Some thorny issues on GST

Decades ago, it was the inimitable Nani Palkhivala who took to the streets, joining a ‘morcha’ on the roads outside the University of Mumbai, to add his voice to the demand for the replacement of octroi, the corruption it embodied and the inefficiencies it brought to businesses looking for free movement of goods across city and State borders.  It has taken a rather long time for that demand to be fulfilled in the form of the Goods and Services Tax, the GST, which is correctly being billed as the single biggest reform initiative since independence. The RBI has described it as a “game changer”. Its implementation after years of political wrangling indicates that this is a reform whose time has finally arrived and the system could block it no more.

In the first flush of this success and the all-round attention as the nation prepares for the new tax regime, there is a sense of euphoria. It is easy to forget that while GST lays the groundwork for a better and more efficient regime for indirect taxes, there are several challenges that will come up in the short and long term as the tax takes effect.

The first of these challenges it would seem has been crossed with the announcement of a four tier tax slab, with the 18 per cent being the “goldilocks” rate for most services, with other slabs at nil, five per cent, 12 per cent and 28 per cent.  A welcome move is also a one per cent tax Collected at Source rate for e-commerce players against the legal provision for a levy for a two per cent tax rate.  The 18 per cent rate that will apply to many services, notably telecom, is higher than the 15 per cent at which services are currently taxed but the government has argued that the slab structure is revenue neutral.  Already, efforts have begun from various groups to lobby for a lower rate and this will be a pressure point that will build as the tax slabs are further clarified and finalised.

The success of the GST depends also on the backbone of technological infrastructure and critically on the Goods and Services Tax Network, or the GSTN, which is an entirely IT-based system. A separate GSTN company has been formed.  GSTN has selected 34 IT, IT-enabled services and financial technology companies, the so-called GST Suvidha Providers (GSPs), who would develop applications for taxpayers interacting with the GSTN.

The GST portal will prepare a summary of all payment confirmations received by it from banks every day and share the same with the RBI and accounting authorities for reconciliation. No tax money will come to GSTN; it will only get confirmation of payment from banks. The shareholding pattern would ensure that the Centre (individually) and the States (collectively) are the largest stakeholders at 24.5 per cent each. Together, the Government shareholding at 49 per cent would far exceed that of any single private institution. After the roll out of GST, the revenue model of GSTN would consist of user charges to be paid by all stakeholders. Thus, it is envisaged to be a self-sustaining and financially viable entity.

A  Reserve Bank report on State finances noted that 70 per cent of the existing registrants have already migrated to the GSTN system. While some of the large businesses have begun or are well into preparing for the GST implementation, there remains a big question on the millions of small enterprises, their GST readiness and indeed their capacity to work with a system that will depend on a proper trail of business across the supply chain that will be required for the proper calibration of tax paid and credits claimed.

As a single, destination-based tax on the supply of goods and services from the manufacturer to the consumer, GST will replace multiple taxes such as Central value added tax (Cenvat), central sales tax, State sales tax, octroi and a host of others. Empirical research and country evidence suggest that the  common base and common rates across goods and services and similar rates across states and between Centre and States will facilitate better tax administration, improve tax compliance, alleviate cascading or double taxation while also ensuring adequate tax collection from inter-State sales.

Since we are currently in the VAT system, it is interesting as well as instructive to present a comparative picture.  First, while VAT is imposed at different stages of production of goods and services, GST is levied at the national level on consumption of goods and services.  Second, credits of input taxes paid at each stage will be available in subsequent stages of value addition, which makes GST essentially a tax on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain. Third, it is a dual tax with both Central GST and State GST levied on the same base.  Fourth, the introduction of GST will not only include more indirect Central taxes and integrate goods and services taxes for set-off relief, but will also capture value addition in distributive trade and a continuous chain of set-offs from the original producer and service provider point up to the retailer. This would eliminate the burden of all cascading effects.

An equally important aspect of the successful implementation will be quick and seamless refunds, IT readiness, fiscal discipline and an efficient administration at the level of the States, which is where the GST may face some of its bigger challenges.  Finally, word will not be enough to contain the very real threat of profiteering as the new regime takes effect. The government will have to come down hard and set some examples if it is to ensure that firms do not capitalise at the cost of the common man.

(Jagdish Rattannai is Editor, SPJIMR. R K Pattnaik is Professor, SPJIMR. Views are personal)