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May 25, 2021

Punjab FM has written to GST Council for Covid Medicine reduce duty and GST Reforms required

by CA Shivam Jaiswal in GST

Punjab FM has written to GST Council for Covid Medicine reduce duty and GST Reforms required

Copy of letter from Punjab FM to GST Council

Subject: Time to Act Comprehensively on GST.

Dear Nirmala Sitharaman ji,

I had a quick glance at Volumes I & II of the agenda set for the 43. meeting of the OST Council scheduled later this week. I must admit that I was a little taken aback. Despite the fact that this meeting is being held after an interval of almost eight months the agenda is mundane and doesn’t deal with any of the substantive issues that confront us and have been raised regularly.

We have two issues which must be addressed immediately, and a series of other issues of a structural nature that will decide whether this system will eventually go on to meet the hopes and aspirations of our nation, and truly manifest itself as a reform that has been stated to be the most transformational since independence.

The following is a brief summary of the salient issues at hand:

A. Covid Management

In view of the prevailing position the country finds itself in today, we need to take some urgent measures on the pandemic front. I have been given a list of various goods that are needed to fight Covid as per the annexure together with toot rates: both BCD as well as GST.

You will notice that many goods suffer BCD ranging up to 20% and GST up to 18% besides a Social Welfare Surcharge @ 10% As IGST is charged on taxable value that includes import duties, the effective burden exceeds by another 2-3%.

GST@18% is applicable on protective garments, digital thermometers, laboratory sanitizers/disinfectants, paper bed sheets, and road transport tanks for oxygen.

Medicines/APIs for Covid (Remdesivir, Doxycycline, Ivermectin, Faviflu and Tocilizumab) have OST rates of 12% or 18%.

Covid Test Kits, Covid Vaccines, Ventilators, Oxygen Concentrators, Medical Oxygen and Nebulizers have GST@ 12%.

It is baffling that despite the crisis our country currently finds itself in, with millions of people suffering the consequences of Covid and inadequate health infrastructure, taxes this high continue to apply on basic essentials needed to overcome this life-threatening disease that has engulfed the entire world.

My attention has also been drawn to a judgement of the Delhi High Court (in the case Gurcharan Singh v MOF (Dept. of Revenue) last week which has struck down the Central Govt.’s notification providing limited exemption to Oxygen Concentrators while denying the same on gig of an Oxygen Concentrator to a senior citizen of 85 years. The exemption has been struck down on grounds of being violative of Articles 14 (equality before law) and 21 (right to life).

The judgement serves a harsh reminder of the disconnect between the administration and the judiciary, the latter being clearly unable to bear the untold misery that has been brought on our people. We need a OST with a heart and I shall strongly urge to place this agenda at the ensuing meeting.

B. Case of excessive delegation and acting through officers bypassing the sanctity and constitutional mandate of GSTC

The agenda of the meeting contains 50 pages (Pages 96-146) of decisions taken by GST Implementation Committee (01C) which are placed for the information (not approval) of the Council.

This is unprecedented not only in sheer number but also the coverage. Since these are merely placed for the information of the Council it will be correct to conclude that no amendment can even be sought by any member of the Council reducing everyone to a bystander for 50 pages of decision making.

GIC is neither a creation of Constitution nor of the GST law. It was created as per an executive decision of the GSTC (14. Meeting) to take routine procedural decisions which need not wait the convening of a Council meeting.

Following arc some of these decisions:

  1. Extending validity of certain exemption notifications;
  2. Enactment of new restrictions on the availment of tax credits by amending Rule 36 and insertion of rule 86B (payment of minimum tax in cash even while tax credit is available in certain cases);
  3. Cancellation and suspension of registration on additional grounds by amendment of Rules 21 and 21A, together with SOP;
  4. Restrictions on validity of E-way Bill;
  5. Amendment in various rules placing additional burden of compliance on tax-payers;
  6. Extending compliance burden of e-invoicing on mid-sized entities with turnover between Rs 100-500 cr.;
  7. Waiver of penalties in certain situations;

Most of these decisions require an amendment to the rules that would also require placing them before the State legislatures. I fear that substantive benefits cannot be withdrawn or restrained by subordinate law and some of them may have ideally warranted a process of enactment of law.

We are thus setting dangerous precedents of subverting the process of law making to officers, clearly a case of excessive delegation and running the risk with judiciary of being struck down.

We should keep in mind that GST Council is sum total of the Central and State legislatures for the purpose of GST and thus cannot be short circuited in important decisions.

I also take note that GST is being increasingly perceived to be causing excessive harassment and arbitrariness (e.g. freezing of productive assets of business, suspension of registrations, and denial of eligible tax credits) and moving away from a fair and non-adversarial tax system that forms the foundation for a progressive tax. It would have been desirable to hold a discussion within GSTC about striking the right balance between the needs of facilitation and enforcement before going for these changes.

