Krishna Byre Gowda, West Bengal's Finance Minister Amit Mitra, Haseeb Drabu FM, J&K and Himanta Biswa Sarma, Finance Minister Assam.

Below is the transcript of the interview.

Shereen: Let me start by asking you about the preparedness of the state of Karnataka for the rollout of the goods and services tax (GST). Are you all set now for July 1?

Gowda: 96 percent of our assessees are already on board GST, they have registered. In terms of outreach also, our Department of Commercial Taxes has carried out extensive interactions across the state. In addition to that, we anticipate some requirement of assistance during the early days of transition. So we have set up call centres within the Department of Taxes and also, some of the trade boards, they have set up their own call centres as well to assist people through the transition phase. So yes, there could be a few hiccups but whatever preparation we can do, we have not spared any energy in that direction.

Shereen: So, it is important that you are saying that 96 percent of the assessees in the state of Karnataka are now on board as far as the GST is concerned. Let me ask you specifically about the state of preparedness of the micro, small and medium enterprise (MSME) sector because that is where most of the queries that at least we are getting, there is confusion on a whole host of issues from invoices to filings. What is your own take on the readiness of the MSME space within the state of Karnataka and specifically, how are you trying to address and facilitate them being on board into the GST?

Gowda: As I said just now, we have done everything from our side to clarify, give adequate information. But nevertheless, I do appreciate that there may be some lack of information within the MSME sector and that is something that we will have to deal with during the next two months. So, it is not that everything has to be on, on July 1 or that it is the end of things. It does not work that way.

So we will continue to work with them through our call-centres, our officers have been extensively trained. So as and when these queries come up from the MSME sector, our people will be on guard to respond to any request for information and clarification. But also, it has been discussed that in the first month, we must go easy on our enforcement because there may be some confusions prevailing.

So we will take it easy for the first month to even if there is some mistake committed by an assessee, we will not be very hard on them to help through the transition. So both, in terms of outreach and communication, but also in terms of enforcement, we will work with the assessees whoever is genuinely interested in making the transition. So we will work with them to ensure there is a smoother transition.

Shereen: Let me also ask you, for instance, the state of West Bengal has said that they will provide some special rebates as far as regional films are concerned. For the state of Karnataka, can we expect any special exemptions, etc. for things like regional films?

Gowda: Our Honourable Chief Minister, during the debate on the state goods and services tax (SGST) act being passed in the legislature, he announced on the floor of the house that we are open to discuss with the Kannada cinema industry and to see how we can continue to nurture our cinema industry. And one of the options available with us is the refund of the SGST and in addition to that, we are also committed to some incentives.

So our outreach to Kannada cinema industry is not limited to refund of SGST, but on top of it, we will continue some of our incentive programmes that are already prevailing. So we will sit. Our Chief Minister has already assured them that we will sit with you guys and discuss the issues and we are committed to nurture vernacular cinema industry.

Shereen: Any other sector where we could see similar sort of exemptions or rebates being provided by the state government?

Gowda: We have not committed as of now, but that does not mean that we will not be extending similar treatment to some sectors.

Shereen: For instance? Which could be the sectors that you may consider?

Gowda: In Karnataka, there are industries like silk which we are a major player, but it is mostly a cottage industry. So there are sectors like those where we may have to look at ways of assisting these small assessees. We will study the situation during the transition. As of now, we have not committed to any of these, but where we are convinced that we need to do more, we will examine those cases as and when they arise.

Shereen: Let me ask you a few specific questions, since you have been part of the GST Council meetings. My conversation with the revenue secretary, Mr Adhia, he seemed to suggest that the compensation need will perhaps, cross the Rs 50,000 crore because that was the number for the last financial year. What is your best estimate at this point in time given the discussions that have taken place within the ambit of the GST Council and how can we expect that to be provided for? Is it only going to be by way of additional cesses, more items being brought under the cess window?

Gowda: Based on the discussions in GST, there was a broad agreement that the compensation requirement would be about Rs 50,000-55,000 crore and that is the likely mop up for compensation fund through cess route. So ideally that should suffice. Now factor in the buoyancy that is likely to be seen in the revenues on account of rollout of GST and GST being able to bring more assessees into the tax network. So if the buoyancy does materialise then the cess requirement may go down meaning the compensation requirement may go down and hence, the burden on the cess may go down.

But we do not know how this is going to play out and the GST Council has also agreed that if there is a shortfall in cess account to pay for the compensation, we will authorise Government of India to carry out borrowings in the cess account. So the borrowings will come in handy to pay the compensation and subsequently, the borrowings will be repaid from the cess itself. So at this point, we do not see the need to enhance cess because borrowings can be repaid even after five years. That is the agreement. So, while cess will continue even beyond five years, the compensation will end at the fifth year. So whatever cumulative borrowings are there, it can be repaid in the subsequent years.

Sougata Mukhopadhyay: Do you think we are ready for GST rollout on July 1?

Mitra: At least four times I have said on record in the GST council that we are not ready, please don't put such haste so that GST such a large reform, perhaps the world's largest fiscal reform falls flat on its face.

