Goods and Services Taxes Regimes: the Market and the New Rules of the Game

SYNOPSIS

Regimes collectively christened “Goods and Services Tax (‘GST’)” would commence soon after the Constitution (122nd Amendment) Bill, 2014 is enacted as law. The Bill envisages lawmaking to develop a “harmonized” national market for goods and services. I investigate the possible post-‘GST’ Rules of the Game (i.e., “Dharma“) which would constrain the functioning of the institution of ‘the Market’. I conclude that owing to dis-harmonies in the functioning of the institutions of ‘the Market’, ‘the Bureaucracy’ and ‘the State’, ‘the Market’ would  be unable to function as an institution ofnational life” and to provide a “just” choice architecture to the actual and potential market-participants’; and ‘the State’ would be unable to- (i) ensure efficiency in the allocation of resources so as to sub-serve the common good, (ii) avoid concentration of wealth and the means of production to the common detriment, and (iii) promote the welfare of the People.

I

INSTITUTIONS OF NATIONAL LIFE AND “JUST” SOCIAL ORDER

The Constitution (122nd Amendment) Bill, 2014 envisages new formal Rules of the Game which would constrain the functioning of the Entities embedded in the institution of ‘the State’ after the Union and the State Legislatures are enabled to make laws to usher in regimes of indirect “goods and services taxes” instead of many (though not all) central and state indirect taxes currently being levied. The new ‘GST’ law to levy central “Integrated” Goods and Services Tax (IGST) and “concurrent” Central Goods and Services Tax (CGST) and State Goods and Services Taxes (SGSTs) is expected to be made so as to secure a harmonized structure of goods and services tax at uniform rates applicable in every State and to develop a harmonized national Market. The provisions of such law are to be identified in accordance with the recommendations of a “Goods and Services Tax Council” to be constituted soon after the Bill becomes law.

In what follows the intended purpose of the 122nd Amendment Bill to develop a harmonized national market would be the main subject of discussion. The implications for building the capacity of ‘the State’ to secure a fair social order, of limiting lawmaking to merely avoid “cascading” of the incidence of GST levies in realizing “harmony” in  the rate structure of ‘GST’ Regimes applicable uniformly in every State,  have been discussed in Sethuraman (2015). It has been argued therein that it would be naive to believe that avoidance of such cascading conforms fully to the requisites of lawmaking and governance envisaged in the Constitution; and that in fact it does not help build the capacity of ‘the State’ to secure and protect a just social order in the manner stipulated in Article 38 by enabling the institution of ‘the Market’ to discover prices for goods and services supplied through the market network without being distorted even by the requirements of having to comply with law (including non-‘GST’ law).

The word “nation” has social and organizational connotations  in the Constitution in the provisions of Articles 38 and 312 even in circumstances not relevant to invoke Article 249 temporarily. Article 38 relates very significantly to the resolve of the People of India, referred to in the Preamble to the Constitution, about securing “justice” to themselves and about the social relevance of “national life” to be sustained by fraternal values which would cherish the dignity of the individual (as a human being, who may be citizen or alien) on the one hand and the unity and integrity of the Nation on the other. It provides direction to ‘the State’ as under:

  1. State to secure a social order for the promotion of welfare of the people.—(1) The State shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life.

(2) The State shall, in particular, strive to minimise the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations. (italics added)

The stipulation that “justice” ought to inform the institutions of national life made in Article 38 implies fairness that would endure in social interactions (in the manner later theorized by John Rawls) without jeopardy to national integrity.  It is important to note that- (i) any jeopardy to the national income and the wealth of the nation would also have to count as jeopardy to national integrity; and (ii) levy of indirect taxes such as goods and services taxes would not have regard to minimizing inequalities of incomes among the individuals (not excluding aliens).

The word “institution” which occurs in Article 38 includes ‘the Market’ as an institution striving for inter-sector coordination to continually forge forward and backward linkages among mutually complementary and productive “sectors” of the economy which evolve therein from time to time and thereby to reach a Bayes-Nash, or other, strategic equilibrium which balances the demand for and supply of goods and services. The equilibrium leads to the discovery of prices at any time for the transfer/appropriation of the values of goods and services which are supplied through the market network. The flow of such values in the economy is visualized by  R A Musgrave as complementary to the “reverse” flow of money incomes of the domestic and non-domestic market-participants who are able to appropriate the values added in the economy and to increase the wealth of the nation.

The economy is assumed to be “open” after the initial four decades of the Republic during most of which ‘State’ policy was being implemented  without relying on collection of indirect taxes even on a modified value-added basis at ‘destinations’ and with emphasis on import-substitution, legal control on the market-participants through licenses and permits and centrally planned strategies to promote growth of domestic product with the central government coordinating policy and action to sub serve common good duly recognizing strategic interdependencies among diverse productive sectors of the economy. The mode of collection of indirect taxes which was enforced during the colonial period for more than a decade before the commencement of the Constitution in 1950 was tweaked to impose restrictions (ironically afterfreedom” from colonial rule) on the Legislatures of the States (including Part “B” States) embedded in the institution of ‘the State’, which was entrusted with the formidable duty of lawmaking and governance in accordance with the principles stipulated in Article 37 referred to below.

Along with the reorganization of the States the mode of collection of indirect taxes was modified further in 1956 by imposing more restrictions on the Legislatures of all the States and by discarding the “destination principle” of collection of indirect taxes in force from 1950. Such enhanced restrictions were imposed in spite of Part B States ceasing to exist. This led to the collection of  the bulk of such tax revenues at the “origin” of production of goods by the Union and to the allocation of resources for public investments in accordance with central planning. In 1986, just five  years before the constitutional relevance of the institution of ‘the Market’ in securing a fair social order was taken seriously, the mode of collection of central indirect taxes was modified to avoid cascading of the incidence of such taxes in pricing the products. This was followed by levy of central taxes on the provision of select services, by subsequently enlarging the scope of the levy to other services over time and by avoiding “cascading”.

Central economic planning through the Planning Commission established in 1950 as an instrument of ‘State’ policy for efficient allocation of resources to sub serve the common good, has now been given up. The institution of ‘the Market’ is expected to play its role through the mechanism of discovery of prices for goods and services in enabling ‘the State’ to ensure efficient allocation of resources to sub-serve the common good. Subject to allocations governed by ‘the State’, efficiency is assumed to be the requirement that every social decision ought to maximize the total of the utilities of the individual citizens embedded in the institution of ‘the society’.

Business and professional entrepreneurs are embedded from time to time as actual and/or potential entities in the institution of ‘the Market’. The fraternity of such entrepreneurs includes those willing to assume risks in exploring the profitable opportunities perceived by them as available owing to the strategic interdependencies among constantly evolving and mutually complementary sectors in the economy. Unlike the transparent decisions in pursuance of public policy expected to be made by the Entities embedded in the institution of ‘the State’, the “0-1” participation decisions of the actual and/or potential market-participants embedded in the institution of ‘the Market’ rely on the privacy of information about the respective preferences and endowments possessed by each and are constrained by the status of competition among the participants which prevails in the environment of ‘the Market’.

There are also other institutions relevant to ensure efficient compliance by ‘the State’ with the stipulations made in Article 37, including those made in Articles 38 and 39. They include-

(a) ‘the State‘ itself in which political entrepreneurs democratically elected to represent the People are embedded as lawmakers along with the bureaucrats appointed to serve its various organs and, after 1985, the political parties if any to which such lawmakers “belong”; and

(b) ‘the Bureaucracy‘ which functions to ensure the personal accountability to the Constitution of every bureaucrat embedded therein as the member of one of the diverse Civil Services created to foster such esprit-de-corps as to enable every incumbent transcend every loyalty other than to the Constitution when deployed in any post in one of the diverse official hierarchies to act in the name of the Head of the Executive as a pseudonymous subordinate to implement the ‘State’ policy; or when deployed as an authority in a legal hierarchy, according to law.

‘The State’, as recognized vide Articles 12 and 36,  is an institution to reformulate public policy by enabling the lawmakers at all levels to collectively optimize social objectives by lawmaking from time to time in accordance with the Constitution and to act in the discharge of its constitutional duty  to implement “the ‘State’ policy” which is discernible at all times by an accurate interpretation of the provisions of law in force. The Constitution provides for ‘the State’

(i) to transparently orchestrate coordination of policy and action to serve the public interests in order to ensure that the individual actions taken by every public authority embedded in ‘the State’ to deal with any problem recognized as causing a social disorder, are well-focused on the subject of solving the problem in coordination with the actions of other relevant authorities recognized as members of a team that would have to act collectively to help secure and protect a “just” (i.e., fair) social order; and

(ii) to enable ‘the Bureaucracy‘ as an institution of national life in taking executive action according to the rule of law with due regard to protocols of governance which comply with the stipulations made in Article 37 referred to below at the least cost of the administration of, and compliance with, the ‘GST’ as well as non-‘GST’ law.

In a mature democracy, the actions of ‘the State’, being constrained only by stable provisions in the Constitution, would appropriately constrain the environments for other institutions.

Institutions reduce uncertainty by providing a structure to everyday life” (North:1990). Vide Article 38,the Constituent Assembly in India had prescience about the roles of the institutions to reduce uncertainties or to convert such uncertainties into risks well before the Nobel Laureate Douglass North famously theorized those roles. Compliance by ‘the State’ with Article 38 implies the creation of a fair choice architecture as a component of a “just” social order which, apart from enabling every producer and exporter to experience fairness of the available terms of unambiguous choice in sourcing his/its supplies, would enable every individual to choose, within his/her means, to consume such goods and services as would result in his/her respective well-being according to his/her respective judgment. The formal rules of the game (“Raja-dharma“) which enable ‘the State’ to function as an institution of national life are discernible from the structure of the provisions in the Constitution ( including especially in Articles 37,252, 256 to 263 and 312). However Ellsberg paradoxes and Knightian uncertainties would be avoided and other uncertainties in securing and protecting a “just” social order in the “national life” as stipulated in Article 38  would  be reduced or converted into manageable risks only if- (a) ‘the State’ does function creatively in accordance with those formal rules and such other formal and informal conventions (“Kshatriya Dharma“, referred to below)  as may be called for; and (b) its actions imply such rules of the game for the other institutions as would enable them to evolve and function as institutions of “national life” and be of relevance in complying with the stipulations in that Article.

An institution playing its role as above is however to be conceived to be different from an organization, public or private, which is merely allopoietic. Every institution, which is relevant for ensuring compliance with the stipulations made in Article 38, is also to be distinguished at all times from every specific Entity embedded in it. Thus the institution of ‘the Market’ is distinct from any specific actual or potential market-participant ( not excluding domestic consumers) or protocol for the governance of any specific kind of contract embedded in it. The institution of ‘the State’ is distinct from any specific authority or  competence to exercise any specific power (e.g., power of a political party to direct a lawmaker to vote as directed) embedded in it. The institution of ‘the Bureaucracy’ is distinct from any specific bureaucrat or specific functional/territorial jurisdiction embedded in it. Every institution is assumed to be autopoietic and to recognize the frequently changing boundary which separates it from its environment at all times.

The institutional environment defines from time to time the formal and informal rules of the game (“Dharma”) which constrain the functioning of that institution. The Government of India, being the keystone authority embedded in the institution of ‘the State’, is the agency of ‘the State’ which is constitutionally responsible, vide Article 263, to ensure coordination, among the Union and the States, of policy and action focused on any “subject” of social concern in order to serve the public interests. Every substantive aspect of public interests is relatable, according to the Constitution, to the provisions enacted as Directive Principles of ‘State’ policy in Part IV of the Constitution and all aspects of public interest are circumscribed by the provisions enacted in Part III guaranteeing Fundamental Rights and by the provisions in Article 37 referred to below. The provisions of the Constitution which may be invoked by the Union and/or the States for purposes of coordination of policy and action include those enacted in Articles 252, 258, 258A and 312 which relate to matters such as reorganization and redeployment of bureaucrats and entrustment of functions and delegation of powers to them in effectively coordinating ‘State’ policy and action. Those provisions have challenging implications for the autopoiesis of the institution of ‘the Bureaucracy’ which is programmed to be rigidly path-dependent to ensure personal accountability of every bureaucrat to the Constitution as subordinate to the appropriate Head of the Executive (i.e., the President or a Governor) in implementing the ‘State’ policy.

Primary lawmaking, such as is envisaged after the 122nd Amendment Bill is enacted as law, and subsequent action thereon  would redefine the rules of the game for the functioning of the institutions of ‘the State’, ‘the Market’ and ‘the Bureaucracy’. The resulting reformulation of ‘State’ Policy would be entitled to be referred to as “Reform” in pursuance of common good  and/or avoidance of common detriment as stipulated, if such lawmaking and action thereafter are consistent with the Fundamental Rights stipulated in Part III and are in the well-coordinated pursuit by the Entities embedded in ‘the State’, of common goals consistent with the following stipulation relating to lawmaking and governance made in Article 37 of the Constitution:-

  1. Application of the principles contained in this Part.—The provisions contained in this Part (i.e., Part IV) shall not be enforceable by any court, but the principles (viz., The Directive Principles of State Policy) therein laid down are nevertheless fundamental in the governance of the country and it shall be the duty of the State to apply these principles in making laws. ( italics and matter in brackets added)

The discussion in this paper is organized as follows: In section II, I list some assumptions relating to lawmaking as envisaged in the 122nd Amendment Bill in the absence of the definitions of some crucial terms used in the Bill and the draft provisions of ‘GST’ Law in the public realm. In section III, I describe how even after ‘GST’ Law commences ‘the State’ and ‘the Market’ would have to continue to function under constraints to overcome problems caused by asymmetric information and how appropriate data and analytics based on mechanism design approaches would help in the relevant institutions harmoniously making collective choices out of possible options from time to time. Subject to the assumptions made in section II, I record my  conclusions  based on received wisdom in  section IV on the likelihood, post commencement of the ‘GST’ Law, of harmony in the functioning of ‘the State’, ‘the Bureaucracy’ and ‘the Market’ leading to a “just’ choice architecture and to compliance with the stipulations made in Article 37.