To guard against such abuse we should define and notify formally powers of the GIC. This should not include powers relating to change of tax rates/excmptions, restriction of tax credits or denial of any other benefit which has adversarial impact either against tax payers or On revenue.

The decisions already taken should either be reversed or placed before GSTC for formal approval with retrospective effect as a separate agenda.

I regret to record the going forward possible for Punjab to incorporate such substantive changes in its laws unless approved in the Council.

C. Strengthen Federal Structure and effective consultation with States

From time-to-time States have raised a number of issues that will strength the federal structure for the implementation of GST. It is surprising that despite some of them being enshrined in the Constitution they are yet to find any receptivity:

i. Appointment of Vice-Chair from amongst States under Article 279A(3) of the Constitution: No such appointment even after 5 years of operationalizing Constitutional amendment ignoring States who otherwise enjoy 75% voting;

ii. Activate Dispute Resolution Mechanism under Article 279 the Constitution: There have been occasions to resort already in the past but going forward there can be man situations. It is essential that this mechanism is put in lest we are struck with confusion and chaos going forward



iii. Discussion on floor and band of rates within which States may be allowed to fix their respective SGST rates under Article 279A (4)(e) after June 2022: Practically all States continue to face revenue deficits of close to 20% of the assured revenue. In the case of Punjab this goes in excess of 50%. Certainly GST has failed to garner the assured revenue threatening the fiscal sovereignty of States. We need to start discussions on how exactly this gap is to be bridged in general together with the possibility of differential SGST rates for States which continue to have far greater deficits.

iv. Review rules for the conduct of GSTC meetings and incorporate the following in GSTC Rules of procedure:

  • a) Manner of dealing with suggestion from States and placing it on agenda of the Council meetings: There is no mechanism to place the suggestions of States as a part of the agenda of the Council meetings or even to formally acknowledge and reply;
  • b) With Covid continuing we need to empower Council to allow voting through VC;
  • c) Agenda for meetings should be circulated at least 7 days before the meeting (3 days were fine when meetings were being held on weekly basis in the initial period);

D. Structural Reform of GST

I had sincerely believed that the period of 5 years – which provided assured compensation – will ensure a stabilized and vibrant GST. Everyone was assured that GST will raise GDP, boost revenues and have a catalytic impact on even Non-GST revenues.

None of this has even remotely happened. On the other hand, the trajectory has been in opposite direction. I shudder to think the position for Punjab next year with a likely deficit of 60% from assured compensation.

To that end I have made suggestions from time to time and summarized once again as follows:

a) Review and harmonize tax rates and exemptions so that opportunities of evasion are eliminated, tax credit chain simplified and the competitive edge for domestic businesses enhanced;

b) Accelerate ease of doing business by removing tax distortions (e.g. taxation of traditional factors of production (land, labour and capital) in a discriminatory manner e.g. land-leasing being taxed @ 8% v exemption to land, huge loss of tax credits in power and real estate sectors, preference to polluting fuel (coal) v natural gas by keeping it outside the GST, preference to captive power plants for large industry v additional tax burden due to embedded tax credits for standalone power plants); of Streamline legal provisions relating to new investments by removing aberrations and obstructions relating to mergers, amalgamations and new acquisitions;

d) Nipping all undesirable litigations already clogging Courts by a balanced review of tax laws and correcting distortions that stand judicially challenged;

e) Making GST predictable by strengthening the system of Advance Ruling Authority and preferably issuing detailed Guidance Notes for uniform interpretations across the entire country;

f) Reducing the burden of tax compliance by streamlining the system of multiple return filings on one hand and adhoc requests from time to time in seeking reconciliations that should be best handled by data analytics by GSTN;

g) Plugging tax leakages; both due to structural defects as well as actions of unscrupulous persons;

h) Need for Ombudsman to handle increasing cases of harassment;

We have about one year before the period of assured compensation is over. Compensation acts as the best binder and thus the remaining period must be used in the most productive manner to overcome all the aberrations and distortions that have crept into this GST.

I had always hoped that GST will provide the foundation for a strong and vibrant India. Punjab had even gone ahead with grave risks to its revenue agreeing to subsume Purchase Tax in GST. Our fears were not unfounded as have been proven with somewhat dubious distinction of topping the States with highest shortfall. While we shall grapple with our deficit as best as we can, we don’t wish to see our sacrifices go waste for the nation.

All hopes pinned in you.

Yours sincerely
(Manpreet Singh Badal)

Smt. Nirmala Sitharaman Ji

Union Finance Minister North Block, New Delhi -110001

Copy to: Shri Tartan Bajaj, Revenue Secretary and Secretary to GSTC, North Block, New Delhi-110001

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