With the Lok Sabha passing four bills related to goods and services tax (GST) on 29 March, the stage is set for the rollout of GST.
While we may argue the design and structure is not flawless, in my personal view, in a complex democracy like India with its federal structure and states’ divergent needs, this is a pragmatic beginning. This will evolve into something ideal for India over the next few years.
GST will create a semblance of a common market where all goods and services irrespective of where it’s transacted will have a common treatment and a common rate.
Tax on tax, or cascading, was inherent in our existing tax regime where both central and state levies were applied on truncated value chain with no offset of credits inter-se these two government levies. For example, manufactured goods suffered central excise duty at the factory gate and later in the value chain, suffered central sales tax (CST) and value added tax or VAT (for inter-state sales or VAT (in intra-state sales) with no credit of the excise duty paid. Such existing cascading, among others, will reduce with both centre and state applying GST on the entire supply chain with offset available in the chain.
Considering we started rate discussions with 12% and 18%, the four slab rates of 5%, 12%, 18% and 28% with identified de-merit goods subject to levy of cess over and above peak rate of 28% was a dampener for the industry. The multiple rate structure is derived from the fact that current effective indirect taxes (both centre and state) over certain bands are maintained for revenue neutrality and linked to above rate slabs.
This basically means on the output side, there will be minimal reduction of tax costs under GST, unlike what was originally anticipated. States are unsure of what buoyancy GST will bring especially in services, though the VAT experience was positive and there is compensation underwritten by centre. The expected buoyancy in GST will help re-think these assumptions and the rates will moderate and converge to a two-rate structure over time.
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Another paradigm shift in GST regime is the new compliance mechanism. Every taxpayer under GST will report electronically monthly for every state they are present at transaction level or aggregate, with a single portal called GST Network (GSTN) and will match their GST credits basis their sales and purchase and pay net GST.
About 8 million PAN-linked taxpayers (the expected GST community) will be tracked electronically across the value chain through this portal; this will effectively plug tax leakages within the GST chain and will contribute to better compliance. Further, all GST registrations will be PAN-linked; so for any transaction in the value chain, the income tax authorities will have full visibility to ensure tax compliance.
The form of compliance reporting will be onerous to say the least for the majority of stakeholders and will require robust IT systems. So, from a point of ease of doing business, it will be tough in the initial phase, more so for the smaller players but will protect revenues.
Also, services industries like banking, telecom and others who dealt with single central levy of service tax from a compliance perspective will now need to deal with multiple state registrations in the proposed construct, which will be painful and expensive for these sectors.
The tabling of GST bills in Parliament has given a chance for industry to examine the finer aspects, as the devil lies in details. An analysis of law will need separate discussions. Some issues are as highlighted below.
Positive changes include the zero-rated treatment of supplies to Special Economic Zones with refunds for inputs, the extension of time limit for payment of tax to 180 days from 90 days for credit reversal with interest, this will provide industry some time to adjust to this self-policing mechanism. Also aligning treatment of actionable claims to existing taxing principle are all welcome steps.
On the negative side, clause that provided credit to telecom towers, pipelines in Model Law over a period of three years is missing. GST as a concept should provide credit for taxes on all goods and services used in business, but this change is more influenced by court judgements in the present context which is unfortunate. There is still no clarity on treatment of excise free zones under GST, there definitely won’t be an exemption but the exact mechanism of refund should be clear.
There is now light at the end of this long tunnel, early release of rules covering valuation, input tax credit and transition, along with rate fixation are now critical for implementation to happen on 1 July 2017.
Harishanker Subramaniam is indirect tax leader at EY.