II

ASSUMPTIONS ABOUT  THE FORTHCOMING ‘GST’ LAW

Past constitutional amendments made without prior political commitments on behalf of the Union and the States on the particulars of the substantive and procedural provisions of tax statutes to be enacted to serve the public interests do not auger well for the future. In the past amendments enacted in 1982 and 2003 to enable the levy respectively of a central consignment tax and “concurrent” service taxes, could not be put to use. Since what has happened imposes no logical restriction on what will happen (Goodman,1965), I go on to assume that-

(i) there would be credible political commitments on behalf of the Union and the States consistent with the recommendations to be made by the forthcoming Goods and Services Tax Council on the particulars of the central and state GST statutes to be drafted with due regard to compliance with Article 37 and the possible adoption of some of the best practices followed in other countries to serve public interests; and

(ii) as soon as the 122nd Amendment Bill becomes law, it would be promptly put to use to ensure, inter alia, the development of a “harmonised” national market as interpreted above (i.e., ‘the Market’ functioning as an institution of national life in harmony with ‘the State’ and ‘the Bureaucracy’) for efficient decentralized allocation of resources to sub-serve the common good that relies mainly on the price mechanism of ‘the Market’ instead of on input-output modeling for such allocation by a central planning process and to comply with the other stipulations made in Article 37

To simplify exposition, I assume that the central and state GST statutes would apply, though only in due course, to all the transactions of “supply of goods and services” (i.e., “supply” of goods or of services or both on which levies defined as “goods and services taxes” would be applicable) without exception. In addition I assume that there would be no exemption in relaxation of the substantive provisions of the ‘GST’ Law except in the form of zero-rating of taxes leviable on the values of the transactions included in well-defined subsets of “supplies”. Substantive exemption of any specific good or service without reference to other elements of the transaction leading to the “supply” of such good or service cannot but disable ‘the Market’ from efficiently coordinating inter-sector allocations, given the withdrawal of ‘the State’ from such coordinating role through central planning; and such exemptions imply Knightian uncertainties in the discovery of prices owing to supply bottle-necks and also to failure to minimize cascading of the incidence of GST levies. It is thus assumed that even zero-rating would primarily relate to transactions included in the public interest in well-defined sub-sets and only secondarily to specific goods or services if required in defining such sub-sets. The logic in this paper may be expected to hold even if the ‘GST’ regimes would not apply in the interim to transactions (e.g., supply of service of transportation of passengers and/or goods through railways or to supply of electrical energy or to supply of goods through inter-state consignment of such goods or to supply of land) not conceived of as taxable events for the levy of IGST,CGST and SGSTs but as taxable events for the levy of such other indirect taxes as may be levied, and even if there are substantive exemptions of specific goods or services, including exclusion of services provided to employers by their employees from taxability under the ‘GST’ Law.

I also assume that the terms “supply” {used in the forthcoming Articles 246A, 269A, 286 and clause (12A) of Article 366} and “integrated goods and services tax” {used in the forthcoming clause (4) of Article 279A} would be eventually defined appropriately in the Constitution by  lawmakers either before or after the resolution through the judicial process, of the uncertainties which would be experienced in the absence of such definitions in the Constitution by the taxable entities and collecting governments. For clarity in exposition, I assume in the interim that-

(a) “supply” would mean supply, irrespective of the location of any place of business within or beyond the customs frontiers of India, of goods or of services or both from a place of business used by a supplier ( to be called the “place of supply”) to a consumer at a place specified by him/her or to another place used by a recipient entity as a place of business ( recognized by the parties as the “destination” of supply) to add values before subsequent supply and would include-

(i) supply of goods –

(1) by transfer of property rights to the recipient of such supply in accordance with an agreement to sell  by a supplier either directly or by endorsement on the documents of title to the goods during the movement of such goods from one place of business to another; or

(2) by movement, without transfer of any property rights, of goods from one place of business authorized for the use by the supplier to another place of business authorized for the use by the same supplier or by his/its agent or principal or by his/its bailee or bailor; or

(ii) supply of services by a supplier to the recipient of  the supply to whom the right to avail such services provided by the deployment and use of the assets in the possession of the supplier accrues in accordance with the terms of the contract between such supplier and recipient; or

(iii) both (i) and (ii); and

(b) since by such definition of the taxable event of “supply” (of goods and/or services) would obviate the need to “deem” some transactions of the nature of supply of services referred to in clause (29A) of Article 366 as supply of goods, lawmaking would lead to the omission of clause (29A) of Article 366 as originally intended by the Constitution (115th Amendment) Bill,2011 either before or in compliance with the decisions of Courts to resolve the uncertainties experienced by the taxable entities and collecting governments owing to the retention of  the said clause (29A) in the Constitution.

Similarly, I assume that consistent with the consensus arrived at by the bureaucrats serving the Union with the State Finance Ministers in the ECSFM (referred to below) –

(a) a central statute would be enacted in the manner provided for in Article 252 creating a constitutionally valid protocol for the functioning of a clearing house for the transfer from the Consolidated Fund of  every State of origin of supply, of credits of SGST used by every taxable person in the payment of IGST to the Consolidated Fund of India and for the transfer from the Consolidated Fund of India of the credits of IGST used by every taxable person in the payment of SGST to the Consolidated Fund of every State of destination of supply; and

(b) the term “integrated goods and services tax” (IGST) would be defined in the Constitution either before or after the resolution by judicial process of the uncertainties experienced by taxable persons and the collecting governments owing to the omission to define the term in the Constitution, as the tax levied by the Union and due and payable in any accounting period on the value of any supply of goods and services made by a person in the course of inter-state trade or commerce from a place of supply located in any State to a place located in another State as destination which may be used for addition of values subsequently by the same or another person by computing-

(i) the IGST due by applying, on the value of  every such supply, an ad valorem rate which would be the sum of the ad valorem (zero or non-zero) rate applicable under the central statute for the levy of CGST and the ad valorem (zero or non-zero) rate under a central statute (enacted in the manner provided for in Article 252) for the levy of SGST applicable in common in all the States including the State in which the destination is located, as if the supply were an intra-state supply in that State ; and

(ii) the IGST payable by allowing out of the IGST due as at (i) above, the credit, if any, on account of the credit of IGST if any transferred by the Union to the State in which the place of supply is situated; and in case such credit is exhausted, by allowing credit of the  SGST paid (but not the CGST paid) for intra-state supplies at the rate applicable in the State in which the place of supply is situated, as part of the consideration for the “inputs” during the relevant accounting period.

To continue, I note some more facts and omissions discernible from the 122nd Amendment Bill (hereafter  also referred to as “the Bill”) and the Statement of Objects and Reasons in its support (hereafter also referred to as “the Statement”)  and the assumptions which would logically follow from such omissions and facts. Firstly, the Statement omits any reference to the service of the public interests, Directive Principles of State Policy, reduction of uncertainties, “just” social order, allocation of resources to sub-serve the common good, avoidance of concentration of wealth and the means of production to the common detriment, coordination of policy and action (focused on a pre-determined “subject” of social concern), relative prices of goods and services  (both as instruments for optimal allocation of resources in the economy in the absence of central planning; and as arbiters of justice in the market transactions), and the destination principle of collection of indirect taxes (envisaged by Kelkar Committee in its July 2004 Report which originally triggered policy interest in the levy of “goods and services taxes” as one of the options for the Union to improve the low buoyancy of central excise revenues and achieve budget-balance). They also omit to refer to the best practices in other countries which according to the ECSFM (referred to below) may be adopted in the public interest in India. I therefore assume that in the judgment of the President (i.e., the Government of India) it is not necessary, in order to serve the public interests (as elaborated in the principles stipulated in Article 37 in Part IV), to establish a Union-States Council by invoking Article 263  to-

(i) get the “subject” of  “Minimizing, without any jeopardy to the national income, the ‘transaction costs‘ unfairly impeding potential market-participants by  avoidable participation constraints” (referred to below) investigated by experts;

(ii) discuss the consequences, as projected by the experts, of every possible candidate option for law-making and governance to enable coordination, as required, of policy and action focused on such subject; and

(iii) make its treaty-like recommendations (on the collective choice of one of the options for coordination of policy and action on all relevant matters including the mode of levy and collection of central and state indirect taxes well-focused on enabling ‘the Market’ to “discover” prices for goods and/or services undistorted by unfair transaction costs) to which the Union and the States would be politically committed, by invoking Articles 252, 258, 258A and/or Article 312 where necessary.

Secondly, the Bill and the Statement conceive of a “stand-alone” reformulation of ‘State’ policy only to the extent it relates to the mode of levy of a subset of indirect taxes on inter-state and intra-state domestic supplies of goods and/or services in India. I therefore assume that the reformulation does not imply any complementary lawmaking or amendment of other provisions of law which would constrain the environment of ‘the Market’. Such provisions of law include those relating to levy of goods and services tax on supplies made in the course of import into or export out of India, duties of customs, contracts (including work-contracts), sale of goods, taxes on incomes (of the suppliers of goods and/or services and others) and taxes on transfers of immovable property, registration of documents and motor vehicles, railway fares and freights, generation and distribution of electrical energy, public procurement of goods and services and regulation of the access of individuals and households to avail public goods and services.

Thirdly, the Bill and the Statement omit any reference to reorganization, in the manner envisaged in Article 312, of the cadres of direct and indirect tax bureaucrats serving respectively the Union and the States to create and sustain an esprit de corps among tax bureaucrats, of belonging to one service common to the Union and the States in the national interest in levying and collecting direct and indirect taxes in the revenues accruing from which both the Union and the States have a common interest (and not varied interests) in relation to the open economy of the nation, the national income of India and wealth of the nation. I thus assume that an All-India Taxation Service common to the Union and the States would, in the judgment of the lawmakers (including those in the Rajya Sabha), not be needed in the national interest for the efficient governance of well-coordinated regimes of concurrent levies of CGST and SGSTs, consistent with the portrayal of the integrity of an economy by R A Musgrave, for the levy of taxes-

(1) indirectly on the flow of values of goods and services in the economy to and from multiple places of business located either within the respective territorial jurisdictions of local bodies in any one (or more than one) of the States and the Union Territories or elsewhere in the world; and

(2) directly on the complementary reverse flow of real incomes accruing anywhere in India to individual residents and non-resident aliens (including those who ultimately own equity in multi-national and other corporations linked somehow to entities formally resident in India)  and to multi-national and other corporate/non-corporate suppliers of goods and/or services (including “substitute” suppliers of farm products, products of artisans and used jewelry and other consumer durables) functioning from one principal location in India.

Fourthly, the Bill and the Statement-

(a) envisage lawmaking on the mode of collection of taxes on the supply of goods or of services or both to be levied “concurrently” by the Union and the States on intra-state B2B and B2C supplies without invoking any Entry in the Concurrent List ( e.g., a forthcoming Entry on the lines of Entry 35 relating to principles of taxation of motor vehicles or a forthcoming Entry on a common procedure for identifying entities taxable for registration under IGST/CGST/SGST statutes, for oversight of their acts, for truly documenting transactions leading to supplies of goods and/or services by means of supply vouchers recognizable throughout India, and for assessment, correction of errors, collection/recovery of dues and accounting for credits in the relevant Consolidated Funds) referred to in Article 246; and without seeking to amend Article 266 to provide for a Concurrent Consolidated Fund to which revenues accruing by way of concurrent goods and services taxes would have to be credited; and

(b) do not envisage levy and collection of goods and services taxes on supplies made in the course of import into India from a place of supply beyond the customs frontier of India or in the course of export out of India to a destination beyond the customs frontier of India presumably leaving the levy of such taxes, if levied at all, exclusively to the Union by invoking its residuary power (Entry 97 of the Union List) as goods and services taxes on the true values, to the nation, of the supplies made or in any other manner.

They omit to refer:

(i) to any incentives to be made available for actual/potential market-participants to induce them to reveal their respective preferences truthfully to each other and to ‘the State’ (e.g., by requirements to avoid mis-invoicing and to invariably vouch truthful particulars in documents to be issued by every supplier as evidence of transactions of supply of goods and/or services from a place of supply to a recipient at a destination of supply regardless of the customs frontiers of India and of inter-state borders, if any, which may intervene geographically between places of business used as places of (origin) of business-to-consumer(B2C) supply or of  business-to-business (B2B) supply on the one hand and the places if any specified as destinations by the consumers and the places of business used as destinations for the receipt of supplies of goods and/or services for use in subsequent value-addition on the other);

(ii) to the ability acquired by ‘the State’ to uniquely identify individuals to prevent identity theft and to credit monetary transfers to them by electronic credits to their respective bank accounts in banks and post-offices linked by “core-banking” infrastructure supported by mobile application protocols of information and communication technology ;

(iii) to the lessons learnt from the past reforms aimed at avoidance of  “tax-cascading” in the mode of collection of indirect taxes of major revenue significance (including the mode of collection of central excises on a modified “value-added” basis by enabling taxable entities to avail incentives of “input” tax credits since 1986, extension of such incentives to the collection of both central service tax and central excise since 2004 and the state-wise modes of collection of state sales taxes independently on modified value-added bases without invoking Article 252 since 2005); or to possible adoption of any of the best practices in other countries observed by the ECSFM (referred to below) which may be consistent with the stipulation made in Article 37 of the Constitution referred to earlier ;

(iv) to provide a stipulation in the forthcoming Article 246A or elsewhere in the Bill to the effect that neither the Union nor any State may levy any goods and services tax otherwise than at ad valorem rates on values-added, since this may prohibit specific rates and deviations from the principle of collecting indirect taxes strictly on a value-added basis without any modification at every stage in the market network;

(v) to the consensus reached by the Government of India with the somehow yet-to-be-wound-up Empowered Committee of State Finance Ministers  (ECSFM) owing its creation to the Conference of Chief Ministers (and not to the President), which has enabled the Bill to be moved finally with the recommendation of the President;

(vi) to the requirement of lawmaking in compliance with Article 266 prior to the transfer by the “exporting” State to the Union, of credits of SGST used by taxable persons in paying IGST dues, or prior to the transfer by the Union to the “importing” State, of credits of IGST used by taxable persons in paying SGST dues; or to the manner of law-making common to all the States envisaged in Article 252 of the Constitution to enable an appropriate definition of IGST consistent with the main terms of  the consensus (referred to below) arrived at with the ECSFM; and

(vii) to any incentive by way of credit of CGST or CGST-component of IGST paid by an exporter as part of the prices of “inputs” in computing the CGST due and payable on the subsequent supply by such exporter of goods or services or both in the course of export out of India, since only the Union would have the legislative competence to levy CGST or any other tax on supplies in the course of export out of India and, vide the forthcoming Article 286, the States would not have legislative competence to levy SGST on supply of goods and services in the course of export out of India, and it would not be possible for any State to allow any incentive  by way of credit of SGST paid or of the SGST component of IGST paid as part of the prices of inputs.

