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What can the European VAT system and the Indian GST system
learn from each other?
Adv LLM thesis
submitted by
Varun Chablani
in fulfilment of the requirements of the
'Advanced Master of Laws in International Tax Law'
degree at the University of Amsterdam
supervised by
PERSONAL STATEMENT
Regarding the Adv LLM Thesis submitted to satisfy33 the requirements of the 'Advanced Master of Laws in International Tax Law' degree:
1. I hereby certify (a) that this is an original work that has been entirely prepared and written by myself without any assistance, (b) that this thesis does not contain any materials from other sources unless these sources have been clearly identified in footnotes, and (c) that all quotations and paraphrases have been properly marked as such while full attribution has been made to the authors thereof. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree. I also accept that
2. in case of such a violation professional organization in my home country and in countries where I may work as a tax professional, are informed of this violation.
2. I hereby authorize the University of Amsterdam and IBFD to place my thesis, of which I retain the copyright, in its library or other repository for the use of visitors to and/or staff of said library or other repository. Access shall include, but not be limited to, the hard copy of the thesis and its digital format. 3. In articles that I may publish on the basis of my Adv LLM Thesis, I will include the following statement in a footnote to the article’s title or to the author’s name:
“This article is based on the Adv LLM thesis the author submitted in fulfilment of the requirements of the 'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam.”
4. I hereby certify that any material in this thesis which has been accepted for a degree or diploma by any other university or institution is identified in the text. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree.
signature:
name:
Varun Chablani
date:
III
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Table of Contents
Table of Contents……… III
List of abbreviations used……… IV
Executive summary………. V
Main Findings………... VI
1. Introduction………. 1
2. European VAT system………..2
2.1. Basic features of the EU VAT system……….. 2
2.2. Taxable person………... 4
2.3. Taxable event, Supply and Consideration……….. 4
2.4. Exemption……… 5
2.5. Input Tax Deduction……….. 6
3. Indian GST system……… 7
3.1. Evolution from the old system of VAT and CENVAT……… 7
3.2. Salient Features of the GST System………. 8
3.3. Taxable event, Consideration and Taxable Person……….. 9
3.4. Input Tax Credit……… 12
3.5. Valuation and (Non) Taxation of Discounts……….. 12
3.6. Exemptions (without deduction) and Zero-Rated Sales (with deduction)……… 13
3.7. Refunds……….. 13
4. Learnings from each other’s systems………... 13
4.1. Financial services ought to be made compulsorily subject to GST / Article 135(1)(b)-(g) to be modified………. 13
4.2. Anti-profiteering concept should be introduced………. 14
4.3. Definition of ‘consideration’ needs to be revisited………. 15
4.4. Exclusion of ‘Post Supply Discount’ from ‘Taxable value’ should not be limited to where the discount is agreed upon beforehand……….. 16
4.5. Removal of GST Compensation Cess. Even if it remains, it should reflect the neutrality principle………...17
4.6. Sectorisation option should be allowed when calculating proportionate reversal on inputs and input services used commonly for taxable supplies and exempt supplies………. 18
4.7. Items given free of cost to unrelated parties should not be subject to GST………... 18
4.8. Partial recovery by employer from employee on subsidised facilities should be taxable.. 20
5. Conclusion……… 21
List of abbreviations used
ACCT Additional Commissioner of Commercial Taxes
Art. Article
ACCC Australian Competition and Consumer Commission AAR Authority of Advance Ruling
CBDT Central Board of Direct Taxes
CBI&C Central Board of Indirect Taxes and Customs CGST Central Goods and Services Tax Act
CST Central Sales Tax Act CENVAT Central Value Added Tax
CJEU Court of Justice of the European Union
EU European Union
GST Goods and Services Tax
HMRC Her Majesty’s Revenue and Customs IGST Integrated Goods and Services Tax ITC Input Tax Credit
PCAP Price Control and Anti-Profiteering Act SCC Supreme Court Cases
VAT Value Added Tax
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Executive summary
At a broad level, both the European VAT and the Indian GST systems operate on the same principles – destination-based consumption taxation, eligibility of credit / input VAT adjustment to set off output VAT, principle of neutrality, legitimate expectation, legal certainty, good faith etc. Clearly, there is a difference in the level of maturity in the two systems. After All, the VAT system was introduced in France way back in the 1950s and at the EU level, there have been multiple harmonisation initiatives apart from various other work done by the European Commission. Indian GST system is as recent as 2017, having culminated from the erstwhile State level VAT and Central level Service Tax and Excise regime.
There are indeed plenty of takeaways for both systems from each other. In general, the weakness of the Indian system is that it does not offer neutrality in its truest sense. This can be seen by the presence of the GST Compensation Cess which creates a cascading effect on taxes. Also, the ITC system needs reforms (in regard to reversal of ITC on inputs and input services commonly used for taxable and exempt supplies) and so does the overall concept of taxability (in regard to free supplies made to unrelated parties), taxable amount (in regard to post supply discount), etc.
On the European side, the system could really benefit by an anti-profiteering mechanism – to ensure that taxpayers who are subject to a change in their taxation system (for example, a new member state having joined the EU) ought not to profiteer from any beneficial taxation regime. Any benefit ought to be passed to the next level in the supply chain. The Australian model in this regard can also be considered. After all, the principle of avoidance of unjust enrichment in indeed an unwritten doctrine of EU law. Another aspect where EU law can improve it to compulsorily have financial services taxes (except of course where the consideration is expressed by way of interest or a discount). I would also recommend a relook at the interplay between supply and consideration in EU law - and suggest that the Indian / New Zealand law is better placed in this regard.
Main Findings
The main findings, issue wise, are as follows:
POINTS THAT EU LAW CAN LEARN FROM INDIAN LAW
1. Financial Services should be compulsorily taxable, lest there be an exposure of cascading effect on taxes, crates a revenue loss for the exchequers and distorts neutrality by
incentivizing businesses to structure their transaction in such a way that financial activities are
insourced as much as possible. The Indian method of taxing financial activities at the normal
rate (and giving exemption to interests and discount) is much better to avoid that distortion. 2. Anti-profiteering provision should be introduced to ensure that those taxpayers who are
benefitted from a change in tax law which treats their business more favourably are obligated to transfer such benefits to their consumers – whether the benefit is from an output tax (like a reduction of tax rate) or input tax (like more input tax available for deduction). The Indian system itself has been inspired from the Malaysian system and the (fairly successful) Australian system. Having this system in the EU would not only concern those taxpayers whose domestic law (like standardized rates) have been changed, but even those taxpayers belonging to states are in the negotiation of joining the EU and are in the process of aligning their tax system to the EU harmonized system.
