The clarity on the implementation of the goods and services tax (GST) finally seems to be emerging, with a breakthrough reached between the Centre and states in the recently concluded GST Council meeting. The implementation is now likely to be from July 2017, although official confirmation is awaited from the government.
The dual empowerment, which was the most contentious issue, was resolved—tax assessees with a turnover up to Rs 1.5 crore will be dealt for scrutiny and audit by states and the Centre in a 90:10 ratio, and for assessees above Rs 1.5 crore in a 50:50 ratio, respectively. Each assessee would be assessed only by one authority—something that the industry always wanted—although it remains to be seen how this segregation of assesses is carried out on the ground. Also, while the Integrated Goods and Service Tax (IGST) will be levied and collected by the Centre, for cross-empowerment purposes through a special resolution the same aforesaid ratio will be followed, with disputes amongst states to be resolved by the Centre.
The issue of territorial waters taxation up to 12 nautical miles was also resolved, with states being empowered to collect tax on economic activity as prevalent today under the value-added tax (VAT).
The Union finance minister and Council members need to be commended for this resolution, with the Centre pragmatically agreeing to state requests in the interest of the GST roll-out.
What’s now critical is to focus on the next steps based on implementation from July 2017. There are still several important measures that need to be taken in the next 3-4 months for GST to actually happen by the deadline.
First and foremost is the passage of GST Bills.
The next GST Council meeting, slated for February 18, is expected to approve the final draft GST laws to enable tabling of the Central Goods and Service Tax (CGST) and IGST Bills in Parliament, in the second half of the Budget Session, most likely around end-February or March first week. States will equally need to table SGST Bills in their Budget or special sessions during this period.
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GST rules and procedures is another area that requires finalisation and approval by GST Council in February-March. One is not sure whether industry would get a chance to look at the final GST laws and rules prior to tabling in Parliament and state assemblies.
Another critical milestone is segregation of goods and services in the agreed multiple rate structure by the GST Working Committee and its final approval by the GST Council. Services are expected to fall in three buckets, with a standard rate at 18%. This would equally require time and debate, and the final time-line could be April-May 2017.
These critical milestones have a direct linkage to readiness of the GST Network—the IT portal fundamental for GST compliance. They have to ready their processes and commence testing by May or latest by June for implementation in July. We know 34 GST Suvidha Providers (GSP) have been short-listed and they, along with Application Service Providers (ASP), have to be ready for testing and offer compliance solutions by July. Industry will need to configure their enterprise resource planning (ERP) systems for GST transition, and they equally require final law and rules to be public. All these would be possible only if GST laws, rules, rates are ready by April or May, as an outer limit.
Hence, it’s evident that even a realistic July 2017 implementation dateline will require each of these actions and outcomes to happen robustly within the required time-frame.
Although majority in the industry are under way with their GST preparations, many are still waiting for clarity on the potential date. It’s now time for them to kick-start, if not already done, or they will be left with no time to be GST-ready. In fact, GST is much more than a tax reform, and has touch-points across IT systems, processes, business models, compliance, pricing, margins, etc, and requires senior management bandwidth with sustained intensity during preparedness. Compliance under the GST regime will undergo a paradigm shift, with transaction-level details needed for compliance in an electronic form.
While industry will need to reach out to GSPs and ASPs for their compliance requirements, they also have to configure their existing IT systems to provide required data elements.
Now that the GST implementation is expected to happen in July, the government will be in a dilemma about how it will look at indirect tax in the forthcoming Union Budget.
The government should avoid making too many changes, especially in excise and service tax. There would be a temptation to align service tax rates to the proposed GST structure, but the government would have to balance such increase in tax burden with temporary slowdown due to the effects of demonetisation. The best would be to wait until GST is unveiled.
In addition, excise is best left untouched at this stage, and customs duty tweaks can be expected as a precursor to GST, more so around the existing Countervailing Duty (CVD) and some end-use exemptions with a view to incentivise domestic manufacturing.
The author, Harishanker Subramaniam is partner & national leader, Indirect Tax Services, EY India. Views are personal