Some Finance Ministers said to me why are you bothered, we are going to get our compensation if we don't have 14 percent rate of growth. Anything lower than that we will get full compensation, let them fall flat on their face. However Mamata Banerjee's intention of supporting GST in principle was that it succeeds.

We have introduced a very nice thing called the composition scheme. What does that mean? Anybody upto Rs 75 lakh turnover can decide I will not be part of GST taxation rates, I will do a single tax, 1 percent for traders, 2 percent for manufacturers and 5 percent for restaurants. What is hidden in that is composition scheme has to keep detailed raw material accounts including even wastage. For this that Rs 75 lakh turnover person has to have an ERP as it is called technically in computers and this is going to lead to inspector raj.

Under VAT we did not have an arrest clause. For a businessman VAT authorities could not arrest a businessman. They would have had to file an FIR. In 5 years of my Finance Minister in West Bengal, I only put two FIRs, one of which was only implemented in 5 years. So, there was no arrest clause. In the GST case which I fought tooth and nail but still I failed because sometimes the lone voice of conscience on behalf of my Chief Minister and my state, there is an arrest clause, that below Rs 2 crore of so called demand of tax there will be no arrest but above Rs 2 crore you will be arrested but you will be given bail. If it is Rs 5 crore you will be arrested and you will not get bail.

So, my point is, is the small and medium enterprise ready today with the kind of computer systems they need, the software they need, testing that needs to go into it. What you see today is the textile strike, you see striking transporters, what is their point? They say we will have to induct last minute notification on June 3.

Shereen: Assam all set for the GST deadline?

Sarma: We are all set and we are looking forward to implement this historical reform.

Shereen: I was just talking to Karnataka representative and they said that 96 percent of the assessees have migrated, what is the situation in the state of Assam?

Sarma: I can't give you the statistics but yesterday I confirmed that almost all the assessees have migrated to GST. The percentage will be between 95-100 percent, almost all have migrated.

Shereen: We were also just talking to other state finance ministers, in terms of any specific exemptions or rebates that may be provided by the state because there are no exemptions under the GST. We have already seen Karnataka talking about perhaps some relief coming in for sectors like the silk sector. Anything in Assam where the state government would like to provide some kind of relief by way of rebates etc?

Sarma: In Assam we used to give industry complete exemption from paying VAT for initial 7 years. There were few industries to whom we used to give mega status, they can actually get that exemption upto 15 years. In GST exemption is not possible. So, the state GST part which industry will pay, we will reimburse them and that notification will also be issued in 10-15 days period of time with effect from July 1.

Shereen: That is a very important clarification. You are saying that the state of Assam will issue a notification which clarifies on the reimbursement for the exemptions that prevailed before the GST, so the exemptions that industry was enjoying under the VAT regime?

Sarma: Only the mode of payment will be different. Earlier they used to get total exemption, now they will be reimbursed by the government.

Shereen: And they will be reimbursed fully?

Sarma: Yes, according to the scheme, whatever scheme we have, there are categories with 100 percent reimbursement. So whatever promise we made to our industry prior to GST, that will be fully honoured by the state government in a post-GST regime and it will be reimbursement model, not in an exemption model. But the refund will be the same, we will honour our promise completely, whatever we have made to our industry.

Shereen: Also, as we move towards the GST, in the transition, have you set up call centres, are there helplines that are active to try and address at least some of the concerns that people may have specifically from the MSME sector.

Sarma: We are working very closely with the central government, the central excise department. We have set up helplines, we have done a lot of workshops. Both, me and my Chief Minister will meet the industry on July 2 also, we are going to have a townhall meeting with the traders, with MSME and industry. So that engagement with the industry and traders will continue for the next 2-3 months so that GST rollout becomes smooth.

Not only that, okay, July 1 we are going to launch, that is not the aim. We will work together with our trade and industry for the next 2-3 months till the process becomes complete smooth and trade and industry develops tremendous confidence on the new mechanism. So we have to remain engaged for the next 2-3 months.

Ronojoy: As we all know, Jammu and Kashmir is the only state which has not joined the GST yet, but you were supposed to hold all an all-party consultation to build consensus on the GST today. Did that meeting happen, can you give us an update on that?

Drabu: Yes, we have been trying to build a consensus not just within the political parties, but across the civil society as well. Today's meeting was an all-party consultative group meeting and no consensus emerged within that meeting. So we are at it, we are trying to build a consensus. We hopefully will be able to get into the GST regime over the next few days.

Ronojoy: What seems to be some of the stocking points, some of the issues, the roadblocks that you can share with us which is not allowing your government to reach a consensus with the other stake holders?

Drabu: You have to understand that J&K is a special state. We have our own constitution, we draw our powers from Section 5 of the Constitution of Jammu and Kashmir whereas all other states draw powers from Article 246 of the Constitution of India. Also, because of our Article 370, any amendment made to the constitution of India, cannot be applied, does not extend to the state of K&K unless it is consented in the concurrence of the state government, the state government recommends that to the President of India.

And there are a number of articles in the Constitution of India which do not extend to the state of J&K and in the Constitutional Amendment Act 101, there are such cases. So there will be a whole series of additions, deletions, safeguards built in so that the position of the state, the autonomous character has in the constitution of India, which is by Article 370 or the legislative powers that we have under Section 5 of the Constitution of Jammu and Kashmir do not get compromised in any way.