 In spite of some of the above facts and omissions, I assume that-

(1) the forthcoming GST Council would pursue no alternative other than to recommend such incentives as are envisaged in the First Discussion Paper published by the ECSFM as under:

“The … Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services with “appropriate” provision for consignment or stock transfer of goods (and services?). The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds”(italics quotation-marks, question mark and brackets added);

(2) the term “integrated goods and services tax” referred to but not defined in the Bill, would, subject to levy of such tax at zero rate on inter-state supplies by movement of goods which do not involve transfer of property rights in goods either directly or by endorsement on documents of title during such movement, be defined to include such supplies;

(3) the Union being path-dependent on its practice since the commencement of the Constitution, no goods and services tax would even after relaxation of regimes of legal control of international trade or commerce, be levied by the Union on the supplies of goods or services or both in the course of import into India or in the course of export out of India, even though there would be no constitutional restraint on the Union in levying such taxes in addition to duties of customs and the forthcoming Article 269A provides for the apportionment, among the Union and the States, of the revenues accruing by way of levy of goods and services tax if any levied on supplies made in the course of import into India;

(4) the Union would adopt the policy of classifying domestic transactions of supply of goods and/or services as “inter-state’ and “intra-state” by mimicking the policy reformulated by the amendment of the Constitution in 1956;

(5) CGST on the one hand and SGSTs and IGST  on the other would respectively be assessed and collected on a modified “value-added” basis by enabling the taxable entities to avail by way of incentive, (a) credit on account of CGST paid as part of the price of every intra-state supply of “inputs” in computing the CGST due and payable on subsequent intra-state supply and (b) credit on account of the relevant IGST or SGST paid as part of the price of every supply of “inputs”, in computing the IGST and SGST due respectively on subsequent inter-state and intra-state supplies made from the applicable “place of supply” by such entities; and by defining “inputs” in such a manner as to make the set of inputs to be a sub-set of goods and /or services received by the taxable entity from its suppliers at the prior stage;

(6) “cross utilization” of input tax credit between the CGST and any SGST would, as suggested by ECSFM, not be allowed except in the case of inter-State supply of goods and services as envisaged above; and

(7)  the governance protocols would:

(a) ensure that credit of IGST/CGST/SGSTs paid as part of the prices for the supply of inputs is allowed once by avoiding any unjust enrichment of ‘the State’  as well as any jeopardy to the revenues accruing to the Union and the States and by ensuring that no input tax credit is availed more than once, by relying on a clearing house created at public expense;

(b) avoid any other protocol for the governance of input tax credit such as-

(i) requiring the potential recipient entity of any B2B supply (i.e., the potential claimant of input tax credit at the appointed destination) to deposit in a public (escrow) account in a bank ( functioning under core banking protocols) the amount of estimated IGST in case of inter-state supply (or the amounts of CGST and applicable SGST in case of intra-state supply) payable as part of the price before placing an order or indent on the supplier; and

(ii) providing the supplier as the party to the relevant contract with mandate, when issuing the prescribed supply voucher, to instruct the bank to credit the relevant Consolidated Fund by debiting the public account in which the recipient deposited the requisite funds and to make an endorsement as to IGST/CGST/SGST paid as part of the price on the supply voucher;

(c) provide no other legal incentive in ‘GST’ Law and non-‘GST’ Law to “nudge” the market participants (including B2C suppliers and recipient-consumers) to reveal their respective preferences truthfully to each other and to ‘the State’, other than making provisions, without any more effective governance protocols than those in the past, to weakly stipulate that every supplier (including unregistered and small suppliers) would have to issue a written voucher indicating the true particulars of every significant transaction of supply of goods and services exceeding a specified sum of money as consideration or every transaction in which the recipient requires that such voucher be issued; and

(d) omit to provide that every supply-voucher issued by an unregistered supplier would have to contain a printed declaration that the amount of consideration is inclusive of the amounts of CGST and SGST leviable on the supply made

Fifthly, the Bill and the Statement envisage-

(i) Categories-of-goods-and/or-services-wise governance of-

(a) registration regimes under the central  IGST and central and state GST statutes somehow independent of each other to be administered through multiple primary IGST/CGST/SGST authorities, though subject to the Union and the States completing the negotiation in the GST Council of uniform “thresholds” of “turnover” applicable for mandatory registration of taxable entities in the SGST statutes in the States in the North-East and other States on the one hand and in the CGST/IGST statutes on the other; and

(b) exemption from registration without any specific governance or e-governance protocol to oversee the compliance with the conditions, if any, of such registration and exemption from registration; and

(ii) e-governance protocols limited to

(a) accurately ascertaining input tax credits which may be availed by every taxable entity in computing the IGST/CGST/SGSTs payable by it out of such taxes due from it on subsequent B2B supplies made by it (the governance of taxable B2C supplies from the places of business of big and small suppliers not being covered by e-governance protocols in spite of the fact that the ultimate economic incidence of the forthcoming taxes would be borne “indirectly” by every domestic consumer); and

(b) the registrations of any taxable entity by every relevant primary IGST/CGST/SGST authority respectively with the requisite territorial jurisdiction without having to visit tax offices {excluding the oversight of the functioning of suppliers including unregistered suppliers of unexempted goods or services or of the compliance by every supplier with the governance protocols of the regime of licensing of the use of specific premises (static and mobile) by local bodies for use in adding values to goods and/or services received therein}.

I therefore assume that the ‘GST’ Law would not unequivocally provide-

(i) that every small and big supplier would be required to print from a pre-programmed hand-held or other electronic equipment and issue a voucher in which the prescribed particulars (including the business  name of the supplier entity and the complete postal address of the place of business used by it for receipt of supplies of inputs to add values and for subsequent use as the place of supply of goods and services to be made by it, number of the license issued by the jurisdictional local body for the use of that place of business to receive goods and services for value-addition and date of its expiry, number of the certificate of registration or of conditional exemption from registration issued under the IGST/CGST/SGST statutes, PAN of the supplier entity) of every unexempted transaction leading to supply (of goods and/or services) would be required to be truly stated;

(ii) that in case of B2B supplies the particulars to be stated would include the number and date of the order or indent to be printed from pre-programmed electronic devices or submitted on line with prescribed particulars by the potential recipient and the complete postal address of the place of business of the recipient entity as the destination of supply to be used by such entity as the place of subsequent supply to be made by it;

(iii) that post commencement of ‘GST’ Law, a national database (to be created and maintained on the basis of information from pre-programmed electronic devices from which the law would require the suppliers to print and issue orders/indents/supply vouchers and of information from local bodies and other sources) would lead to signals which would enable not only primary and post-primary GST authorities to assess (or re-assess, if required), to the best of their respective judgments after due notice to and hearing of every registered and other taxable person, the amounts of IGST, CGST and SGSTs owed (i.e., due and payable) accurately but also the customs officers, income tax authorities and local bodies to assess customs duties (and CGST if levied on supplies of goods or services or both in the course of import into or export out of India), corporation tax, personal income tax and local taxes and license fees accurately;

(iv) that  the supply voucher to be issued by every small and big supplier would be recognizable throughout India as formal documentary evidence of the particulars of the transaction vouched by the supplier therein with (a) stipulations as to colour scheme ( say, pink or blue side borders) applicable respectively to vouchers to be issued by registered suppliers and by those exempted from registration; and (b) a requirement to specify the “destination” (i.e., the place of subsequent supply at which input tax credit may be claimed) in every voucher for B2B supplies made; and

(v) a strict requirement in law that since small B2C suppliers exempted from registration under the state and central GST statutes would be required to issue supply vouchers in which the amounts of CGST and SGST would be included in the price for the supply, such suppliers would formally declare on the supply vouchers to be issued, that the price includes the amounts of CGST and SGST levied.

Lastly, the Bill and the Statement do not envisage/provide either for the omission of Entries 92A and 92B in the Union List ,or the repeal/amendment of section 6 and/or other provisions of the Central Sales Tax Act, 1956 so as to make law consistent with the forthcoming Article 286 ( though with unamended marginal title), and with the forthcoming Article 269A; or for the repeal of sections 14 and 15 of that Act, even though according to the Statement the concept of “declared goods of special importance” under the Constitution would be dispensed with. I assume that Sections 14 and 15 of the Central Sales Tax Act,1956 would, subject to amendment, continue in the statute book as long as ‘GST’ Law continues to be inapplicable to the supply of petroleum products.

To sum up, the provisions in the central and state GST statutes likely to be enacted after the 122nd Amendment Bill becomes law, would be based on the following assumptions:

  1. Since market-participants take their rights seriously, the provisions would rely on the definition of “supply” in the Constitution with due reference-

(i) to the exchange of property rights in goods from a supplier to a recipient and to the movement (including movement across the customs frontiers of India and inter-state borders) of goods without exchange of property rights from one place of business to another; and/or

(ii) to the availing by a recipient of contractual rights to services provided by the deployment and use of the assets of the supplier.

  1. The concept of IGST to be levied by the Union at an ad valorem (zero or non-zero) rate which would be the sum of the ad valorem rate of CGST and a single ad valorem rate of SGST common to every State to be applied on the values of the supplies, and the governance protocols of the “clearing house” envisaged by the ECSFM are crucial in the reformulation of ‘State’ policy relating to the mode of levy and collection of indirect taxes. The term “integrated goods and services tax” would, subject to zero-rating pre-determined values of inter-state supplies of goods not involving transfer of property rights, therefore be defined in the Constitution with reference to the stipulations relating to lawmaking to apply in common to all the States made in Article 252 of the Constitution. Article 246A would also be suitably amended to restrain the Union and every State from specifying in law any rate of GST other than ad valorem rates and any mode of collection other than collection strictly (i.e., without any modification) on a value-added basis.
  2. Law-making would accord with the recommendations of the forthcoming GST Council to be made consistent with the principle, to be enacted in the forthcoming Article 279A, of “harmony”. Harmony implies diversity of procedural law and is logically at variance with the concept of the substantive “uniformity” of rates of levy that is common to every State The principle would not find place in Part IV of the Constitution. The “democratic” restraint on the Courts referred to in Article 37 would be removed. Courts would have the jurisdiction to interpret whether specific provisions enacted by the Parliament and any State Legislature to levy goods and services taxes comply with the requirement of harmony in the light of the myriad facts and circumstances which may be brought to the notice of the Courts from time to time.
  3. The limited emphasis in the 122nd Amendment Bill is only to extend the past reforms aimed at avoiding tax-cascading in the levy of select central and state indirect taxes on domestic supplies of goods and /or services. The Bill does not seek to minimize other distortions in the prices induced by privacy of information possessed by specific agents in the economy and by the requirements of compliance and/or non-compliance by market-participants with the non-‘GST’ Law. The reformulation of ‘State’ Policy implied by the Bill would therefore not lead to the enactment of any law relating to other matters, including- (i) levy of taxes on agricultural and non-agricultural incomes; (ii) levy of CGST on the values of the supplies made in the course of import into or export out of India as predetermined by ‘the State’; (iii) registration of plants and machinery installed on land after supply, of transfers of land and other immovable property and of consumer/producer durables, including motor vehicles and jewelry and precious metals, facilitating the set-off of GST paid before registration when supplied eventually by subsequent transfer (including in the used-goods market); (iv) levy of taxes on railway fares and freight for the services of carriage provided by the railways owned by the Government of India, central terminal taxes on passengers and goods carried by railways, sea or air for the services provided at the terminals and state taxes on passengers and goods carried by land or inland water-ways by carriers providing the services of carriage of passengers and goods by road or inland water-ways; (v) trade-wise record-keeping relating to transactions by registered and other entities and additional record keeping relating to transactions of other suppliers, by the suppliers of banking, insurance, carrier (including railways), warehousing and local-government services as aids in the concurrent enforcement of the central and state statutes ; (vi) public procurement of goods and/or services for use by central, state and local governments; (vii) regulation of access by individuals conditionally entitled to avail the supplies of public goods and/or services; and (viii) regulation of state lotteries to provide incentives to consumers to demand issue of supply vouchers by B2C suppliers.
  4. Incumbents populating the central and state civil services are deployed to oversee the identification of taxable persons, assessment of direct and indirect taxes and payment/collection/recovery of such taxes and related dues and their prompt credit into the respective Consolidated Funds. It would not be found necessary to reorganize them in the national interest as a service common to the Union and the States in order to ensure efficient collection of goods and services taxes (including CGST and SGSTs levied concurrently on intra-state supplies) and other indirect taxes on the values of the flow of goods and services and direct taxes on the incomes of the suppliers engaged in the businesses and professions which make such supplies.
  5. The Government of India may, by invoking Article 258, authorize the state GST authorities to collect IGST and CGST along with the applicable SGST from those taxable entities which use places of business for adding values in one State only. Similarly every relevant State Government may, by invoking Article 258A, authorize the central GST authorities with the requisite territorial jurisdiction over the principal place of business of the taxable entity in India to collect every relevant SGST along with IGST and CGST from every taxable entity using places of business (directly or through agents) located in multiple States for value-addition. It would however be found unnecessary to redeploy the incumbents of those services in this manner. Thus there would be no one-to-one correspondence between taxable entities and primary central-cum-state GST authorities with the requisite territorial jurisdiction to oversee the taxable entities using places of business within their respective jurisdictions for adding values. There would also be no one-to-one correspondence between every taxable entity and a unique hierarchy of post-primary authorities with appropriate functional jurisdictions to correct errors in the decisions of any primary or other lower central-cum-state GST authority.

