The avowed position of the central government is that it is committed to the implementation of GST in India, effective April 1, 2016. While there could be some debate and contingencies around the date of introduction, the next relevant question is if the introduction across the country will be simultaneous or could states have the ability to introduce it in a staggered manner. A look at the Constitution Amendment Bill for introduction of GST perhaps provides the answer, albeit an indirect one.
The Amendment Bill’s clause 20 provides for ‘Transitional Provisions’. This clause, worded in what lawyers describe as a ‘non obstante clause’, overrides all other clauses of the Amendment Bill to permit an existing state law for a period of one year even after the effective date of the amendment of the Constitution. The existing state law, it is provided, shall govern even if it is inconsistent with the constitutional provisions relating to the GST design.
The underlying intent seems to be to provide a breathing space to the states to transition to GST. The states are expected to get their act together and get in line with the GST design at the earliest and in any case no later than one year from the commencement of the new regime. It is in this wake that clause 20 provides that an inconsistent existing law of the state shall be permitted to operate till such period as modified to bring in line with the GST regime. The appreciable intent of the clause notwithstanding, this provision carries the potential to legally permit inconsistency in the implementation for the GST regime for a full period of one year.
The reasons for the continuation of the existing laws in a state can be multifarious. A state may, for example, choose to defer the implementation of GST on account of under-preparedness on legislative or administrative grounds, lack of clarity on the nitty-gritty of the provisions and GST IT infrastructure, etc. A conscious decision to defer the implementation of GST by the maximum permissible limit of one year can also be purely on account of political reasons. The reason for the deferment notwithstanding, even a minor deferment can have multifarious effects for the taxpayers. For illustration, designing appropriate standards for book-keeping, accounting systems, invoicing formats, etc, and their implementation can be a nightmare with different states acceding to GST on different dates.
Similarly managing the computation of inter-state credits, local-level compliances for inter-state movement of goods, internal control mechanisms, etc, will be a challenge and will also involve significant compliance costs.
Lessons drawn from VAT transition by the states in different years reveal the enormity of the challenge, which is only accentuated by the fact that in case of GST even the central laws will undergo a change.
What compounds the misery is the fact that one state can disturb the entire GST design. This is owing to the fact that the application of the CGST and IGST will commence from day one whereas the existing state legislations will continue to apply. In a scenario where the state chooses to defer the implementation of GST, a supply will be required to be examined from the perspective of multiple legislations—the Inter-state GST law; Central GST law; State VAT law; State Entry Tax Law and so on and so forth. It is therefore evident that a staggered implementation of GST has multiple consequences for the intermittent period.
A saving grace in the existing proposal is that it freezes the rights of the states to modify the existing laws except to bring them in consistency with the GST design. Further, no such protective embargo exists for the central laws. Thus, the only leeway granted under the proposed regime is to the states and that too for a period of one year, for which no rationale has been extended. If the idea is to usher the GST regime at the earliest, there seems to be no valid reason to continue the grace period for full one year. At best a month or for exceptional scenarios a quarter-year seems sufficient if indeed the idea is to provide for breathing space. This is particularly so in view of the difficult removal powers provided for in the Amendment Bill which permits appropriate modifications to be made to iron out the differences. In fact, a shorter period would ensure that the GST design is implemented across the breath of the country and measurable gains are attained within the very first year. To wait for full one year just to implement GST seems to be a no-brainer.
The multifarious administrative complications and significant compliance costs related to a staggered implementation of GST by various states are perhaps too many to be relegated for a consideration at a later date. The Select Committee examining the Amendment Bill is best advised to examine this aspect and, if found feasible, devise a remedy within the Amendment Bill. Alternatively, it may be agreed in principle that the GST Council will bring the states on board to ensure a single date for transition to GST. It is hoped that this aspect will receive due consideration of the stakeholders and will be acted upon.
(With inputs from Tarun Jain, managing associate, BMR Legal)
Rajeev Dimri is leader, Indirect Tax, BMR & Associates LLP. Views are personal