3. Tolsma judgment is to be revisited to ensure that consideration and supply is not understood based on the legal relationship entered into (or created) between the parties, but rather, whether a benefits is accrued to the party receiving the supply (as against purely altruistic charity payments, where there is no ostensible benefit that accrues to the donor). In other words, consideration should be understood not only to qua what is done in return for a supply, but also, like provided in the Indian / New Zealand law, in response to a supply, or even, turning the tables, for the inducement of a supply.
POINTS THAT INDIAN LAW CAN LEARN FROM EU LAW
1. Ensure that post supply discount is excluded from the taxable amount even if there is no (i) correlation between the original invoice (ii) pre-existing agreement on such discounts. The taxable amount needs to reflect the legal neutrality / proportionality principle – where the tax should be qua the consideration that is finally charged.
2. Major changes are recommended (and even, if possible, as unlikely as it may be, an outright removal) in the GST Compensation Cess law. Economically, even if not legally, the
Compensation Cess causes double taxation. Worse still, the ITC utilization and refund facilities are really limited – and cannot be set off against CGST, SGST or even IGST. This is in sharp contrast to the EU law – which places emphasis on neutrality, a more robust refund facility and even the possibility of using unutilizable input tax for discharging other tax liabilities.
3. To ensure a more precise and scientific way of calculating ITC reversal on inputs and input services commonly used for taxable and non-taxable (exempt) supplies, the sectorization method option should be given to the taxpayer – by which the ITC reversal formula on common credit can be applied ‘sector-wise’ and not just ‘company-wise’.
4. Items given free of cost (like cricket match tickets) to unrelated parties should not be subject to GST, and surely not by way of agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act.
5. Salary sacrifices made by the employee to obtain a facility from the employer (as long as it is outside the scope of facilities necessary for the employee to perform his duties, or otherwise required under law) should be subject to GST.
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1. Introduction
Indirect tax is usually a tax on consumption of goods and services. Throughout most of the world it has been quite an effective way of raising revenue – mainly due to its broad tax base, (relative) difficulty to avoid taxes, fairly in-elastic to economic booms or busts and comparatively painless. In fact, the global trend of revenue collection has been constantly shifting from direct taxes to indirect
taxes.1 The cornerstone of the VAT / GST system is that it offers neutrality, in a legal sense (i.e., tax burden proportionate to expenditure), economic sense (usually, no incentive for vertical aggregation, insourcing, disturbances in competition or artificialities), internal sense (each transaction is taxed on value added) and from a cross border point of view (goods and services are exported and not their taxes, goods and services when imported are taxed just like domestic supplies). The ultimate goal of the principle of neutrality is to ensure that factors of production are efficiently allocated.2 Of all the VAT / GST systems tested out in various countries, two of the rather successful ones are the EU VAT system and the fairly recent Indian GST system. The EU system is quite evolved with multiple Council directives resulting in much maturity in the system. The Indian GST on the other hand is only three years old. The comparison therefore may not be entirely accurate, and the development of many aspects in the respective regimes is only a matter of time and individual policy considerations, which cannot be imported from one system completely to the other.
This thesis would compare both these systems and open a discussion on concepts (at a principle level) which can be borrowed from one system to the other. After all, the OECD encourages all states to ensure that their indirect tax system adheres to the neutrality principle (VAT is a tax for final consumption and is neutral for business) and the destination principle (internationally traded services
and intangibles should be subject to VAT in their jurisdiction of consumption).3 The Guidelines endorse the following core principles for VAT:4
1. Broad Based Tax on Final Consumption 2. Staged Collection Process
3. Destination Principle
4. Generally accepted policy on of tax policy to VAT as: (i) Neutrality, (ii) Efficiency, (iii) Certainty and Simplicity, (iv) Effectiveness and Fairness and (v) Flexibility.5
At the end of this thesis, I will compare my solutions proposed for the two systems on the basis of the above five objective elements. I have personally seen the transition from the old (Excise, VAT, Service Tax) system to the new GST system in India – and seen the development from a litigation, consulting and in-house point of view – so I hope that my thoughts on the exchange of ideas is a useful read. Meanwhile, on the EU side there has been a fair amount of harmonization at the EU level, with only a limited agency available to the member states (for example, determining the tax rates).
1 Ad van Doesum and Frank JG Nellen, ‘VAT in a Day: A Concise Overview of the EU VAT System’
(Kluwer: Deventer, 2017), at p. 9.
2 Nebojsa Jovanovic, ‘The Treatment of Public Bodies under Article 13 of the EU Directive’, available at
https://arno.uvt.nl/show.cgi?fid=134310, visited on 19.07.2020, at p. 6.
3 ‘OECD International VAT/GST Guidelines Draft Consolidated Version Invitation For Comments February
2013 Committee on Fiscal Affairs Working Party No. 9 on Consumption Taxes’.
<https://www.oecd.org/tax/consumption/ConsolidatedGuidelines20130131.pdf> accessed 20 July 2020.
4 Ibid (p. 11-16)
5 ‘The Draft Ministerial Report Preface’ – 'A Report by the Committee on Fiscal Affairs, as presented to
Ministers at the OECD Ministerial Conference, “A Borderless World: Realising the Potential of Electronic Commerce” on 8 October 1998. <http://www.oecd.org/tax/consumption/1923256.pdf> accessed 20 July 2020. See alsoOECD, Ottawa Framework Conditions, endorsed by finance ministers in October 1998, available at http://www.oecd.org/dataoecd/46/3/1923256.pdf, visited on 18.07.2020.
Let’s start with the ‘what’? The interesting aspect about this research is that in terms of population, area and (in some cases) robustness of the economies, one can draw parallels between the EU member states and the states in India – and flowing from that, draw parallels between the tax systems as well. There are indeed plenty of similarities between the two systems – both are destination based consumption taxes, both have taxes across the board on (almost) all supplies, both seek to avoid the cascading effect of taxes and both have a debit and credit mechanism to ensure that the taxes is only on the value added. This common ground makes me believe that the two systems can indeed learn from each other and accordingly working on this thesis is a useful activity.
Next, why? From a very personal point of view, I am motivated to work on this thesis because of the experience that I have had (and hope to continue having) in the Indian GST system – and I would certainly not exclude that the Indian system can gain from the European system. Likewise, certain interesting peculiarities in the Indian system which I found quite useful can be explored to be tested in the European system as well.
