Adoption of the GST is expected to ease doing business by managing the multiple indirect taxes applicable in the existing tax regime, removing cascading effect of taxes and widening the tax base. Further, experts estimate that this move can boost the GDP by 1%-2%. It is expected that such reforms will also help improve Indias image globally, given its consistently poor ranking in the ease of doing business index for the past few years.
Globally, GST has been adopted under different models depending upon variety of objectives to be achieved and their priority. The needs and concerns of developing and transitional economies may not be similar with that of developed economies. Though features like single rate with no exemptions, zero-rating instead of exemptions and immediate refund of unutilised credit are considered as desirable characteristics of an ideal GST regime, these may not be possible or desirable in the context of a particular country or a particular time, for political and practical reasons. Political considerations influence most tax policy decisions. More than 140 countries have introduced GST in some form with over 40 models currently in force, each with its own peculiarities. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has multiple rates and exemptions. In Australia, GST is a federal tax collected by the Centre and distributed to the states. On the other hand, Canada operates largely on a dual GST model. In India, given the federal structure, the framework has been laid down in order to bring in a dual GST model with concurrent levies at the Central and state levels.
However, the implementation of GST is not free from impediments. The necessary constitutional amendment will need the support of two-thirds of both Houses of parliament, and the BJP does not hold a majority in the fragmented Upper House. Further, half of Indias states will also need to approve GST for it to become a law.
States have historically insisted on the exclusion of certain goods like liquor, petroleum, alcohol, etc from GST, along with retention of the power to levy and administer municipal and entry taxes. Thus, the cascading effect on such taxes would continue under GST regime if such demands of the states are accepted. Additionally, the successful implementation of GST is contingent on the availability of a robust information technology network to administer the levy and collection.
In the past, lack of agreement between the Centre and states, particularly BJP-ruled Gujarat and Madhya Pradesh, had delayed GST, originally scheduled for rollout on April 1, 2010. However, with BJP at the Centre, some of these hurdles should not arise. However, it would have to be seen as to how the state-specific demands are addressed. The same may not be possible without compromises and granting concessions. One of the solutions could be estimating the impact of GST on the revenue of the states for the initial period, and compensating the same adequately. Such a measure would entirely be dependent on the availability and mobilisation of funds. Further, compromises could be made to ignore the impact of cascading effect of state levies, and decentralise the same at the state level for gaining confidence.
The task in hand for the new government is far from easy. The biggest challenge is to ensure smooth phase out of CST, CenVAT, and entry of GST by bringing effective transitional provisions to ensure that none of the stakeholders are at a loss. Further, it needs to be ensured that the classification of taxable and exempt goods and services, and corresponding GST rates are in line with the international standards. The administrative machinery for levy and collection of GST must be extremely efficient, as this would involve flow of funds across states and the Centre. The industry expects the government to simplify tax structures with clarity on points of tax and tax credits, as this was the one of basic premise for moving into GST regime. Another prerequisite for successful implementation would be setting up of adequate information technology infrastructure, for which the cooperation of the states would also be required.
Even though it appears that the government is committed to the rollout of GST, it would be imperative for it to undertake the necessary steps listed above. It needs to be seen how the government juggles between the expectations of the states and industry sentiments. As is typical of introduction of any tax reform, some of the unwanted features may be inevitable for successful adoption in the first place. It depends a lot on the ability to make difficult choices.
The author is Tax Partner, EY.
Views are personal