There is a lot of apprehension in the minds of the larger civil society also, some political groups, that these might get compromised when you extend 101 to J&K. so the government has already been discussing this and building safeguards into the amendment which will apply to J&K. And once that amendment is done, then the SGST Act for the state will be passed and the GST regime would then apply to J&K.

Ronojoy: Just a few days ago when Finance Minister wrote to your Chief Minister, he had said that because Jammu and Kashmir comes under Article 370, it does give power to the state to give approval without necessarily getting a consent from the assembly. I can understand the unease of governments because this provision has only been used sparingly, I think 39-40 times in the past, but could that be an option that the Jammu and Kashmir government may contemplate going ahead?

Drabu: We are in, apart from the constitutional position itself, the state has not been, has seen a lot of civil strife and so on and so forth. So it is advisable that the government has taken a view, the cabinet has taken a view, there have been discussions on this. We are open to all forms of extension, but we need some time to build a consensus, because it is not so much about government.

The most important thing for us, as a consuming state is that we stand to lose if we do not join the GST regime. More importantly, if we do not join the GST regime, there will be a complete trade isolation, so traders from the state cannot then import stuff and businesses cannot export stuff, you do not avail of input tax credit (ITC), the consumer does not benefit because he gets double taxation. So it is not so much about state government and technicalities, only that, but it is also a much larger issue of how GST impacts the entire economic situation in the state.

Ronojoy: Considering how fragile the social environment in Jammu and Kashmir right now is and the sort of adverse impact for a state like Jammu and Kashmir not to embrace GST like the rest of the country, it is going to lead to an increase in prices. And since you are a consuming state, it is going to hit the people of Jammu and Kashmir at the end of the day. Is there a fear also within the government that this could further stoke fire, further increase the angst and the anger of the people in your state?

Drabu: There are implications. It is not just a technical issue as I said, it is also a political issue and we are facing a very fragile and a very volatile situation. So at this point of time, we have to look at all these factors for us to take a definitive view, but I do not think that it should be very long before we join the GST regime.

Ronojoy: As the FM I am guessing you would have done some internal study in terms of the financial impact of not embracing GST. Could you give us some estimates, some numbers that you are playing with at this point?

Drabu: It is not about finances right now. It is very clear that we will stand to gain substantially under GST regime by virtue of the fact that we are a consuming state, so there are no two ways about it. Also the fact that if we stay out even for a small period of time, there are bound to be disruptions in the trade network that have been built over the years, it will cause shortages in the system. So, you will have a very disruptive kind of thing here. In terms of finances we will stand to gain Rs 1500-2000 crore but that is not the key factor that is driving the decision making at the state level. What is driving is the implications that it has on the customer, the consumer, the businessman, the trader, it will be a very disruptive kind of a thing. However as I said, we hope to be a part of the system sooner rather than later.

Ronojoy: How soon are you hoping?

Drabu: We were banking on some kind of a consensus today emerging but I don't want to put a timeline to it. As I said that it will be sooner than later.

Ronojoy: When are you meeting again? I am guessing you would be making all the attempts at your end to build consensus. So, when is the next meeting scheduled?

Drabu: My own sense is that we are pretty much done with the consultative process. So, now the government would take a view in the next couple of days.

Ronojoy: We are just about 24 hours away, your thoughts on this? Do you foresee any short term challenges, roadblocks that companies may face at least in the short run, what is your own view on that?

Drabu: You can't sleep in a VAT regime and wake up in a GST regime. There are bound to be disruptions, there are bound to be glitches. I tend to compare this thing as you have these disruptive technologies which change the sector and are the game changers, I see this as a disruptive policy change which will eventually lead to a much better equilibrium in the system. So, over the next 3-4 months I am sure like in the demonetisation case, there was a whole lot of chaos and discomfort, you will see this at various levels in various states, in various sectors, in various groups. It is a huge reform. I think we adequately recognise the kind of changes it will bring not just to the economy or the taxation system but also to the social mindset of people, the way it impacts the entire issue on corruption for instance, there is a huge social implication as well. Of course there are operational issues of IT, technology of how the GST network will work, do companies have ready ERPs where they are kind of going to go online. I think already the union government, the Finance Minister has given some relaxations, looked at it a little more liberally. So, there is going to be pain for some time but over the next 3-6 months we should see it settling down. There are bound to be teething problems, it is not a small reform.

Ronojoy: Finance Minister of West Bengal said that come July 1 2017, inspector raj will be back in India. Do you agree with that view?

Drabu: I don't. I think it is unfortunate that this should happen because he was also the chair of the empowered committee and whatever decisions have been taken so far in the GST council have been unanimous. I am sure there is politics in all this which goes beyond the regular seeing as tax regime. I do hope that the governments both at the centre and the state see this more constructively as a long term reform that will change the face of India. Tomorrow is going to be historic occasion which compares very much with the tryst with destiny - a midnight ceremony. So, it will be wonderful to be a part of that piece of history.

 
 
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