Finally, how? I would follow a classical legal approach – of examining positive law (constitutional documents, provisions, directives etc.), case law, and articles. I would also follow the ‘comparative law’ approach – as I attempt to find new ideas to solve existing legal issues in each system. In this thesis, I will examine certain salient features of each system (not all features, either because no reasonable parallel can be drawn with the other system, or if, in my opinion, an aspect is working well in one of the systems). Then, I will compare the features and evaluate if borrowing it in the other system would make the other system work better? In this regard, special emphasis will be made on certain aspects of taxability (scope of ‘taxable person’, ‘economic activity’, ‘Government’, ‘financial services’ etc.), consideration, valuation issues, refund mechanisms, additional cesses, anti-profiteering provisions etc.
2. European VAT system
2.1. Basic features of the EU VAT system
The EU VAT law is based on written principles and unwritten principles. The written principles include (i) The principle of Loyalty,6 (ii) principle off subsidiarity7 and (iii) prohibition of discrimination based on nationality.8 The unwritten principles are not found in primary or secondary EU law. These include, - legal certainty,9 legitimate expectation,10 prohibition of profit from fraud, principle of prevention of unjust enrichment,11 consideration of commercial or economic reality12 principle of neutrality13 which should intend to reflect the general principle of equal treatment,14 which must be maintained even in cases of rectifying fraudulent activities15 and on the basis of good faith.16
The EU VAT model is generally a consumption tax where tax is assessed on the value of goods and services. It aims to tax all private consumption. Article 1(2) of the Council Directive 2006/112/EC of 28
6 Article 4(3) of the Treaty of the European Union (‘TEU’).
7 Article 5(3) of the Treaty on the Functioning of the European Union (‘TFEU’). 8 Article 18 of the TFEU.
9 ACF Chemiefarma v. Commission Case 41/69, Zabrus Siret SRL Case C-81/17, ¶38. 10 Grundstuckgemeinschaft Schloßstraße GbR C-396/80,
11 Marks and Spencers Case C-309/06, ¶41, 42. 12 HMRC v. Paul Newey Case C-653/11, ¶42, 43.
13 Cookies World Vertriebsgesellschaft mbH iL v Finanzlandesdirektion für Tirol, 2003 Case C-155/01 14 HMRC v. The Rank Group plc., In Joined Cases C-259/10 and C-260/10, ¶61.
15 Schmeink & Cofreth, Case C-454/98, ¶59. 16 Id ¶61.
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November 2006 on the common system of Value Added Tax, OJ L 347, 11 December 2006 (‘EU VAT Directive’) reads,
“The principle of the common system of VAT entails the application to goods and services of
a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.”
A few key features of the EU VAT system are:
(i) VAT is applicable on all economic activities to be applied to each stage of production and born by final consumer, entailing the application to goods and services of a general tax on
consumption.17
(ii) EU doesn’t have any fixed amount tax and is generally percentage based and is collected after adjusting Input VAT on purchases/ expenses on respective business activity. (iii) VAT is paid by the supplier, but is borne by the consumer (and hence, the term indirect
tax)
(iv) Cascading effect on taxes (tax on tax) is avoided by allowing deduction of input tax from the output tax liability.
The rates of taxes in the EU is dependant on the prerogative of the individual Member state and ranges from 17% (Luxembourg) to 27% (Hungary). Member states ought to apply a standard VAT rate. The rate should at least be 15%.18 Additionally, Member States can apply one or two reduced rates in certain circumstances.19
There have been plenty of reforms under the EU VAT regime – ranging from the ‘Green Paper’ on the future of VAT,20 ‘VAT Action Plan’21 in 2016 to reboot the current EU VAT system to make it simpler, more fraud proof and business-friendly,22 following from which the European Commission has made a series of proposals to work towards its completion. The first proposal was on 01.12.2016 on VAT on
cross-border e-commerce. As on the date of filing this thesis, the last proposal was on 18.02.2020 for VAT Scheme for Small Businesses. With this backdrop, I will analyse some key definitions and
concepts under EU law, to set the stage for a later comparison with Indian law, and a discussion on lessons to be learnt from each other. The ‘EU VAT’ Directive’ is actually recast23from the ‘Sixth VAT
17 A.J. van Doesum, H.W.M. van Kesteren, G.J. van Norden, ‘Fundamentals of EU VAT law’, (Alphen aan
den Rijn: Kluwer Law International, Deventer: 2016), p. 35.
18 Articles 96 and 97 of the VAT Directive.
19 Articles 98 to 101 of the VAT Directive. See also Annex III.
20 Green Paper of 1 December 2010 “On the future of VAT – Towards a simpler, more robust and efficient VAT system”, COM (2010) 695.
21 Communication from the Commission to the European Parliament, the Council and the European
Economic and Social Committee on an Action Plan on VAT Towards a single EU VAT area - Time to decide, Brussels, 7.4.2016 COM (2016) 148 final, available at
https://ec.europa.eu/taxation_customs/sites/taxation/files/com_2016_148_en.pdf, visited on 19.07.2020.
22 Press Release, “VAT Action Plan: Commission presents measures to modernize VAT in the EU”,
07.04.2016, available at https://ec.europa.eu/commission/presscorner/detail/en/IP_16_1022, visited on 21.07.2020.
Directive’. The Sixth VAT Directive itself was amended many times to capture it’s present form, first in 197724, then in 1986,25 and later on in 2008.26
2.2. Taxable person
A taxable person as per Article 9 of the VAT Directive, “shall mean any person who, independently,
carries out in any place any economic activity, whatever the purpose or results of that activity.” The
operative terms here are ‘independently’ and ‘economic activity’. Examining the term ‘economic
activity’, the directive states, ‘Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as "economic activity". The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.’27 There are some interesting judgments28 on the scope of the term ‘economic activity’. One of the interesting concepts worth discussing in this thesis is the extent to which a holding company is a taxable person. The existing judgments show that if the holding company is merely holding the shares, then it is not considered to be a taxable person.29 Whereas, if the company is indeed involved in the direct or indirect management of the subsidiaries, then the holding company is a taxable person.30 I will not delve into this further because adequate parallels can be drawn in India on the concept of business.31
2.3. Taxable event, Supply and Consideration
Under European law, there exists the following transactions subject to tax (i) the supply of goods for consideration, (Articles 14-19)
(ii) the supply of services for consideration; (Art 24-29 of VAT directive) (iii) the Intra-Community acquisition of goods for consideration (Art 20-23) (iv) the importation of goods (Art 30 of the VAT directive)
Hence, it is important to examine the terms, supply and consideration.