III

DESIGNING GAME FORMS TO SERVE PUBLIC INTEREST

Given the assumptions made in section II, I proceed to draw upon the received wisdom from the relevant theories to be able to ascertain if the institutions of ‘the State’, ‘the Market’ and ‘the Bureaucracy’ would, post commencement of the ‘GST’ Law, be able to function harmoniously as institutions of national life so as to serve the public interest consistent with the stipulations, relating to governance (according to the rule of law) of the implementation of ‘State’ policy, to constitutionally valid lawmaking  and to lawful levy of taxes, made respectively in Articles 37, 245 and 265. Relevant theories would include those current among the practitioners of the disciplines of new institutional economics, contract theory, theory of games, mechanism design, implementation theory, decision theory, operations research, econometrics, information economics, control theory, systems theory and graph theory. As already noted,  the norms and goals of public interest are stipulated in the “Directive” Principles specified in Part IV of the Constitution which ‘the State’ is constitutionally bound to apply; and they are circumscribed by the stipulations made in Part III to secure fundamental rights and by the stipulations made in Article 37 about lawmaking and governance including a “democratic” restraint on the Courts disabling them from enforcing the Principles adumbrated in Part IV.

The relevance of institutions which, according to the received wisdom in the new institutional economics, function to reduce uncertainties in life, is recognized by the directive principle specified in Article 38 in Part IV, as long as such institutions relate to “national life”. National life may be logically interpreted as life for which not only trade barriers within the nation are irrelevant, but which sustains fair terms of domestic and international trade or commerce in transactions and effectively avoids surreptious extraction of surplus values from the national economy by domestic and non-domestic entities which function as agents in the economy. The principle of Harmony, referred to in the forthcoming Article 279A to be inserted in Part XII is not explicitly referred to in Part IV. If as stipulated in Article 37, “harmony” has to be consistent with the “directive” principles, it would have to be interpreted as a desideratum for the simultaneous, though varied, modes of functioning of  the instruments of ‘the State’ and ‘the Bureaucracy’  on the one hand, and the instruments of ‘the Market’ on the other.

The actions of the entities embedded in the institutions of ‘the State’, ‘the Bureaucracy’ and ‘the Market’, in the pursuit of their respective and varied goals, no doubt tend to affect the relative unit prices for goods and services which prevail in the environment of ‘the society’ from time to time. If the indirect tax regimes ensure prior-stage/input indirect tax credit to every B2B and B2C supplier but deny such credit to domestic consumers, some/many suppliers may extract undue surplus values from the economy. It is thus socially relevant to note that the actions of the entities embedded in those institutions would also affect the incomes accruing respectively to the domestic and non-domestic suppliers when every transaction in every supply-chain to which any of them is a party is not “balanced” but many of those transactions generate surplus/deficit of money values for specific parties to the contract underlying any such transaction.

The instruments of ‘the State’ include transparent enactment and enforcement (or opaque non-enactment and/or non-enforcement) of the provisions of statutes that comply (or omit to comply) with constitutional law which would have to be consistent not only with Part III but also with Article 37. The instruments of ‘the Bureaucracy’ include well-reasoned (or arbitrary) decisions taken in accordance with (or in derogation of) the principles of administrative law and of natural justice. The instruments of ‘the Market’ include privacy-preserving protocols for negotiating contracts and for governing negotiated contracts in compliance (or non-compliance) with law relating to business organizations, contracts, levy of taxes and other matters. If harmony fails to be realized, actions (and omissions) of the lawmakers, bureaucrats and the actual and potential market participants would-

(i) on the one hand lead to mis-allocation of resources without regard to the common good and/or to concentration of wealth and means of production in the possession of domestic and/or non-domestic entities to the common detriment, contrary to the stipulations made in Article 39; and

(ii) on the other hand, lead to failure to address, or to address adequately, the problem of social disorder which would ensue when justice fails to prevail as stipulated in Article 38 in the economy ideally without generating any surplus or deficit value for any participant in the market, justice being  interpreted in the manner conceived by John Rawls to be “fairness”  in the prices as determinants of the values of goods and /or services supplied in well-balanced market transactions.

‘The State’ and ‘the Bureaucracy’ would be legitimately expected to function by coordinating policy and action to ensure, inter alia, a “just” social order based on fair (i.e., undistorted) prices for goods and services (vide Article 38), efficient allocation of resources to sub serve the common good (vide Article 39) and avoidance of the concentration of wealth and means of production to the common detriment (vide Article 39). As for efficient allocation of resources to sub-serve the common good, it is legitimate to expect that such allocation would-

(i) be subject to production possibilities and to the transfers of positive values from the suppliers to the recipients of goods and/or services (always avoiding “negative-length cycles” referred to below, and netting out across individual entities as “balanced transfers” of values without generating overall surplus or deficit values); and

(ii) mainly rely, in the absence of central planning – (a) on the prices for goods and services “discovered” by ‘the Market’ for inter-sector coordination; and (b) on legal regulation of the terms of supply, including the terms of supply of services by the banks of accepting and servicing deposits of money from savers and of supplying credit by lending money needed by entrepreneurs who aim to create values by taking risks.

“Efficiency” in allocation is a requirement that a social decision induced by ‘the State’ policy maximize the sum of utilities of the individuals embedded in a society (Jackson,2003).’The Market’, being required to function in an open economy integrated with the rest of the world, would be legitimately expected to function to ensure creation of the wealth of the nation through profitable enterprise and to “discover” prices for goods and services from time to time. This would be by balancing demand and supply through strategic equilibriums while continuously recognizing emerging possibilities for inter-sector linkages and coordinating the establishment of such linkages by creating and/or modifying the requisite production capacities and utilizing the installed capacities efficiently (see for example: Wydick,2010:33-48)

The functioning of every institution would be based on the games played by the individual entities embedded in each institution through their interactions within and across the institutions. The mechanism design literature models the interactions of the individuals using game theoretic tools, where the institutions governing interactions are modeled as mechanisms (Jackson,2003). Matthew Jackson observes,

“A mechanism is often also referred to as a game form. The terminology game form distinguishes it from a game , as the consequence of a profile of messages is an outcome rather than a vector of utility payoffs. Once the preferences of the individuals are specified, then a game form or mechanism induces a game. Since in the mechanism design setting the preferences of individuals vary, this distinction between mechanisms and games is critical .The mechanism design problem is to design a mechanism so that when individuals interact through the mechanism, they have incentives to choose messages as a function of their private information that leads to socially desired outcomes. In order to make predictions of how individuals will choose messages as a function of their private information, game theoretic reasoning is used” (italics added).

According to Rahman (2010), “understanding implementable allocations is an essential topic of mechanism design”. Vohra(2011) asks, “What exactly can a given institution achieve when the information necessary to make decisions is dispersed and is privately held?” and goes on to characterize the “environment” of an institution and to define what a mechanism is before noting, “A mechanism reduces an institution to a procedure for making a collective choice“.

It would be useful to keep in mind the concepts relevant to mechanism design theory. Jackson (2003) provides an excellent glossary of the concepts. To begin with it would be appropriate to note that in a transaction between two entities, each with information about its endowment and preferences to which it alone is privy, it is possible for either party to take advantage of the asymmetric information that implies the ignorance of the other about some crucial aspects during the negotiation leading to, or later during the governance of, any contract. The ignorant party would be a victim of hidden action or moral hazard if it is unable to enforce a negotiated contract fairly; and would be a victim of hidden information or adverse selection in negotiating fair terms of the contract; it is also possible that both parties being unaware of some aspects, the contract negotiated with bounded rationality would be incomplete. The actual/potential market-participants are referred to in the literature as “agents” (that is to say, “players” whose acts and omissions affect the economy).

In game theory, an asymmetric game where players have private information is said to be “strategyproof” if it is a weakly-dominant strategy for every player to reveal his/her private information. It is also called truthful or dominant-strategy-incentive-compatible. Dominant strategy is a strategy that is taken as best for an agent, regardless of the strategies chosen by other agents. A specification of individual strategies as a function of information such that no individual agent can gain by a unilateral change of strategies is called “Bayesian Equilibrium“.

In ‘the Market’, the strategy of each agent embedded therein would be a function of the messages he/it relies on. Accordingly a “Mechanism” is defined as a specification of a message space for each agent and an outcome function that maps vectors of messages into “social” decisions (on participation, including the terms of participation; or non-participation) and transfers. The changes in  ‘the State’ policy ( not taken to be limited only to  the governance protocols relating to the mode of levy and collection of indirect taxes on the supplies of goods and services in the economy) would affect the message space for every actual and potential market participant and its effect would not be limited to the unit prices of goods or services “discovered” by ‘the Market’ from time to time. The private information held by an individual entity relating to preferences of that entity is called its “type“. Representations of “type’ would vary according to circumstances. For example, a type may be represented by a permutation (or ordering) of preferences over the universe of such permutations; or, it may just be represented by the money value of specific combinations of goods and/or services subject to constraints related to income or technology or substitution. If, in determining the value of an outcome, the information possessed by other agents in addition to one’s own is relevant, “type” is referred to as “signal“.

A function mapping types into collective social decisions and transfers is called a “social choice function“. A mechanism where the message space is the type space and the outcome function is the social choice function is referred to in theory as a “direct mechanism“. If a direct mechanism requires truthful revelation of the types by the agents it is said to possess “Bayesian incentive compatibility“. A mechanism is said to “implement” a social choice function if its equilibrium outcomes correspond to the outcomes of the social choice function for each vector (or “profile“) of types.

According to Jackson (2003), given a social choice function, the utility that an economic agent receives from an allocation would be

Utility according to true type = Utility according to revealed types + Transfer………….(1)

This formulation of preferences is stated to be quasi-linear. The transfer may be positive or negative. In the colloquial language of the market participants in India the legitimate part of the transfer is referred to as “margin” and the money value of the “transfer” as at (1) above would differ from that margin by the money-value of what is characterized in the literature as “information rent” availed by the better-informed party to the transaction at the expense of the ignorant party. Subject to caveats, Jackson (2003) also observes that one can associate a direct mechanism that is incentive-compatible with each mechanism and equilibrium. Vohra (2011) demonstrates the “Revelation Principle” which states that if a social choice function can be implemented in dominant strategies by a mechanism, it can be truthfully implemented in dominant strategies by a direct mechanism. He quotes from R.B.Myerson’s article on “Revelation Principle” in the New Palgrave Dictionary of Economics (Second Edition) and points out the importance of the principle in the following words:

“In any economic institution, individuals must be given appropriate incentives to share private information or to exert unobserved efforts. The revelation principle is a technical insight that allows us to make general statements about what allocations are feasible, subject to incentive constraints, in economic problems with adverse selection and moral hazard. The revelation principle tells us that, for any general coordination mechanism, any equilibrium of rational communication strategies for the economic agents can be simulated by an equivalent incentive-compatible direct-revelation mechanism, where a trust-worthy mediator maximally centralizes communication and makes honesty and obedience rational equilibrium strategies for the agents.” (italics and emphasis added)

Vohra (2011) notes that any direct mechanism can be decomposed into an allocation rule and a payment rule. The utility received by an agent in respect of an allocation would then be

Utility = Value assigned by the agent –  payment to be made by/accruing to the agent……..(2)

By definition, the payment (inclusive of indirect taxes) to be made by the recipient of the allocation is positive.  Rakesh Vohra goes on to derive the so-called “taxation principle” and notes that the principle allows us to interpret a mechanism as offering a menu consisting of a list of allocations and corresponding prices to be paid by a given agent depending on the set of preferences of the other agents. Referring to the strategic approach found in Rahman (2010), Vohra (2011) also derives a theorem showing that a game form is implementable in dominant strategies if there is no undetectable reporting strategy that is profitable in the game and vice versa. It is important to note that the payment representing the excess of the value assigned by the recipient over the utility of the allocation experienced by him/it, is derived from the “menu” of prices for the allocations of goods and/or services as a function of the preferences of other agents who are not parties to the relevant contract.

The money-value of surplus extracted or deficit experienced by any supplier or recipient who are parties to any contract leading to any supply would be known only to the party extracting such surplus or experiencing such deficit. The amount of money payment to be made as “consideration” or “price” by a recipient of supply would however be acknowledged by both the parties to the contract, in supply vouchers issued for the information of the rest of the world, to be the same as the money payment accruing to the supplier. It would include the amounts accruing to the Union and to the State concerned as indirect taxes (including CGST and SGST, or IGST, as the case may be). The utilities respectively derived by and the values respectively assigned by the supplier and the recipient according to the respective equations in accordance with (2) above would remain unaffected by the levy of IGST (or as the case may be, CGST and SGST) as long as the entire incidence of  those levies forms part of the payment to be made.

