1. GST: Unified tax, myriad challenges

GST: Unified tax, myriad challenges

Concerns have been raised on whether the Centre has caved in too far to the demands of the states

Published: December 26, 2014 12:43 AM

The much-awaited Constitutional Amendment Bill to roll out the goods and services tax (GST) was finally tabled by the finance minister in Parliament after a series of hectic negotiations between the Centre and the states, with the finance minister leading from the front.

GST is touted as the answer to the current bane of multiplicity of taxes, cascading effect and never-ending compliances which handicap virtually every business today. No doubt, GST is perceived and is being pushed as the single-biggest indirect tax reform in India till date.

However, the two major stumbling blocks to the implementation of GST are the Constitutional Amendment (to enable the Centre to tax goods and the states to tax services) and the issue of perceived encroachment of the states’ financial autonomy and the expected revenue loss that the states may suffer due to the proposed radical shift in the indirect tax regime. It is these two fundamental aspects that have crippled any effective progress so far.

In a bid to get the states on board, petroleum products though included under GST would continue to be taxed by both the central and state governments separately and would not be the subject levy of GST until decided otherwise by the GST Council. Also, the states have been assigned the proceeds of an additional 1% levy on inter-state supply of goods for two years plus a compensation mechanism against revenue loss for five years has also been proposed. Further, as a trade-off, the finance minister has managed to include entry tax and other local levies such as taxes on advertisements, luxury tax, entertainment tax, etc, under the GST ambit. And all this has happened at a pace which has astonished everyone!

But then one may not be entirely wrong in wondering if everything seems too good to be true. Concerns, in fact, have been raised on whether the Centre has caved in too far to the demands of the states. Leaving out petroleum products (at least for initial years!) and levy of 1% additional tax on inter-state supplies go against the basic tenets of a unified tax regime and is not likely to eradicate tax cascading which cripples the industry today.

Fate of how current exemptions (including area-based exemptions, SEZ, EOU, etc) would be dealt with remains at best cryptic. Specific issues such as proposed tax on stock transfers (remember that GST is a tax on ‘supply of goods’ and not ‘sale’) would lead to increase in working capital and product costs at least in the interim.

Businesses will have to rethink entire supply chain structure and distribution arrangements. Exemptions need to be framed in a manner which not only achieves the objective of GST but also enables a commercially-feasible and reasonably-acceptable transition.

Another ongoing and complex debate is around the estimation of the revenue-neutral rate. The Empowered Committee had recently proposed a rate of approximately 27%, which appears high, and which, the industry apprehends, could lead to substantial increase in tax cost. Though a single uniform rate seems simpler and reduces compliance, states are pushing for a uniform floor rate with power to levy tax within the specified range of rate. However, the concept of varying rates seems not only regressive but also defeats the whole purpose of GST.

Once the Bill is enacted, rules and mechanics would need to be framed to implement this reform. Current laws are clearly not adequate to efficiently cater to a changed business environment and a much-evolved and complex business scenario such as e-commerce, intangibles or services encompassing both international and domestic transactions, etc. The law needs to be logical, clear, practical and convenient to comply with. While it may be unrealistic to expect the rules to embody all possible business situations or transactions, it is imperative that the rules, particularly the ‘place of supply rules’ to determine the tax jurisdiction, should certainly address current gaps, anomalies and difficulties. The law and implementation mechanism must match up with the ever-evolving business dynamics.

One should also remember that the introduction of the Bill is only a stepping stone towards the mammoth tasks of transitioning and implementation. The much-desired reform is faced with onerous challenges, contentious issues and substantial amount of ground work.

Further, the Bill needs to be passed by both houses of Parliament as well as by majority of state legislatures. This, in itself, is no less than a herculean task. Once the Bill is passed, the setting up of an effective administrative system, procedures and compliances requires considerable amount of work and effort. The success of GST is equally dependent upon a robust IT system at the end of both the revenue and the assessee, efforts towards which are being made like the setting up of GST Network (GST-N).

In addition, both the revenue officers (Centre as well as the states) and taxpayers would require sufficient time to adapt to and be acquainted with the new regime and systems. Add to this, the issue of transition which is bound be complicated. Proper training and checks would be required to be put in place to ensure seamless implementation of this much-needed reform.

The government needs to be applauded for the determination and momentum put in due to which GST seems much more realistic now. However, it would need to be seen how the finance minister finishes this long-drawn battle and is able to achieve a result which could catapult our economy and benefits all stakeholders.

Amit Bhagat

The author is partner, Indirect Tax, PwC India

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  1. S
    Dec 26, 2014 at 6:07 pm

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