Article 14 of the VAT Directive states that supply of goods shall mean the transfer of the right to
dispose of tangible property as owner. Then, Article 14(2) gives some further understanding of the
term to deem to include expropriation, hire-purchase and transfer of goods on payment of commission on purchase or sale.
Next, we come to supply of services. Article 24 defines it to mean any transaction which does not
constitute a supply of goods. Article 25 further states that a supply of services may consist of one of
the following transactions (i) assignment of intangible property (ii) obligation to refrain from an act or to tolerate an act or a situation (iii) performance of services pursuant to an order of public authority / law.
24 Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States
relating to turnover Taxes: Common system of Value Added Tax: Uniform Basis of Assessment (OJ L 145, 13.06.1977)
25 Thirteenth Council Directive 86/560/EEC of 17 November 1986 on the harmonization of the laws of the
Member States relating to turnover taxes – Arrangements of the refund of value added tax to taxable persons not established in Community Territory (OJ L 326, 21.11.1986)
26 Directive 20080/9/EC of 12 Febtuary 2008 27 Article 9(1) – EU VAT Directive.
28 For example, - Brigitte Breitsohl C-400/98 and Fuchs C-219/12. 29 Polysar C-60/90 and Harnas and Helm C-80/95.
30 Floridienne / Berginvest C-142/99 31 Section 2(17) of the CGST Act
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Next, we examine the terms ‘taxable amount’ and ‘consideration’ under Article 73 of the VAT
Directive. This provision says that the taxable amount shall include everything which constitutes
consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply. Regarding
the inclusions and exclusions from the taxable amount by reading Articles 73, 78, 79 and 90 cumulatively, the following emerges:
(i) INCLUSIONS:
a. Taxes, duties, levies and charges, excluding the VAT itself;
b. incidental expenses, such as commissions, packing, transport and insurance costs that the supplier recharges to the customer;
c. subsidies directly linked to the price of the supply. (ii) EXCLUSIONS:
a. Price reductions by way of discount for early payment;
b. price discounts and rebates granted to the customer and obtained by him at the time of the supply; or
c. amounts received by a taxable person from the customer, as repayment of
expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account.
The law relating to the scope of ‘consideration’ is quite interesting. In the case of Tolsma32 the
question was whether in absence of a legal relationship, can the VAT still be leviable? This was a case where the individual was playing a musical instrument on the streets. People would pass by (some would stop and listen to the performance also) and some of them would, on their own accord, give him some money as they deem fit. On the question on whether such proceeds are subject to VAT, the ECJ held that tax is leviable only in the existence of a legal relationship. The next question that arises is regarding the levy of VAT where the obligation for payment is binding in honour only? Answering in the negative, the ECJ in Para 14 held that in absence of a legal relationship pursuant to
reciprocal performance, no VAT can be levied. I believe that this is not a perfectly valid judgment – and perhaps the Indian law (which itself has taken inspiration from the New Zealand law) can offer some better solutions. This will be discussed in Chapter 4.
Next, we deal with the issue of (non) inclusion of post-supply discount within the taxable value. Article 90 makes it clear that Where a supply is cancelled or refused or payment for the goods or services is
either wholly or partly withheld, or the price is reduced after the supply takes place, the taxable amount must be reduced accordingly. This is an important discussion because in India, the position
is slightly different and a comparison will be a useful exercise.
The next issue to discuss is on subsidies. Under EU law, if the subsidies are directly linked to the price of the supplies, then it is subject to VAT.33 By consequence, if subsidy is not directly linked to the price of supplies, it does not form part of the ‘taxable amount’.
2.4. Exemption
A supply of goods or services is an exempt supply if no VAT is applied to it, whether at the final stage of sale to the consumer or at some intermediate business-to-business stage. Exemptions are
discussed in Title IX of the VAT Directive. Articles 132 and 135 provides a list of transactions that
shall be exempt from VAT. Supplies that must be exempt include certain activities in the public 32 Case C-16/93.
33 Article 73 of the VAT Directive. See also, Second Report, COM(88) 799 def., 20 December 1988, which
states, that in order to be subject to VAT, the subsidies should (a) be the consideration or part of the consideration (b) to be paid to the supplier or the service provider and (c) be paid by a third party.
interest (such as medical and dental care, social services, education etc.) as well as most financial and insurance services and certain supplies of land and buildings. Exemptions also exist for intra-EU supplies and exports of goods outside the EU.
The three types of exempt supply are:
• Exemptions without the right to deduct (e.g. public-interest supplies)34 • Exemptions with the right to deduct (e.g. exports and intra-EU supplies)35 • Other exemptions (E.g. certain import and intra-EU acquisitions)36
Financial Services is exempt from VAT under Article 135(1)(b) through (g)37 unlike the Indian law. Traditionally the understanding was that financial services ought to be exempt because it is too hard to determine the value addition. I will question this narrative and address this issue further in Chapter 4 with recommendations because this is quite different from Indian law.
2.5. Input Tax Deduction
Article 168 of the VAT Directive permits a taxable person to deduct Input VAT (which is the same concept of availing Input Tax Credit under the Indian law) to the extent of goods and services purchased and used for the purposes of their own taxed transactions, provided that the input
transactions have a direct and immediate link with the output transactions. This means, logically, that no right to deduct if the input VAT is use for exempt transactions. If the goods and services procured are commonly used for both taxable and exempt transactions, then deduction is allowed proportionate to the turnover of38the taxable output transaction. Some flexibility is allowed to the member states, for example, the formula can be applied for each sector of the taxable person’s business.39 These options are not available in India and so are worthy of a discussion in Chapter 4.
34 ‘Exemptions without the Right to Deduct | Taxation and Customs Union’
<https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/exemptions/exemptions-without-right-deduct_en> accessed 16 July 2020.
35 ‘Exemptions with the Right to Deduct | Taxation and Customs Union’
<https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/exemptions/exemptions-with-right-deduct_en> accessed 16 July 2020.
36 ‘Other Exemptions | Taxation and Customs Union’
<https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/exemptions/other-exemptions_en> accessed 16 July 2020.