From (1) and (2) above, it would follow that in case the preferences are mutually revealed truthfully by the supplier and the recipient-

value for supplier -utility for supplier = value for recipient -utility for recipient,

leading to a well-balanced outcome. But if preferences are not revealed truthfully, either,

value for supplier- utility for supplier- transfer to recipient= value for recipient -utility for recipient

or,

value for supplier-utility for supplier = value for recipient- utility for recipient-transfer to supplier,

depending on which party would be able to get the advantage of “information rent” in the governance of the relevant contract. Such information rents result in participation constraints in the form of transaction costs in the participation by every potential market-participant. If the actions of the entities embedded in ‘the State’ and ‘the Bureaucracy’ do not “nudge” the parties to every transaction/contract underlying any supply of goods and/or services to reveal to each other their preferences truthfully, it is possible that the values of the rights realized by many suppliers  (recipients) in respect of the supplies made to (from) the corresponding recipients (suppliers) may be negative.

Vohra (2011) provides a net-work interpretation of the strategic equilibriums in ‘the Market’ and derives necessary and sufficient conditions for implementable allocations subject to incentive compatibility. He does so by relying on various concepts from the graph theory and by applying linear programming techniques to minimize transaction costs. He notes that a directed graph with nodes and arcs in which a value (“length”) is associated with each arc, is a “network“; and that while a “path” is a sequence of arcs connecting an initial and a terminal node through other intermediate nodes, a “cycle” is a sequence of arcs in which the initial and terminal nodes are identical. He refers to the “shortest path problem” and points out how the flow of values in the network may be decomposed into “path-and-cycle flows“. Many results derived in Vohra (2011) relate allocation rules implementable in dominant strategies to the avoidance of finite cycles of negative lengths in the market network.

Vohra (2011) also refers to a class of allocation rules known as “affine maximizers” and provides a proof of the well-known Robert’s theorem that characterizes allocation rules which are incentive-compatible in dominant strategies as solutions to maximization problems (e.g., maximizing total utilities for all the economic agents). He pursues the idea of efficiency in allocations by building on the idea from Dantzig (1963) that some optimization algorithms can be interpreted as “auctions”. He relates ascending auctions to the Walrasian tatonnement process and provides a simple recipe for deriving ascending auctions aimed at efficiency; issues related to revenue maximization and rationalizability of given mechanisms are also discussed.

The transition to the regimes for the levy of CGST and IGST would involve reliance on contracts. Contract Theory relates to the study of contracts which are subject to transaction costs. The finding (known by the name “Coase Theorem“) by Ronald Coase that in the absence of transaction costs the outcomes of private contracts would be Pareto-efficient may also be viewed as an indirect way of defining “transaction cost“. Transaction costs related respectively to incentive constraints and bounded rationality form two broad categories of transaction costs. In this paper I confine attention to minimizing transaction costs owing to incentive constraints. It would be naive to equate transaction costs with the incidence of indirect taxes including IGST or, as the case may be, CGST and SGST, and to pretend that there is no other source contributing to transaction costs faced by the actual and potential suppliers, producers, consumers and exporters in the economy.

IV

THE LIKELIHOOD OF ‘GST’ LAW INDUCING A “JUST” CHOICE ARCHITECTURE

Given the assumptions made in section II and the received wisdom from current theories referred to in section III, I proceed to consider the features of the game form which is likely to be induced by the forthcoming ‘GST’ Law for the actual and potential participants embedded in the institution of ‘the Market’. I also proceed to evaluate the likelihood of the institution of ‘the State’ being able to play the role, as envisaged by Roger Myerson, of “a trust-worthy mediator (who) maximally centralizes communication and makes honesty and obedience rational equilibrium strategies for the agents” by coordinating, along with the institution of ‘the Bureaucracy’, policy and action aimed at the creation of an incentive-compatible direct revelation mechanism to simulate the outcome of the games likely to be played by the actual and potential market-participants after the commencement of the ‘GST’ Law so as to-

(i) make allocations of resources consistent with the stipulation to sub-serve the common good made in Article 39; and

(ii) effectively avoid concentration of wealth and the means of production to the common detriment as stipulated in Article 39.

I expect my analysis to help ascertain the likelihood of the instruments of the institutions of ‘the State’, ‘the Bureaucracy’ and ‘the Market’ functioning harmoniously after the commencement of ‘GST’ Law to secure and protect an unambiguous and “just” choice architecture as a significant part of the just social order in the environment of ‘the Market’ as stipulated in Article 38.

The Constitution (122nd Amendment) Bill, 2014 implies a paradigmatic change in the ‘State’ policy which implies a change in the evolution of the major tax-bases relevant to the legal mode of levy of indirect taxes on the value of the domestic product from the activities (e.g., “removal” of goods from factory or “distribution” of services) of “production” to the transactions of “exchange”. The ‘State’ policy would limit the levy of excises (not to be subsumed in the IGST/CGST/SGSTs regimes) on the production of select goods (e.g., “sin” goods such as tobacco and alcohol or goods- such as petroleum products- the use of which implies air pollution and such other negative externalities). It would however continue the non-levy of indirect taxes on the “sale or purchase of  goods” in the course of international trade or commerce without any change in extending the same ‘State’ policy to (the yet-to-be-defined) “supplies of goods and/or services” in the course of import into and in the course of export out of India. This would be so in spite of-

(i) the fact that the Statement of Objects and Reasons in support of the Bill envisages that the new GST Regime would subsume Additional Duties of Customs commonly known as “Countervailing Duties”; and

(ii) the relaxation of regimes of licenses and permits which had been in force from the early days of the Republic to control international trade in which a place of business in India is either the destination or the origin of the supply.

The collecting governments at the Union and State levels would no doubt ensure that the transition to the new regimes is “revenueneutral” (i.e., there is no jeopardy to the current levels of revenues accruing from indirect taxes which would be replaced by IGST, CGST and SGSTs). The tax-paying market participants would however “take their rights seriously” when, as observed by Ronald Dworkin, “a political society is divided and appeals to cooperation and a common goal are pointless” (Dworkin,1977:184). The major legal change would, owing to the commencement of ‘GST’ Law, therefore have to be in the  change for purposes of ascertaining the occurrence of every taxable event, from

reliance on a unilateral act (e.g., “removal” of goods from factory gate or “distribution” of service provided) of the taxable entity with reference to specific goods or services defined by nomenclature or description listed in schedules of “tariffs” of  value per unit of the good or service expected to prevail within the nation in the economy, and without reference to the rights exchanged in any transaction in accordance with a contract,

to

reliance on a bilateral act which results in a voluntary transaction between the taxable entity (i.e., a supplier) and another party (i.e., a recipient) leading to a “supply of goods or services or both” for a mutually agreed monetary consideration ( implying a voluntarily agreed “price” per unit for every specific good or service definable by nomenclature or description) and with due reference to the rights exchanged in a transaction in accordance with a contract.

After the commencement of ‘GST’ Law, path-dependence by lawmaking initiatives and governance protocols on the pre-‘GST’ Law mode of collection of central indirect taxes would however-

(i) ignore the transaction costs faced by the actual and potential market-participants other than the costs owing to the levy of IGST (or, as the case may be, CGST and SGST) paid on the yet-to-be-defined “inputs by the recipients of B2B supplies made in the course of domestic trade or commerce . {Such transaction costs would include the costs for the potential domestic suppliers involved in overcoming the participation constraints in competing with the actual non-domestic suppliers since no non-domestic supplier or the importer in India to whom supplies are made would be required to pay in addition to duties of customs, if any, levied to protect domestic industries, any CGST ( even if “deemed” to be IGST in spite of the fact that the States would stand disabled vide the forthcoming Article 286 from levying SGST on supplies made in the course of import into India) as per tariff based on the expected fair international cif values per unit of  the supplies of well-defined goods or services or both in the course of import into India};

(ii) ignore the transaction costs faced by actual and potential exporters of goods and/or services from India owing to denial of credit of the IGST (or the CGST and SGST as the case may be) paid by them on their “inputs”, since the States would stand disabled vide the forthcoming Article 286 from the levy of SGST on supplies of goods and/or services in the course of export out of India and the Union, though not so disabled, would not levy ( e.g., at zero rate, contingent on the value vouched in the relevant supply-voucher for the relevant transaction being not lower than the value according to the tariff based on the expected fair international fob values per unit of the supplies of well-defined goods or services or both ) any CGST (or IGST, if so “deemed”) on such supplies in the course of export out of India;

(iii) ignore the terms of the contracts underlying every supply of goods or services or both other than the mutually agreed “prices” for the “supplies” vouched in the supply- invoices evidencing the relevant transactions and taken, even when they vary from one transaction and another, somehow as proxies for the fair values per unit of specific goods or services expected to prevail in ‘the Market’ within India( In particular the stipulation by a recipient of the place of destination at which the supply would be required by him/it would be ignored);

(iv) emphasize as the exclusive characteristic of every “supply”, the unilateral act at a legally-defined “place of supply”, of every supplier (taken merely as an entity from which “goods and services taxes” accrue to the Union and one of the States and ignoring other conditions of the embeddedness of the supply in the institution of ‘the Market’); and ignore, in creating documentary evidence of transactions leading to the supplies of goods and/or services, the relevance of the use by any taxable entity of any premises as a destination to receive goods and/or  services in order to add values in that place before subsequent supply of the same or other goods and services from that place ; and

(v)  ignore, in defining the term “place of supply”, the legal role which would have to be played by the local bodies in licensing every well-defined premises as a “place of business” for the exclusive use by every specific business/professional entity in receiving supplies of goods or services and adding values at such premises without contravening applicable local bye-laws before making subsequent supplies of the same or other goods and/or services from that place.

It is important to note that since the Bill does not provide for omitting the Entries 92A and 92B from the Union List, it does not contemplate the “subsuming” of the levies of Central Sales Tax (in spite of the forthcoming amendment of Article 286 omitting reference to “sale or purchase of goods” and inserting references to “supply of goods or services or both”) and the yet-to-be-levied Central Consignment Tax (in the anvil since 1982) if levied, in the ‘GST’ regimes. If the Goods and Services Tax Council constituted after Article 279A comes into force makes any recommendation for subsuming those central taxes in the GST regime, it would be for the Parliament to amend the Constitution once again to provide for omitting Entries 92A and 92 B in the Union List in the manner stipulated in Article 368. While the constitution of the Goods and Services Tax Council is not subject to any prior requirement of a judgment by the President as to such constitution serving the public interest, the Parliament and the State Legislatures would be bound to comply with the stipulations made in Article 37. So would the Goods and Services Tax Council be bound, since it would stand embedded in ‘the State’ as soon as it is constituted.

From the deliberations of the Ministry of Finance with the ECSFM to the extent such deliberations have been disclosed in the public realm, it appears most likely that “harmony”, the principle which would stand stipulated in Article 279A for the overall guidance of the forthcoming Goods and Services Tax Council, would be interpreted by the central and state governments as achieving uniformity in the rates of the SGST-component of IGST. This would be because unlike Article 263 which would be relevant if the Union and the States were to pursue a “subject” of “common interest” in serving the public interests, the forthcoming Article 279A is not concerned prima facie with serving the public interests or with the pursuit of a subject of common interest. Article 279A is expected only to facilitate a political compromise of the varied revenue interests of the Union and every State which would relate only to the matters referred to in the forthcoming Article 246A and not relate to any subject of social relevance (such as “transaction costs”, referred to in the Coase Theorem, which may restrain participation by potential market participants on fair terms). The principle of harmony that would stand stipulated in clause (6) of Article 279A would thus not be a directive principle of ‘State’ policy, but a constitutional principle (i.e., principle of Peoples’ policy) by which the extent of “concurrence” (i.e., overlap) in the respective legislative competences derived from Article 246A  by the Union on the one hand and the States on the other would be redefined from time to time in accordance with the recommendations of the forthcoming Goods and Services Tax Council. Though not stated explicitly in the forthcoming Article 279A, the recommendations of the GST Council would have to be consistent with the stipulations (made by the People) in Article 37 which specify and circumscribe, subject to the requirements of compliance with securing the fundamental rights of the individuals vide Part III, the norms which define the public interest. The norms include those aimed at welfare, common good and avoidance of common detriment in the accumulation of wealth by individuals.

It would be left to the Parliament and every State Legislature to act on the recommendations of the Goods and Services Tax Council, if they respectively find such recommendations to be (or not to be) consistent with the stipulations made in Articles 245 and 37. Here a comparison of the provisions in the forthcoming Article 279A with those in Article 263 would be in order. The most crucial differences are-

(1) Article 263 implies a Kant-type categorical imperative, premised on and in the pursuit prima facie of the public interest, for the Council (e.g., a Union-States Council) referred to therein:

make recommendations“.

It leaves no room for the Union and any State to deviate from the recommendations. On the other hand, Article 279A does not imply any such categorical imperative for the GST Council, merely providing that it shall

make recommendations to the Union and the States“.

The recommendations of the GST Council, not being in the pursuit prima facie of the public interest but being limited to securing the respective revenue interests of the Union and the States, thus leave the Union and every State to take their own decisions on such recommendations, based on their respective judgments on the relevance of the recommendations for the actions to be taken by each in pursuance of the public interest;

(2) Article 263 cannot be invoked unless a “subject” of social concern (which may relate to one or more “matters” of legislative competence) is identified and the nature of duties to be performed by a Union-States Council, its organization and procedure are definable and a prior judgment that the establishment of a Council (say, a Union-States Council) would serve the public interests is made by the President. The terms of reference of the Goods and Services Tax Council constituted as stipulated in the forthcoming Article 279A and  its composition and procedure for decision-making as to recommendations (on matters other than “compensation”) for mutual yielding of political spaces by the Union and the States would on the other hand stand stipulated in the Constitution and would be limited to enable-

(i) the redefinition of the respective legislative competences of the Union and the States in levying taxes concurrently on the intra-state supplies of goods and/or services from time to time; and

(ii) the definition of the so-far-undefined term “integrated goods and services tax” (“IGST”), denoting a tax to be levied in accordance with the Constitution by the Union at a uniform all-India rate on inter-state supplies,

without any requirement of prior judgment of the President that such redefinition would serve the public interests; and

(3) The procedure for the Council established by invoking Article 263 would be defined by the President (i.e., the Government of India) but such definition would relate to the subject chosen in the public interest for investigation and discussion by the Union and the States having a common interest (e.g., compliance with Article 37).The procedure for decision making by the GST Council on the redefinition of the legislative competences of the Union and the States would on the other hand be subject somehow to compliance with clause (8) of Article 279A (which does not restrain the Council in any way) as well as clause (9) of that Article (which restrains the Council in the manner specified in the Illustration at the end of the Statement of Objects and Reasons) to the extent the provisions in those clauses are reconcilable by resort, if necessary, to clause (11) of that Article, but be unrelated to-

(i) any expert investigation of the social and revenue consequences of recommending every candidate option for the redefinition of legislative competences; or

(ii) the ratio of-

(a) the total revenues (exclusive of the relevant central tax revenues assigned to the States) which accrued in a mutually-agreed representative period to the Union from the central taxes to be subsumed in the ‘GST’ Law; and

(b) the total revenues (inclusive of the relevant central tax revenues assigned to the States) which accrued in the same period to the States and to the local bodies from the central and state taxes to be subsumed in the ‘GST’ Law.

The Union seeks to acquire political space from the States to levy central tax on down-steam transactions beyond the stage of production, including  on B2C transactions. If law-making by the Union and the States would have to aim at serving the public interests, would the need for an offer by the Union and acceptance by every State, of monetary compensation to secure the redefinition of the respective legislative competences arise? The unequivocal answer would logically be:

“no”.

It would therefore be logical to note that any redefinition of the respective legislative competences of the Union and the States contingent on the offer and acceptance of such monetary compensation is prima facie evidence that service of the public interests would not be the primary object of the recommendations of the GST Council. The requirement to serve the public interests would however be a constraint envisaged in Article 37 on the institution of ‘the State’, in which the Goods and Services Tax Council, if and when constituted, would also be embedded. At any rate,  the provisions of the law relating to “compensation” referred to in section 19 of the Bill would have to be consistent with the requirements of Articles 245 and 266. It is important to note that the matter “compensation” referred to in section 19 of the Bill and omitted from section 12 of the Bill, would not relate to Article 246A but would relate to Entry 97 of the Union List in the Seventh Schedule to the Constitution; and it would not be included in the “other matters” referred to in sub-clause (h) of clause (4) of the forthcoming Article 279A. The contextual principle noscitur-a-sociis of statutory interpretation (vide Bennion ,1984:823) would relate the word “other” in the said  sub-clause to matters in the same context as the matters specified in the other sub- clauses of clause (4) of the forthcoming Article 279A. The context implied in the said clause (4) is to define from time to time the extent of overlap in the legislative competences of the Union and the States in-

(a) concurrently levying goods and services taxes in accordance with clause (1) of Article 246A; and

(b) facilitating the levy at an uniform all-India rate by the Union of goods and services tax in accordance with clause (2) of Article 246A.

The matter “compensation” cannot thus be construed to be one of the matters to be considered by the GST Council referred to in section 12 of the Bill.

Article 263 implies treaty-like recommendations (of a Union-States Council if established as stipulated therein to serve the public interests) based on which the Union and the States would be politically committed to well-coordinated law-making (on every relevant matter of legislative competence) and action focused on a well-chosen “subject” of social concern and in the service of the public interests. The concern may for example be the social problem of the political economy, viz., “Minimizing, without any jeopardy to the national income, the ‘transaction costs’ unfairly impeding potential market-participants by  avoidable participation constraints”  Such minimization would lead naturally to what is characterized in the contemporary media as “ease of doing business“. This would be in spite of the fact that such characterization ignores the need for harmony in the functioning to the institutions of ‘the State’ , ‘the Bureaucracy’ and ‘the Market’ and emphasizes the role of ‘the State’ only. On the other hand, the forthcoming Article 279A does not imply any coordination of action which would rely on well-coordinated procedural protocols of governance, including entrustment of functions and delegation of authority by transcending “levels” of government in accordance with the Constitution. It aims mainly at a uniform ad valorem rate of SGST which would be substantively common in application in all the States  (presumably without resort to the procedure of lawmaking stipulated in Article 252 since that Article has not been referred to).

A common SGST rate applicable in all the States is envisaged as an aid to law-making so as to enable the definition of “integrated goods and service tax”, referred to in clause (4) of Article 279A but left undefined in the Bill even for the information of the lawmakers. In defining the term “integrated goods and services tax”, there is likely to be significant uncertainty in the lawmakers being able to arrive at a consensus on whether or not to include the relocation of inventories of goods from a place of business in one State to a place of business of the same entity or its agent or bailee/bailor in another State, and on the principles which ought to regulate the “distribution” of services from a place of supply to multiple destinations. It is also a matter of very grave constitutional significance to note that every law-maker would have to exercise his/her respective (and serious) judgment with long-term implications for the nation-

(i) in making political commitments to stable changes in the Constitution to be enacted pseudonymously in the name of the People as envisaged in Article 368; and

(ii) in molding the approach to the reformulation of ‘State’ policy, of the national and sub-national political party, if any, to which he/she may “belong” and which has been embedded in ‘the State’ since 1985 to exercise the authority referred to in the Tenth Schedule;

but no lawmaker has been made aware of the definition of the term “supply”, used in the forthcoming Articles 246A, 269A and 286 and in the forthcoming clause (12A) of Article 366 in the Bill.

The result may be that unless the procedure envisaged in Article 368 when followed does not lead to the enactment of the Bill as law because many lawmakers would like to be better informed, the Constitution would be amended without the lawmakers serving the Union and the States being aware of-

(i) the definitions of the terms “supply” and “integrated goods and services tax” referred to but left undefined in the Bill; and

(ii) the likely provisions of the state statutes  and central statutes including any central statute which would have to be made validly only by invoking the procedure stipulated in Article 252 if called for, after the commencement of the Amendment Act.

If no central and state statutes are enacted levying appropriately defined IGST and “concurrent” CGST and SGST on well-defined and dis-joint (i.e., non-overlapping) subsets (e.g., “inter-state” and “intra-state”) of transactions resulting in the “supplies” of goods or services or both after such commencement, there would be business as usual (i.e., there would be no significant change in the transaction costs to be confronted even by way of indirect taxes by the entities, including the actual  and potential domestic producers, consumers and exporters, embedded in the institution of ‘the Market’). This would be in the same manner in which business has continued as usual

(i) after the amendment of 1982 which has not been followed by the levy of central consignment tax  envisaged in that amendment; and

(ii) after the amendment of 2003 which has not been followed by the levy of “concurrent” central and state service taxes envisaged in that amendment.

The Constitution (115th Amendment) Bill,2011 also did not define the term “supply” even though it avoided the use of the term “integrated goods and services tax” ( i.e., IGST, which had been coined in the First Discussion Paper brought out by the ECSFM referred to earlier); and it was opposed by some States. If, unlike that Bill, the amendment of the Constitution as envisaged in the Bill (i.e., the 122nd Amendment Bill of 2014) were to become a reality somehow and to be followed by the enactment of central and state statutes for the levy of IGST,CGST and SGSTs, the rules of the game for the agents in the economy embedded in the institution of ‘the Market’ would change to the extent they relate to domestic trade or commerce. Since the provisions made in the forthcoming Article 246A do not relate to the legislative competence of the Union to levy goods and services tax on the supplies made in the course of import into or export out of India, the Union would have to invoke the residuary Entry 97 in the Union List to levy such taxes, but we have assumed that the Union would mimic the post-1956 policy; and consequently the Union would not levy any such taxes. As such the rules of the game which have prevailed since 1956 would continue in regard to international trade or commerce even though regimes regulating the same by requirements of many licenses and permits have ceased to be. We have also assumed that the terms “supply” and “integrated goods and services tax” would be defined eventually as stated in section II.  Subject to such definitions, it would be relevant to ascertain if the change in the rules of the game would enable ‘the Market’, ‘the State’ and ‘the Bureaucracy’ to function as institutions of national life harmoniously so as to minimize the transaction costs faced by the actual and potential market-participants, simultaneously complying with the stipulations made by the People in Articles 37, 38 and 39.

Firstly, the forthcoming Article 246A continues the distinction of domestic supplies of goods and/or services as either “inter-state” supplies  or “intra-state” supplies, thus making the inter-state borders within the nation socially relevant in enforcing the ‘GST’ Law. The provisions of Article 246A would thus be path-dependent on the distinction made by the 1956 amendment of the Constitution which followed the Matthai Commission recommendations of 1954. It is noteworthy that those recommendations were made without any political commitment on behalf of the Union and the States. In suggesting constitutional amendments, Matthai Commission ignored its own recommendation for the establishment of an All-India Taxation Council by invoking Article 263 to make appropriate recommendations based on political commitments on behalf of the Union and the States. The princely ( i.e., “Part B”) States ceasing to be in 1956, it would not be illogical to observe that the 1956 amendment  could have avoided the distinction based on inter-state borders if only the Union and the States mutually committed politically to invoke the provisions of Article 258 and of Article 258A creatively. It is very significant to note that Article 258A was inserted by the same amendment in 1956 but is unused so far. Subject to defining business-to-business (B2B) sales and business-to-consumer (B2C) sales appropriately, to amending Article 286 appropriately (or omitting that Article and invoking Article 252) and to redefining the legislative competences of the Union and the States to enable levy taxes respectively on all sales and B2C sales (instead of on inter-state and intra-state sales)-

(i) every State or its officers could be entrusted with the function of levy and collection of a central tax on B2B and B2C sales of goods from entities which had a place of business in only one State along with the collection of the respective state tax on B2C sales of goods; and

(ii) the Union or its officers could be entrusted with the function of levy and collection of every state tax on B2C sales of goods from entities having places of business (through branches or agents) in multiple States along with the collection of central tax on B2B and B2C sales of goods in the State in which every such entity had its principal place of business.

The Bill which provides for the legal relevance of inter-state borders within the nation cannot logically enable the institutions of  ‘the State’ and ‘the Market’ to function as institutions of national life for the purposes of ‘the State’ meeting the requirements of Article 38. The indirect tax bureaucracy serving the Union and every State would, instead of functioning as institutions of national life, also function respectively as a central institution or as a state institution in the concerned State, and the direct tax bureaucracy would function as a central institution to collect tax on incomes excluding agricultural incomes, unless it is possible to invoke article 312 in the national interest and create an All-India Taxation Service and entrust functions to direct and indirect tax bureaucrats possessing a common esprit de corps by creatively invoking Articles 258 and 258A. The creation of such an All-India Service would enable ‘the Bureaucracy’ to evolve and function as an institution of national life in due course and would facilitate entrustment of functions and delegation of powers across the national and sub-national levels of government.

Such creation  would also enable ‘the State’ to overcome in due course the continuing constraints inherited from the past colonial rule under the Crown. The Crown, in the pursuit of the political-hierarchical principle of paramountcy, had to accommodate the revenue requirements of the erstwhile princely States by treating them at par with the provincial governments of British India and by delegating similar authority to the provincial governments to levy  indirect excise duties on a subset of production, viz., the production of alcohol and narcotics, and to levy direct taxes on a subset of incomes defined as “agricultural incomes”. “National life” referred to in Article 38 ought to imply, in the case of the Republic constituted as a Union of States, the abolition of any such hierarchical relationship premised on any principle extraneous to the Constitution, between the national and sub-national political entities (viz., the Government of India and the State Governments) embedded in ‘the State’.

Secondly, since the Bill is aimed only at achieving harmony in specifying a uniform ad valorem rate of SGST applicable in common in all the States, it would disregard the requirement of harmony in the functioning of the institutions of ‘the State’, ‘the Bureaucracy’ and ‘the Market’ in accordance with the post-‘GST’ governance protocols. Coordination of approach to policy between the Union and the States as would be required in compliance with the forthcoming Article 279A would be limited to the matters referred to in that Article. There would be no coordination across levels of government, of policy and action by ‘the State’ and ‘the Bureaucracy’ which would be focused on minimizing the transaction costs faced by the actual and potential market-participants by applying the received wisdom from the theories referred to in section III.

Disharmonies in the functioning of the institutions of ‘the State’, ‘the Bureaucracy’ and ‘the Market’ would result in uncertainties in  the assessments of the IGST/CGST/SGSTs due and payable by specific taxable entities. There would be no one-to-one correspondence between a taxable entity and a primary central-cum-state GST authority with the requisite territorial jurisdiction. This implies that there would be no one-to-one correspondence between a taxable entity and a unique hierarchy of post-primary central-cum-state GST authorities having the requisite functional jurisdiction to correct the errors at the primary or other lower level of the hierarchy. Therefore for any taxable entity there can be no unique assessment of the IGST/CGST/SGST due and payable by the taxable entity to the best of the judgment of a unique primary GST authority. In addition, since the principle of “harmony” would not stand specified in Part IV of the Constitution, the restraint on the jurisdiction of the Courts stipulated in Article 37 would not apply. The jurisdictions of many Courts would be invoked by the taxable entities and the various IGST/CGST/SGST authorities seeking the confirmation by the Courts of competent jurisdiction of their respective interpretations of harmony in the light of the myriad facts and circumstances of various transactions. There would be unavoidable time lags in reconciling the various (and often conflicting) interpretations by superior Courts and ultimately by the Supreme Court. Transaction costs involved in hedging against uncertainties in the interpretation of the provisions of law and in the multiple assessments of dues would remain unaddressed by ‘the State’ policy.