37 (b) the granting and the negotiation of credit and the management of credit by the person granting it; (c)
the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;
(e) transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors' items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest;
(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);
(g) the management of special investment funds as defined by Member States;
38 Article 174 of the VAT Directive.
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3.
Indian GST system
3.1. Evolution from the old system of VAT and CENVAT
Before 2017, the Indian indirect tax system was quite complicated. There was a myriad of indirect taxes, both at the Central level and at the State / Union Territory level. At the Central level, there existed the
(i) Central Excise Act, 1944 for excise duty levy on manufacture of goods and (ii) the Service tax levy through the Finance Act, 1994 on provision of services.
At the State / Union Territory level, there was the Value Added Tax on sale of goods within the State. For sales in the course of interstate trade and commerce (i.e., sales of goods from one State / Union territory to the other), there was the Central Sales Tax Act, 1956 (CST Act). The CST Act was a central levy (i.e., the tax was levied by the Central Government). After the levy was imposed, the tax revenue was allocated to the state from where the sale originated (i.e., the origin state). Both the Central levies (Excise Duty and Service Tax) had a credit mechanism known as the Central Value Added Tax (CENVAT) Credit system for setting off input tax / duty against Excise Duty / Service tax. Separately, each State / Union Territory had an inbuilt VAT Input Tax Credit (ITC) system for setting off the Input Tax on purchases made within the State / Union Territory against the output tax of VAT / CST. There were, of course, some other minor taxes and levies (still in existence) which I will not go into them for this thesis.
A few obvious problems come to light due to this structure. Firstly, the Input Tax on purchase of goods (accumulated on State level VAT) could not have been set off against the output tax / duty at the Central level. Vice versa, the CENVAT Credit accumulated on inputs and input services on which Excise Duty / Service tax was paid could not have been set off against State / Union Territory VAT liability. This had led to a cascading effect on tax (i.e., tax on tax). For example, goods manufactured were subject to excise duty. Once the duty paid goods were sold to the customer, then the same goods were subject to VAT. The Input Duty on Excise paid on the goods could not have been set off against the output VAT liability in the State. In other words, the existing system in this regard did not adhere to the principle of proportionality.
Another difficulty that arose was that the individual States / Union Territories could determine their own tax rates and systems based on their preferences and the importance of the goods for the State economies. This made it unbearably difficult for businesses who had to understand the tax structures of each State wherein they were dealers. This arrangement had a lot to be desired for improving
efficiency and simplicity.
A third difficulty was that each State would ensure protection of their own tax revenue. By
implication, goods that moved from one State to another had to face arduous checkpoints at the State border and tax officers at the border often detained the goods on the allegation that tax was not duly paid in the State of departure. This created a disincentive for businesses to purchase goods from the other States and thereby hampered inter-state trade and commerce. This hampered neutrality, by incentivizing the businessmen to purchase goods from the very same state.
A fourth difficulty was that the controversy on whether the subject matter was goods or services. Software, for example, was a big-ticket litigation – and both the Central Government and the State Governments had sought to tax the very same software. Other controversial issues like taxation of works contract also invited a lot of litigation (despite the presence of deeming fictions under the
Central law and the State laws). This gave a lot of confusion to businesses, heavily compromising
legal certainty.
There were, of course, other problems in the old system as well but I will not discuss it any further.
3.2. Salient Features of the GST System
The Goods and Services Tax (GST) regime is based on the philosophy of One Nation One Tax. It is a
tax on supply of goods or services or both. Some goods like alcohol, petroleum products etc. are not
within the GST system yet. What is important to note is that the taxable event is supply and not
manufacture. Stock and branch transfers are also covered under the GST system. The tax is based
on a dual structure (i.e., the Central levy and the State levy). That is to say, for supplies within the State or the Union Territory:
• Central GST (CGST) is payable to the Central Government
• State GST / Union Territory GST (SGST / UTGST) is payable to the State Government. • For interstate supplies, Integrated GST (IGST) is payable to the Central Government. There are some additional levies within the GST system, like the GST Compensation Cess. This cess would be discussed later.
The rates of IGST are – nil, 0.1, 0.25%, 3%, 5%, 12%, 18% (most common rate) and 28%. If the supply is within the State, the CGST would be 50% of the above IGST rate and the SGST / UTGST will be the remaining 50%. Hence, unlike the difficulty as described in Paragraph 3.1, a given good(s) / service would be subject to that very rate irrespective of the State / Union Territory from where it originated or consumed.
While the levy is distributed between the Central Government and the State Governments as discussed above, the collection (which includes administrative activities like control, assessments, audits etc.) would be exercised either by the Central Government or the State Government – on a dealer to dealer basis.
Central Excise Duty under the Central Excise Act, 1944 will continue until further updates, on petroleum products. Tobacco is subject to excise duty and GST. Alcoholic liquor is subject to State duty and is outside the GST system.
The dual structure emanates from Article 246A of the Constitution of India and the inter-state supply of goods and services, subject to IGST, emanates from Article 269A(1) of the Constitution. Equivalent IGST (representing the Countervailing Duty previously levied) would be levied on imports.
The revenue from IGST is apportioned between the Central Government and the State Governments based on the recommendations of the Goods and Service Tax Council – emanating from Article 269A (2) an Article 270(1A) of the Constitution of India.
The major difference between the previous law and the new law is that the GST is a destination -
based consumption tax. That is to say, that tax is attributable to the State in which the goods /
services are consumed.40 This means that the State(s) from where the goods / services are supplied will not get any tax revenue on such output supply.
40 ‘Central Board Of Indirect Taxes & Customs New Delhi Frequently Asked Questions (FAQ) On Goods And
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Coming to Input Tax Credit, the cornerstone of the GST system is that the cascading effect on tax, as discussed in the sub-section 3.1 would be avoided. In other words, the following setoffs are possible:
• Credit of CGST, S&UTGST and IGST can be set off against tax liability of CGST, S&UTGST and IGST respectively.
• Credit of CGST and S&UTGST can be set off against tax liability of IGST and vice versa. In other words, except for the possibility of setting off credit of CGST / S&UTGST against tax liability of S&UTGST / CGST respectively, other permutations for setoff are allowed.
In the following sections, I will deal with certain specific issues relating to the Indian GST system, which will lay the foundation for a comparison with the EU system, leading upto my comments on possible learnings from each system inter se.