Thirdly, as we have assumed in section II, there would be no lawmaking on matters other than those dealt by the statutes levying the indirect taxes which would be replaced by the levy of IGST, CGST and SGSTs. This is because unlike the “discussions” in a Council established by invoking Article 263, the “functioning” of the GST Council constituted by invoking the forthcoming Article 279A would not be focused on any “subject” of social concern which may relate to multiple matters of legislative competence referred to in Articles 246 and 248 in addition to the matters specified in Article 246A. The functioning of the GST Council would relate only to the matter of “concurrent” legislative competence of the Union and the States for the levy of GST on intra-state supplies and somehow also to the matter of the “exclusive” legislative competence of the Union for the levy of GST (christened “integrated goods and services tax”) on inter-state supplies referred to in the forthcoming Article 246A. There would thus be no linkages between the ‘GST’ Law and non-‘GST’ Law including, most significantly-

(i) the law relating to the levy of direct taxes on the agricultural and other incomes of the entities which incur liabilities to pay IGST, CGST and SGSTs; and

(ii) the law relating to the licensing of specific premises by local bodies enforcing their bye-laws for use by suppliers to receive goods and services as “inputs” and to add values to them therein.

The direct and indirect tax regimes and local government regimes overseeing the use of land and buildings within their respective jurisdictions and licensing professions, trades, employments and callings for purposes of levy of local taxes ought to rely dynamically on all possible data relating to (truly/untruly vouched and unvouched) transactions and on the signals in ‘the Market’ and on analytics based on  models of behaviour of the actual and potential market-participants which would have to be consistent with Article 37 read with Articles 38 and 39. The dynamics in the functioning of ‘the Market’ encompasses the autonomous entry and exit of specific entities which supply goods and/or services by transcending the entry and exit barriers. Undue extraction by select market-participants of surplus values (by way of “information rents”) which would form part of the incomes of such economic agents would thus remain undetected owing to lack of coordination of the protocols of governance of direct and indirect tax regimes and local tax regimes to the extent required.

Fourthly, and most importantly, e-governance would be limited only to the regimes for registration of taxable entities, furnishing returns  and assessments respectively of the IGST, CGST and SGSTs due and payable subject to oversight of “input” -tax credits in computing the amounts of IGST (or, as the case may be CGST and the relevant SGST) payable out of the IGST or CGST or the relevant SGST due, so as to ensure that there is no “cascading” of the incidence of IGST/CGST/SGSTs. According to the assumptions made in section II, there would be no linkage to the regimes for the licensing by the local bodies of the premises used by suppliers to receive goods and/or services to add values and to make subsequent supplies of the same or other goods and/or services there from. Registration regimes envisaged under the central statutes for the levy of CGST and IGST, even though they may be State-wise, would not be linked to the registration regimes envisaged in the respective state statutes. Entities (individuals and others) which may (or may not) obtain licenses from the local bodies having the requisite territorial jurisdiction for use of specific static or mobile premises for receiving goods and/or services for purposes of adding values before subsequent supplies are made from those premises would be free to function without seeking registration under the state and/or central statutes if their respective (so-far-undefined) “turnover” in any relevant accounting period is below the relevant state or central “threshold” specified in law according to their respective judgments. At any rate, since CGST and SGST would be levied concurrently on intra-state supplies, it would have to be ensured in drafting the central and state statutes that the definition of “turnover” under the central statute excludes the amount of SGST paid as part of the consideration and the definition of “turnover” under every state statute excludes the amount of CGST/IGST paid as part of the consideration. Otherwise there would be “cascading” of the levies. The definition of “turnover” under the IGST statute would not be problematic if SGST rates common to all States are specified in law made in the manner stipulated in Article 252.

Presumably there would be an overlap in the  mutually independent central and state oversight protocols to ensure that the turnover of every entity in every relevant accounting period has not breached the central and/or the state thresholds and that such entity need not comply with the requirement of mandatory central or state registration in any accounting period. The central and state GST statutes may not recognize any role for the local bodies to oversee that the places of business used by the suppliers do comply with the requirements of the local bye-laws. Exemption of any specific entity from state and/or central registration is likely to be tacit and is not likely to require any formal decision to grant specific exemption on the part of the respective central and/or state primary GST authority having the requisite territorial jurisdiction over the relevant place of business. There would however have to be no exemption in the local government regimes for the licensing of specific premises for the receipt of goods and services for purposes of value-addition therein. Unless the state and central thresholds are the same, there would, in case the central threshold is higher than every state threshold, be three categories of the taxable entities in every State, viz., (i) entities registered under the central and state statutes; (ii) entities registered under the state statute but not under the central statute; and (iii) entities registered neither under the state statute nor under the central statute. It would be important to keep in mind the fact that exemption of any supplier entity from registration would not imply freedom for that entity from owing any IGST/CGST/SGST; it would be good practice of government to declare in law that the amount of consideration charged by any unregistered supplier would be deemed to include the amounts leviable as IGST/CGST/the appropriate SGST as the case may be; and to require the supplier entities, big or small, to include such declaration duly signed on behalf of the supplier entity in the supply-vouchers required to be issued by them.

As long as part of the tax revenues accruing to the Union are to be assigned to the States, it may be wiser for the political leadership in every State to yield political space exclusively to the Union to levy GST on B2B supplies instead of on inter-state supplies subject to the Union yielding political space to every State to levy GST on B2C supplies without any restriction on rates to be specified by the State Legislature other than floor-rates common to all the States. (Such floor rates would prevent a “rate-race to the bottom” among the States in order to retain the presence of  taxable entities in the respective States.) This would leave every State free to specify the rate of its SGST not below such floor-rate as may be left to be specified by the Parliament in the manner envisaged in Article 252. That way no State needs to make a long-term political commitment to a rate of SGST applicable in common in every State as envisaged in the deliberations in the ECSFM referred to above. However , it is likely that the option of applying B2B and B2C classification of transactions and of avoiding the inter-state and intra-state classification would not come up before the GST Council since it is not envisaged in the Bill.

Path dependence on the practices obtaining prior to the commencement of the ‘GST’ Law is likely to lead to a formal provision in every central and state statute stipulating that every supplier, small or big, registered or not registered, would have to issue a “true” supply-voucher. Petty transactions would be exempted from this requirement, though there may be variations in the central and state statutes in providing for such exemptions. Some statutes may provide a caveat to such exemption, requiring the supplier to issue a supply-voucher, if the recipient demands such issue even for a petty transaction. It is likely that in spite of specifying somehow a common “rate” of CGST/SGST/IGST applicable throughout India, there would be no requirement that the supply-voucher would have to be got printed in a format and a colour-scheme recognizable throughout India as evidence of the transaction vouched therein and issued from a pre-programmed hand-held, or other, electronic equipment. For the first time a central tax (CGST or IGST) would apply in the Republic to B2C transactions also. Since domestic consumers would not formally be “taxable persons” under the ‘GST’ Law, B2C transactions need strict oversight by central and state tax bureaucracies so that there would be jeopardy neither to tax revenues nor to national income. At any rate it would be in the public interest to require that every supply-voucher issued by a supplier entity which is not registered under the central and state statutes should carry a declaration signed by the supplier that the consideration charged for the supply includes the amounts owed to central and state governments respectively as CGST and as SGST. Such a requirement would disable B2C suppliers from offering to charge a lower consideration from any consumer if the consumer does not insist on a written/printed supply-voucher.

It may be possible to design electronic equipments in which the identity of the taxable entity and the particulars (e.g., license number relating to the place of business at which values were added before the supply, registration or exemption-from-registration number(s) relating to the supplier entity licensed to use those premises etc) relevant to the enforcement of the central/state/local enactments can be embedded. It may also be possible to update the relevant software embedded in the equipment every time there is change in central and/or state rate of levy of GST or state surcharge if any and to disable the equipment after notice in case of infraction of central/state/local law. It may be possible to devise electronic or physical governance protocols to transfer to a central data-base the information as to the particulars recorded in the supply-vouchers issued and orders/indents for supplies placed  from the equipment in every accounting period. The data-base would have to be at the national level and would aid in making the governance of the GST regimes data-and-analytics-based. Over time the data-base would also be a rich source to derive appropriate insights and to fine-tune various aspects of the ‘State’ policy and action relating to the national economy.

It may also be possible to “nudge” the B2C suppliers to invariably issue true supply-vouchers by incentivizing consumers to demand such issue. The incentives may be in the form of income tax credits to such consumers or deductions in computing taxable incomes of such consumers or many moderate prizes to be awarded in every accounting period/in every primary GST jurisdiction and select large prizes in every accounting period at the State levels and one bumper prize in every accounting period at the national level , in well-organized official lotteries in which the extent of participation would be directly proportional to the total amount of CGST and SGST paid by individual consumers as part of the price for supplies during every accounting period (e.g., every quarter). The governance or e-governance protocols may also include participation in lotteries on the basis of the particulars of the amounts of CGST and SGST disclosed, subject to penalties for perjury, in solemnly affirmed/sworn affidavits in prescribed forms as part of the prices paid to well-identified suppliers as consideration for unvouched/untruly vouched transactions.

It may be possible to design the requisite software so as to distinguish between B2C supplies and B2B supplies (in which cases references to supply order/indent, identity of the recipient and the address of the location specified by the recipient as “destination” may be relevant). It may be possible to distinguish by appropriate colour schemes (e.g., pink or blue or other coloured side borders) between vouchers to be issued by the supplier entities registered under the central and state GST statutes or by those registered only under the state statute or by those not registered under any such statute. It may be possible to design the equipment to provide for swiping of PAN or ADHAAR based magnetized identity cards in addition to credit/debit cards. According to the assumptions made in section II, it is likely however that none of the foregoing possibilities would be considered by the GST Council. This would be so since the emphasis in the forthcoming Article 279A would be to reach a political compromise on the matters specified in the various sub-clauses of clause (4) of that Article and not on “other matters” such as the oversight of the issue of a true supply-voucher in respect of every supply of goods and/or services by every supplier in compliance with law. Though such oversight is practically unavoidable in the public interest, it is most likely that it would not be interpreted as a matter referred to in sub-clause (h) of clause (4) of that Article.

Fifthly, the Bill does not refer to a “clearing house” as suggested by the ECSFM. Even the Statement (of Objects and Reasons) in support of the Bill does not refer to the instrument of a “clearing house”. If such a legal entity has to be created to manage the transfer of credits of IGST availed by taxable entities in computing the SGST payable out of SGST due in any accounting period from the Consolidated Fund of the State concerned to the Consolidated Fund of India and the transfer of credits of SGST availed in computing the IGST payable out of IGST due in any accounting period from the Consolidated Fund of India to the Consolidated Fund of the State concerned as suggested by the ECSFM, law has to be enacted by an Act of Parliament for application in common in every State in the manner envisaged in Article 252 so as to enable compliance with Article 266

‘The Market’ may be represented as a “network” (as referred to in section III) in many ways, for example-

(i) by characterizing every node in the network as a “place of business” where values are added before supplies of goods and/or services are made there from, without ignoring movement of goods from one place of business to another otherwise than in pursuance of an agreement for the transfer of property in the goods;

(ii) by characterizing every node as a supplier entity (whether or not liable to pay IGST/CGST/any SGST) so that the role of every supplier as a direct as well as indirect tax-payer can be emphasized and movement of goods from one place of business to another without any transfer of property from one entity to another can be ignored;

(iii) by characterizing every node as an entity taxable under ‘GST’ Law, ignoring suppliers who would not be liable to pay IGST/CGST/any SGST, just to limit the governance protocols without regard to oversight of those exempted from registration as taxable entities;

(iv) by characterizing every node as a well-defined good or service so as to implement governance protocols goods-or-services-wise in a rate-of-tax-sensitive manner.

Consistent with the observation of Gwyer CJ of the Federal Court in the CP and Berar Case (1STC 1), it would be logical to assume that the Union and every State would levy and collect their respective direct and indirect taxes from “the same taxpayer“, since taxes would ultimately have to be paid by, or collected/ recovered from, an entity called a “taxpayer” ( and not from a “place of business” or from a “good or service”). Subject to zero-rating true values of inter-state supplies made by the movement of goods without any transfer of property rights, a hybrid of (i) and (ii) above would be to characterize every node as a “single-State” and a “multiple-State” supplier functioning from a “unique/principal” place of business in the State concerned or a “principal” place of business in one of multiple States in India or a place of business outside the customs frontiers of India. It is likely however that the ‘GST’ Law would lead to a characterization which may not differ very much from (iii) above.

Even though there would prima facie be a paradigmatic change in tax regimes in transiting to “concurrent” levy of taxes for the first time in the Republic, the assumptions made are designed to somehow avoid any paradigmatic disruption in the cadre organization and deployment of the bureaucrats (e.g., by invoking Articles 258, 258A and 312). They would at any rate be required to serve the Union and the States in common for-

(a) continuously identifying and registering (or exempting from registration) in accordance with the applicable provisions in the central IGST statute and the concurrent CGST and SGST statutes in every State, actually/potentially taxable entities which add values to goods and services (either by themselves or through their agents) in a single place (or in multiple places) of business located within the territorial jurisdictions of, and licensed (or not licensed) by, one (or more than one) local body functioning in one (or more than one) State, and overseeing the compliance with the exemption-from-registration regimes {including substitute-taxable-person (or reverse-charge) regimes};

(b)requiring by law (either with incentives limited to “input” tax credit or nudging in addition through appropriate legal incentives to domestic consumers such as income-tax credits and/or rights to participate in State lotteries) small (and big) entities supplying goods and services to issue ( ideally after printing from a pre-programmed electronic device in which applicable rates of tax may be updated from time to time) in the prescribed manner vouchers for every transaction of supply as documentary evidence of the true particulars (including true identities of the parties) of the transaction as revealed therein and recognizable as formal documentary evidence of the transaction vouched therein throughout India (since central levies viz., CGST or IGST would legally be part of the value of supply vouched therein, whether or not separately vouched as such); and overseeing compliance with the conditions of exemption in case the issue of supply voucher is conditionally exempted throughout India in the public interest in respect of transactions included in any well-defined subset.