3.3. Taxable event, Consideration and Taxable Person
As discussed supra, the taxable event under the GST is supply. The definition is quite wide and it includes:
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business
(b) importation of services, for a consideration whether or not in the course or furtherance of business and
(c) the activities specified in Schedule I, made or agreed to be made without a consideration. The operative words for further discussion have been emboldened here. Firstly, the terminology is so wide that it includes all forms of supply, not only of goods or services, but even both. Examples given include (and obviously, not limited to) – sale, transfer, barter, exchange, license, rental, lease or disposal. Further, the supplies ought to be for consideration and in the course of furtherance of
business. Importation of services, similarly, is also supply. There are also some further deemed
supplies, even if they are made without a consideration under Schedule I.41
One interesting issue that comes up is on the taxability of free tickets. KPH Dream Cricket P Ltd. In
re,42 the Authority for Advanced Rulings held that free tickets for the Indian Premier League cricket is 'supply' and taxable. This is quite an interesting ruling (do note that Advanced Rulings are only
binding to that particular taxpayer and no other assesses, so this law may develop over time). I personally have a different view on this point and I would like to compare with EU law later.
41 Schedule I
Activities To Be Treated As Supply Even If Made Without Consideration
1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. 2. Supply of goods or services or both between related persons or between distinct persons as specified in
section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an
employee shall not be treated as supply of goods or services or both.
3. Supply of goods—
(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
4. Import of services by a person from a related person or from any of his other establishments outside India, in
the course or furtherance of business.
Next, we go to taxability of branch transfers. Section 25(4) says that establishments in different States belonging to the same person, will be treated as distinct persons, so long as they have separate registrations. This means that interstate stock-transfers is now subject to GST43 (even intra-state, for that matter, if separate registrations are obtained). This aspect will also be covered later.
Next, we analyze the issue of fringe benefits given to employees and taxability thereof. Firstly, it is no doubt that employer and employee are related persons44 and that taxation of gifts upto Rs. 50,000 is
exempt from GST.45 The Government has also made it clear46 that perquisites from employer to employee is not taxable as they are not gifts. Instead, they are provided in the course of or in relation to employment. On the other hand, the law is not as clear where there is indeed (even partial) recovery made from the employees and such facility provided is not a part of the employment contractual obligation. One way of looking at this issue is to examine Rule 28 of the CGST Rules 2017 which prescribes valuation of such related party supplies at an open market value.47 Another way of looking at this is to say that the concept as described in the Government clarification ought to continue, to say that no (or even if any recovery) made is not within the scope of GST48 on account of it being perquisite. Employment services are obviously not supply and outside the GST system.49 Though the former view is more logical (and probably the courts will decide such when the judgements starts coming out), perhaps a comparison with EU law would be useful, and will be discussed in Chapter 4.
The next issue deals with the very concept of neutrality (briefly discussed in Chapter 1). The question is whether the Indian GST system is actually ‘neutral’? In this regard, the important concept is the GST Compensation Cess, levied under the Goods and Services, Compensation to States Act, 2017 (‘Compensation Act’). Briefly, the logic of having such a levy as a diversion to the traditional
neutrality concept is that the new law as discussed before is a destination-based consumption tax. In other words, it is a tax based on consumption (unlike the Excise duty, which was based on
manufacture) and it is based on the destination principle (unlike the CST Act, which was based on the origin principle). Logically, under the previous law, the States which have a higher manufacturing
capacity tended to benefit more because dealers there could sell their goods to customers in States with a lower manufacturing capacity. The former states would get the tax benefit. With the advent of the destination principle, the latter group of States are expected to benefit under the new law and the former group of States are expected to be disadvantaged under the new law. Hence, the Government felt a need to have a Compensation Cess to compensate, inter alia, this expected difference. Input Tax of Compensation Cess paid can only be set off against output Compensation Cess liability – not CGST, SGST or IGST liability. This goes against some industries, for example the metal and mining industry which procures Cess-paid coal to manufacture metals like copper, aluminium, gold etc. which are subject only to GST and not the Compensation Cess. The Input Tax of Compensation Cess lying in the balance sheet of such companies keeps accumulating (unless of course they export their goods / change their business structure). This creates excess finance costs for such dealers and one can
43 Cummins India Ltd. In re (2019) 73 GST 517.
44 Explanation (a)(iii) to Section 15 of the CGST Act, 2017. 45 Refer Schedule II.
46 CBI&C press release No. 73/2017 dated 10.07.2017.
47 In Re: Caltech Polymers Pvt. Ltd. 2018 (4) TMI 582 – AUTHORITY FOR ADVANCED RULINGS,
KERALA
48 G Natarajan, 'Treading the GST Path XLVI FAQ on Employee Canteens'
<https://www.swamyassociates.com/downloads/2018/Treading-the-GST-Path-XLVI-FAQ-on-employee-canteens.pdf> accessed 16 July 2020
49 Schedule III - 1. Services by an employee to the employer in the course of or in relation to his
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borrow EU law refund principles (comparison made in the next chapter) to achieve the neutrality concepts.
Perhaps one can say that even though this levy does not exactly follow the neutrality principle, it is necessary to ensure the overall balance of the economies of various States. After all, the levy is merely temporary. On first glance, this seems logical that a higher capacity manufacturing state would be disincentivized to industrialize the State if corresponding tax revenues do not reflect the benefits of industrialization. On a closer look, though, the fact remains that a more industrialized state would also
consume more (which is the principle for taxation under GST) and that too on an interstate basis (by
which partial tax revenues would be allocable to the destination state). This would open such States to more purchase markets in other States (that too without the previously existing bureaucracies like border checkposts and having generally standard tax rates) and over a period of time, increase their tax revenues – thereby ensuring the tax incentives for industrializing that state. My recommendations as regards this aspect will be given in Chapter 4.
The next issue that is interesting under the Indian law is the concept of Anti Profiteering. In simple terms, this means that if the tax costs before the GST system was introduced was lesser than after the GST system, then the dealer has to ensure that such differential benefits are indeed passed on to the consumer. In principle, this is a very logical move to ensure that the dealer is not unjustly enriched merely on account of a reduction of his tax cost (be it input tax or output tax). Any such advantages ought to be passed on to the next level of the supply chain. There are a few countries like Australia that have this principle. No doubt that there has been implementation related criticisms of this law (which is not within the scope of the thesis). Yet, it is possible that in the event of expansion of the EU, a potential member state (for example, Montenegro, North Macedonia etc.) which may have a different indirect tax system and upon accession into the EU, would have some dealers benefit on account of a more favoured tax regime would ought to ensure that such benefit is indeed passed on to the consumer. This will also be discussed later.
Now, let’s deal with the concept of consideration. This is defined under Section 2(31) of the CGST Act as follows:
“(31) "consideration" in relation to the supply of goods or services or both includes—
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;”
The emboldened words are important here. The trigger for a payment to fall under the ambit of
consideration is if it is in respect of, in response to or for the inducement of the supply of goods and
services. When one looks deeper, it is noticed that this law is borrowed from the New Zealand GST law.50 This is an important aspect to be kept in mind when comparing with the EU law.
The next issue pertaining to the definition of consideration is the includability of subsidies. This was quite a controversial topic under the old law. With the new law, it is clear that subsidies are includable within the definition, except given by the Central Government or the State Government.
3.4. Input Tax Credit
Next, we deal with Input Tax Credit (ITC) eligibility. GST is a destination-based tax. ITC is required to avoid the cascading effect of taxes. ITC is allowed51 on inputs, input services and capital goods used or intended to be used by supplier in the course of or furtherance of business. This facility is of course not absolute. There are restrictions placed on it. I will not go into all the conditions because they are not relevant for this thesis. Yet, one interesting consequence of the law is that if the purchaser avails the ITC but does not pay the supplier within 180 days, then the purchaser ought to reverse the ITC
with interest.52 This provision may have been inserted to ensure that ITC is not unduly taken without payment of the consideration to the supplier. Note that this provision does not mean that the supplier is exonerated from his liability to pay. The supplier still ought to pay the tax based on the supplies made (after all, the taxable event is supply, not receipt of consideration). This provision will be discussed in the next chapter further.
Another issue relating to (reversal of) ITC is the formula that ought to be followed when a taxable person effects taxable and exempt supplies are made. The calculation for determining the ITC ought to be reversed is based on the following steps53:
STEP 1: ITC availed used exclusively for taxable supplies is fully availed. STEP 2: ITC availed exclusively for exempt supplies are reversed.
STEP 3: Input Tax attributable to the remaining credit, which are commonly attributable to
both taxable supplies and exempt supplies is reversed in the proportion of exempt supplies to
total turnover.
The reason that this calculation is worth discussing in this thesis is because the law does not allow sectorisation. That is to say, if a company is involved in, say, three sectors, the formula cannot be applied thrice, it has to be applied once.
3.5. Valuation and (Non) Taxation of Discounts
Next, we shall discuss (non)taxability of discounts for the purpose of valuation under the GST law. The law54 is clear that the value of supply shall not include (a) before or at the time of the supply provided such discount has been duly recorded in the invoice issued in respect of such supply and (b) after the supply has been effected, provided that (i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and (ii) input tax credit as is attributable to the discount has been reversed by the recipient of the supply. Effectively, this means that the post-supply discount is excludable only if such discount was known before or at the time of such supply. To ensure that symmetry exists, the policy is to deny such benefits if the GST costs have already been passed on to the consumer.55
51 Section 16(1) of the CGST Act.
52 Second proviso to Section 16(2) of the CGST Act. 53 Rule 42 to the CGST Rules.
54 Section 15(2) of the CGST Act.
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3.6. Exemptions (without deduction) and Zero-Rated Sales (with deduction)
India has one regime for those supplies which are exempt from GST. No ITC is available attributable to such supplies. India also has certain supplies which are zero rated. ITC is available attributable to such supplies. In this thesis, I will not get into the individual items which fall under a certain rate because these are political choices and a comparison with the EU Member States choosing to exempt any supply may not draw fruitful parallels.
3.7. Refunds
In India, refund is eligible only in two situations: (a) zero rated supplies (exports and supplies to Special Economic Zones) and (b) Inverted duty structure - input credit more than tax payable on output supply (but not in case of exempted supply or supply with Nil rate of tax). Since ITC on exempt supplies are not allowed to be refunded, this creates various problems from a neutrality point of view. The best example is the previous discussion on GST compensation cess. Aluminium, for instance requires a lot of electricity to manufacture, which is in turn, generated using coal) From the point of view of the Compensation Cess Act, Aluminium is exempt goods (it is only subject to GST, not Compensation Cess). Coal, on the other hand, is subject to both Compensation Cess and GST. The Cess-procured coal which is, eventually, used to manufacture aluminium, cannot be used to setoff GST liability on supply of aluminium. Hence, the Input Tax (Cess) is accumulated. The law as it stands currently, does not allow refund of the unusable Input Tax balance lying in the Electronic Credit Ledger. This is a problem and will be compared with EU Law later.
4. Learnings from each other’s systems
There are plenty of aspects that I believe that one system can learn from the other. My understanding of the comparison of the two systems is as follows:
CATEGORY 1 – Aspects that are comparable in both systems. Both systems have little or no difference in their system. No recommendations required here.
CATEGORY 2 – Aspects that are substantially different in both systems BUT there is a justification / valid reason for the difference. No recommendations are required here either.
CATEGORY 3 – Aspects that are indeed substantially different in both systems AND where one system can indeed learn from the other. Recommendations will be given for this.
Under Category 3, I will first deal with some issues that I feel that EU Law can learn from Indian law.
4.1. Financial services ought to be made compulsorily subject to GST / Article 135(1)(b)-(g) to be modified
The traditional logic behind making various Financial Services exempt is that it is too difficult to identify the taxable amount.56 Yet, it has been commented often in literature57 that it distorts
neutrality,58 and that the nature of financial services in the modern day is quite different59 from when 56 Rita De La Feria and Michael Walpole, ‘Options for Taxing Financial Supplies in Value Added Tax: EU
VAT and Australian GST Models Compared’ [2009] International and Comparative Law Quarterly 897, 897–932.
57 Giuseppe Guarente, VAT exemption for financial services: Applicability assessment to crowdfunding
(dis)intermediation Testing the financial intermediation exemption ex Article 135 VAT Directive against the activity of crowdfunding platforms, Master’s Thesis LL.M. International Business Tax Law Tilburg Law School, available at https://arno.uvt.nl/show.cgi?fid=145714 visited on 16.07.2020.