(c) assessing (and re-assessing, if need be) the central IGST on inter-state supply or concurrent CGST and concurrent SGST on intra-state supply due ( i.e., without availing “input” tax credit according to law) and payable (after allowing “input” tax credit if any to the extent provided in law), by accurate choice of the applicable statute and/or accurate interpretation of its provisions and in accordance with  the respective best (or other) judgments of the primary assessment authority (or authorities) with territorial jurisdiction(s) over all-India-multiple-places-of-business (or all-State-multiple-places-of-business or single-place-of-business) of any taxable entity in every accounting period;

(d) securing in the absence of governance protocols for current stage state tax suspension based on declarations/certificates of out-of-State market-participants in statutory forms, by protocols of governance ( vide clause (2) of Article 266 and Article 283) of prescribed public accounts (or otherwise), payments of dues accruing according to law as IGST due and payable by every taxable entity before clearance of imports at the customs frontier (where applicable) or before every inter-state supply within India, or of CGST and the appropriate SGST immediately before every intra-state supply is made from a place of supply or after clearance of exports at the customs frontier (where applicable) into the appropriate Consolidated Fund;

(e) collecting the dues after “best-judgment” or other assessment and recovering overdue payments from defaulters of CGST and any SGST by invoking the law made in accordance with Entry 43 of the Concurrent List from any place in India  and accounting for the revenues collected and/or recovered by having the same credited to the respective Consolidated Funds;

(f) correcting, when deployed to perform such functions as post-primary  IGST/CGST/SGST authorities, errors in the decisions {including those on assessments respectively of IGST, CGST and SGST and determination of other dues (e.g., interest on overdue payments or penalties for non-compliance)} at the level of the primary IGST/CGST/SGST authority/authorities with the requisite territorial jurisdiction/jurisdictions or at the level of every subordinate post-primary IGST/CGST/SGST authority/authorities with the requisite functional jurisdiction/jurisdictions;

(g) giving effect to the final orders made by the Courts in any dispute relating to GST liability incurred by any specific person arising from the enforcement of IGST, CGST or any SGST statute or relating to differences in the interpretation of any recommendation of the GST Council by the Union and any one or more State(s) or between two or more States as complying with the stipulation of the forthcoming principle of “harmony” to be enacted in Part XII of the Constitution (thus removing the restraint enacted in Article 37 on the jurisdictions of the Courts);

(h) assessing and collecting direct taxes on the incomes which accrue to the entities engaged in businesses and professions, by addition of values to goods and services before making subsequent supplies of goods and/or services; and

(i) creating and maintaining a national database from which, apart from deriving information of value for purposes of course corrections in economic policy to be pursued by ‘the State’ and facilitating interactions between the taxable entities and the tax authorities to enable delivery in the normal circumstances of the services/decisions of the tax authorities on line without the agents representing the taxable entity having to visit the IGST/CGST/SGST offices

(1) the current particulars of the status of registration or exemption-from-registration of every market-participant and of the identity or identities of the place or places of business authorized by the appropriate local body to be used to receive goods and services for purposes of adding values to enable subsequent supplies of goods and services would be accessible publicly on real-time basis to facilitate potential transactions;

(2) confidential information and evidence available from the periodical returns of incomes and of values of supplies of goods and services furnished and from other sources uploaded from primary direct and indirect tax authorities and other central, state and local enforcement personnel from time to time would be accessible by every primary and post-primary income tax, non-‘GST’ and IGST/CGST/SGST authority securely to enable best judgment assessments and reassessments when called for and to enable taxable entities to comply with law on line most of the time;

(3) particulars of discordant facts which need verification by physical inspections of the places of business of any market-participant may be ascertained confidentially for scheduling a well-coordinated inspection by either a local or a state or a central team of inspectors by avoiding repetitive inspections by various inspectors and keeping the number of such inspections of the place or places of any specific market-participant to the unavoidable minimum; and

(4) data for continuing research into the values of the supplies of goods and services transacted by typical suppliers, may be obtained in order to ascertain from time to time the amounts of CGST/ SGST to be pre-fixed as payable in any accounting period by suppliers of every type who are conditionally exempted from registration under the central and state statutes.

The ‘GST’ Regimes would however be designed, without having to invoke Articles 258,258A or 312, to help-

(i) identify the State within whose territory the place of supply associated with a taxable entity is situate irrespective of the place of business if any appointed as destination in the contract between the taxable entity and the corresponding second party to the relevant contract; and

(ii) enforce the constitutional restrictions (vide the forthcoming Articles 286 and 269A) on the legislative competences of the States by sub-classifying B2B and B2C transactions of “supply” (of “goods” or “services” or both)  with reference to “non-Market” criteria, which would rely unavoidably on legal fictional phrases, as ‘”supply” in the course of import into India’, ‘”supply” in the course of export out of India’, ‘”supply” inside a State’, ‘”supply” outside a State’ and ‘”supply” in the course of inter-state trade or commerce’.

Margaret Levi (“Of Rule and Revenue“) pithily observes, “the history of state revenue production is the history of evolution of the state“. Political entrepreneurs elected to Provincial Assemblies after the commencement of the Government of India Act,1935 laid the foundation for the evolution of the institution of ‘the State’ in India by starting to levy taxes payable by their constituents. They were however not enlightened enough in their interactions with the Constituent Assembly in 1948 to persuade that Assembly to avoid the insertion of Article 286 in the Constitution which placed such restrictions on the legislative competences of the States as had not been envisaged even by the colonial rulers in the pre-Independence days. A feeling of self-incurred tutelage under the colonial bureaucracy and the colonial Courts presumably led them to the erroneous (and parochial) belief  that a political entrepreneur elected to public office at the sub-national level, not being a member of the “steel-frame” appointed in London under the authority of the Crown, is not to represent the ‘People of India’ irrespective of their domicile but to represent, just as the native princes did in any Princely State in the erstwhile Empire, the  people of the sub-national unit only. Arguably the continuance of such feeling and belief tends to impede the evolution of ‘the State’ as an institution of “national life” in a Union of States which is no longer an Empire.

The collective designated ‘the People of India’ was formally recognized as the integral whole embedded in one nation-wide fraternal community in the Constitution in 1950 The evolution of such community has also been discovered from history. The term ‘the People of India’ was in fact referred to as such even in the 18th century by Edmund Burke in his well-known impeachment of Warren Hastings, the first Governor-General of India, in the House of Commons in London. The restrictions on the legislative competences of the States (including Part A States) since 1950 led to impediments in the evolution of ‘the State’ in India as an institution of national life.

The impediments to such evolution were aggravated by further restrictions in 1956 on the legislative competences of the States, even after a reorganization of States, by amendments to Article 286 and 269 and by the enactment of the Central Sales Tax Act,1956. The amendment of 1956 effectively curtailed the capacity of ‘the State’ to function as an institution of national life by further restricting the legislative competences (to levy taxes on the sale or purchase of goods) derived from the Constitution by State Legislatures embedded in it, to competence to exercise such power only within such limits as stipulated by the Union; and disabled every State from collecting taxes on the sale or purchase of goods nation-wide by recourse to the legally valid “nexus principle” from dealers who did not have a place of business in the State.  This was even though recovery of state tax dues from defaulters could be enforced even outside the State territory in accordance with law made in the matter listed at entry 43 of the Concurrent List. By recognizing the relevance of inter-state borders in the levy and collection of taxes, law created an environment consisting of legal barriers within the nation for the institution of ‘the Market’ from 1956 which prevented that institution also from functioning as an institution of national life. The 122nd Amendment Bill would continue the same environment for the institution of ‘the Market’. The problem of levying taxes on inter-state consignment of goods which could be set-off on subsequent supplies by compliance by market-participants with the law has defied solution so far and as such the prospects for minimizing the related transaction costs continue to be dim.

More significantly, the amendment of 1956 dispensed with the “destination principle” (of collection of taxes on the sale or purchase of goods which were delivered therein for consumption) which had been recognized as an important aspect of ‘State’ policy in clause (1) of the pre-1956 Article 286 even in restricting the legislative competences of the States. As noted above, the destination principle is not being reinstated unambiguously in the 122nd Amendment Bill. The ‘GST’ Law would emphasize the relevance for the revenues accruing to ‘the State’, of the legal concept of “place of supply” {as the place at which the IGST accrues or CGST and SGST accrue as the case may be, irrespective of whether the supply is B2B or B2C and of what happens at the destination of supply subsequently to the goods and/or services so supplied}. It would omit any reference to the “destination” agreed to by the parties to the relevant contract as the place where consumption of  goods and/or services made in the B2C transactions would follow or, as the case may be, values would be added to the goods and/or services made in the B2B transactions before subsequent supplies (of the same or other goods and /or services) are made within India or in the course of export out of India. The destination principle conforms to the classification of supplies as B2B and B2C as recognized by the institution of ‘the Market’. A law stipulating taxability of a transaction at a legally defined place of supply without reference to destination of supply voluntarily agreed to by the relevant parties would mislead the institution of ‘the Market’ to disregard the identities of the places of business where values are in fact added in the Indian economy in conformity with the by-laws made by local bodies.

The flexibility in the capacity of ‘the State’ to reformulate from time to time and to implement ‘State’ policy in the service of the public interests by applying the Directive Principles of ‘State’ Policy as stipulated in Article 37 got eroded with the cooption of the political parties as public authorities to exercise power to direct the Representatives of the People as envisaged in the Tenth Schedule inserted by the 1985 amendment. On the one hand the Constitution as amended in 1985 robbed the political parties of their status as social entities (not embedded in ‘the State’ and functioning in the environment of the institution of ‘the State’), which could translate peoples’ aspirations into options for mediation between the People and ‘the State’ in collaboration with rival political parties by transcending their respective prior ideologies in the pursuit of the public interest. On the other, political entrepreneurs who had their ears to the ground as to what would serve the public interest had to conform to the rigidities of  the options favoured by the respective party high-commands (in the short-sighted emphasis on their respective prior ideologies so as to distinguish themselves in the Peoples’ minds from rival high-commands) in order to remain somehow in the service of the People who elected them to the public office of representing them.

Let us sum up. The evolution of the institution of ‘the State’ as an institution of national life has been impeded by parochial attitudes with origins in the colonial past. This has been compounded by the political parties losing the status of socially relevant entities which can effectively intervene between the People and ‘the State’ since they have been embedded in ‘the State’ since 1985 to exercise the authority vested in them vide the Tenth Schedule. ‘The State’ is unable to conceive of a net-work underlying the institution of ‘the Market’ in a manner which would facilitate the coordination of actions to be taken at the Union, State and local levels. The “destination principle”, so passionately advocated by the original authors of the term “goods and services taxes” has all but been given up. The unsolved problem of how to levy taxes on inter-state “consignments” lingers.

Our observations lead us to conclude that even assuming that the terms “supply” and “integrated goods and services tax” are defined as referred to in section II and a proper constitutional status of “the clearing house” envisaged by the ECSFM is ensured –

(1) Inter-state borders being socially relevant to parochial sub-national units post-‘GST’ Law, the institutions of ‘the State’, ‘the Bureaucracy’ and ‘the Market’ may not be able to function as institutions of “national life” for purposes of applying the directive principle of ‘State’ policy (i.e., striving for welfare) stipulated in Article 38;

(2) Post ‘GST’ Law, transaction costs involved in hedging against uncertainties in the reconciliation of multiple assessments of IGST, CGST and the SGSTs due and payable and in the confirmation by the Supreme Court of the accuracy of any of the rival interpretations of “harmony” by taxable entities and the IGST/CGST /SGST authorities in the light of the myriad  facts and circumstances of the various transactions which would be brought to the notice of the Courts would disable ‘the State’ from applying the directive principles referred to in Articles 37 , 38 and 39 effectively; and

(3) ‘The State’ would be unable to play the role envisaged by Roger Myerson of ” a trustworthy mediator (which) maximally centralizes communication and makes honesty and obedience rational equilibrium strategies for the (economic) agents” in order to create a direct revelation mechanism which would be able to simulate fair communication strategies for them; and

(4) Undue extraction of surplus values by way of information rents through the use of the technique of mis-invoicing of domestic and inter-national transactions would continue owing to lack of coordination of policy and action focused on the subject of “Minimizing, without any jeopardy to the national income, the ‘transaction costs’ unfairly impeding potential market-participants by  avoidable participation constraints“.

The rules of the game constraining political enterprise by emphasizing service of public interests, including allocation of resources aimed at common good (or at the avoidance of accumulation of wealth to the common detriment) and securing and protecting a “just” social order, may be designated “Kshatriya Dharma“. These are what the Directive Principles of State Policy provide for in Part IV of the Constitution. The rules of the game constraining economic enterprise by emphasizing the relevance of the vector of relative pay-offs (based on prices discovered by market-participants truthfully revealing their respective types in reaching equilibrium) as the principal instrument in the allocation of resources, efficient performance of contracts, avoidance of wrong-doing, compliance with law, animal spirits in recognizing demand-supply gaps and taking risks to recognize and invest in ventures to avail production possibilities arising from the sectoral complementarities in industries which evolve from time to time and competition in realizing growth efficiency by discovering shortest paths in the transaction-values network, may be called “Vaishya Dharma“.

Harmony, being a virtue to be pursued in group music production is just a means. The end sought is melodious music. Similarly, harmony in governance is just a means. The ends are specified in the Directive Principles of ‘State’ Policy and include Welfare, Common Good and Avoidance of Common Detriment. The Statement of Objects and Reasons in support of the Constitution (122nd Amendment) Bill, 2014 omits any reference to the Directive Principles of State Policy. The ends sought by developing a harmonized national Market are thus not stated.

 

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