58 Jeffrey Owens, ‘The Move to VAT’ 24 Intertax (1996) 2, p 45-52, pp. 46.
59 Howell H Zee, ‘VAT Treatment of Financial Services: A Primer on Conceptual Issues and Country
the exemption was first envisaged. Getting into the nuts and bolts of how Financial services ought to be taxed is a subject matter that has already been debated upon60 quite a lot, and so it is not required to be repeated in this thesis. In light of the changing nature of the financial services industry (like automation, more revenue earned through fees rather than interests etc.) it is possible to follow the Indian system which exempts61 services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount and still tax service fee or
documentation fee or other amount charged by banks.62 Under the erstwhile Service Tax regime, the question of drawing the line between exempt and taxable services was posed before the
policymakers. They had opined63 that where the activity is a transaction in money, it would be outside the ambit of tax, whereas any amount over and above the consideration in the form of interest or discount, would be eligible to tax.64 This logic was borrowed in GST as well. In this hybrid (partly exempt, partly taxable) model, the solution that Indian law provides is to either take the credit only to the extent of taxable supplies65 (which, admittedly is a bit complicated to calculate) OR take 50% eligible credit (quite an elegant solution by way of deeming fiction).66 For proportionate reversal of ITC is to include such supplies (insofar as consideration is received by way of interest or discount) for calculating exempt supplies for banking and financial institutions engaged in such business of accepting or depositing loans.67
4.2. Anti-profiteering concept should be introduced
One of the keystones of the Indian GST Law was the anti-profiteering provision. As discussed supra, the logic behind anti profiteering is to ensure that any benefit obtained (either on account of output tax rate, or input tax credit) by the taxable person ought to be passed on to the customer by way of reduction of prices.68 Indian law itself was inspired by the Australian GST law and the Malaysian69 (repealed) law. IN Malaysia, the prosecution was on realising an ‘unreasonably high profit’ following the implementation of the GST. Australia70 followed the ‘net dollar margin rule’,71 with the guidelines, ‘if the changes caused taxes and costs to fall by , then prices should fall by at least’, and ‘if the cost of
the business rose by under new tax system, then prices may rise by not more than. The Australian
60 De La Feria and Walpole (n 48).
61 Notification No. 12/2017-CT (Rate) and No. 9/2017-IT (Rate) both dated 28-6-2017. 62 FAQ No. 43 issued by CBI&C on banking sector on 27-12-2018.
63 Taxation of Services, An Education Guide, Central Board of Excise and Customs, available at
https://www.cbic.gov.in/resources/htdocs-servicetax/EducationGuide.pdf, visited on 16.07.2020, ¶4.14, p. 44.
64 Id, ¶4.14.3
65 Section 17(2) of the CGST Act, 2017 66 Section 17(4) of the CGST Act, 2017
67 Explanation 1 to Rule 43 of the CGST Rules, 2017 68 Section 171(3A) of the CGST Act, 2017
69 Price Control and Anti-Profiteering Act, 2011 (PCAP Act). 70 Competition and Consumer Act, 2010.
71 Kaushal Sonthalia Understanding Anti Profiteering, – Part 1 November 20, 2018, available at
https://taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=35254 visited on 16.07.2020. Principles based on which the recommendation is made:
If financial services are compulsorily taxed, principle of Neutrality and Fairness will be strengthened. There would not be any cascading effect on the taxes. Through improvement of bookkeeping technology, the traditional reason for not taxing financial activities (too difficult to tax) would not be valid anymore and there should be no (major) compromise on the simplicity and administrative burden on the taxpayer. The other principles (including OECD’s 5 benchmarks) would not be compromised.
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Competition and Consumer Commission (ACCC) did a brilliant job72 in ensuring that there was no profiteering and at the same time, not distorting the balance of natural market forces. A view exists
that the reason why the law was required for Australia and Malaysia was that they had moved from a narrow-based taxation system (like a positive list of transactions that should be taxed) to a broad based system (like a negative list of transaction that should not be taxed), and therefore having a check and balance system was necessary.73 Another view is to control expected inflation upon an immediate introduction of a new tax system.74 I believe that this policy should be borrowed in the EU, especially when any potential EU Member state is seeking to align their tax system with the
harmonised VAT system. Effectively, taxpayers are required to prepare cost sheets before the introduction of GST (i.e., base costs, tax costs) and compare them with the cost sheets after GST. If it is found that the taxpayer has profiteered from GST, then a penalty is imposed.75
4.3. Definition of ‘consideration’ needs to be revisited
I have compared the EU Law scope of consideration vis-à-vis the New Zealand / Indian law supra. In this regard, I argue that the Tolsma judgment would have had a different outcome, had it been subject to Indian law. The Indian law has the phrase, in respect of, in response to, or for the inducement of in its definition of ‘consideration’. Granted that the payment made in Tolsma was voluntary, and at best, binding in honour only. Yet, one can say that the payment made was, indeed, in response to the music played by the musician. This is true, even though there was there was no legal relationship between the parties. The situation in Tolsma is quite different from that of a charity. In the recent case of D.J. Malpani v. CCE76 a dharamda (alms or gift in charity, as per Hindu customs) is not
consideration because there is no reciprocity involved.77
A contrario, in Tolsma, the passers-by did indeed receive something which, in their mind, is valuable
(i.e., the consequal benefit of having the pleasure of listening to music). This ought to be the case
even if there is no established legal relationship between the parties. Going one step ahead, in fact,
the New Zealand law further mentions the term, whether or not voluntary, in its definition for consideration.78
72 Nitesh Kancharla and Kritika Jagannathan ‘Price Control Measures undertaken in other GST jurisdictions', available at
https://taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=28662 accessed 16 July 2020.
73 Dennis McCarthy ‘GST and Anti-Profiteering Measures – Challenges for Indian Businesses', <h
ttps://idt.taxsutra.com/experts/column?sid=325> accessed 17 July 2020.
74 ‘GST: A Look Back on Anti-Profiteering, Its Relevance and the Need for Well Defined Norms’
<https://economictimes.indiatimes.com/small-biz/policy-trends/a-look-back-on-anti-profiteering-its-relevance-and-the-need-for-well-defined-norms/articleshow/64743244.cms> accessed 16 July 2020.
75 Section 171(1) of the CGST Act, 2017 76 (2019) 106 taxmann.com 29.
77 It is to be noted that though this pertains to the erstwhile Excise law, the principle is still applicable. 78 I believe that Indian law does not require this phrase for the same effect to take place. because the supply definition includes services …. made or agreed to be made. The term agree (with its connotation: Principles based on which the recommendation is made:
The principle of effectiveness, neutrality and avoidance of unjust enrichment would be
strengthened. It is necessary under a free market economy to ensure that no taxpayer profiteers There is a possibility of a slight compromise on the simplicity but it is still necessary step to align tax systems of those states which are undergoing negotiations to join the EU.
