By Vivek Johri, Former chairman, Central Board of Indirect Taxes and Customs, and senior adviser, KPMG and National Council of Applied Economic Research
The run-up to the 56th Goods and Services Tax (GST) Council meeting was full of mixed sentiments—lots of excitement about the broad-brush picture of GST 2.0 reform and yet some lurking apprehension about the likely fine print. There was some relief when the Group of Ministers approved the Centre’s proposal on August 21. Given that some of the states had been expressing concerns about the revenue implications of the proposal and their pitch for seeking compensation, there was nervousness about which way the proposals would go in the GST Council when it met on September 3 and 4. Questions like whether the Council would reverse some of the proposed changes to accommodate these concerns or even defer it till a more acceptable alternative emerges were quite figural.
Belying these apprehensions, the Council has exhibited statesmanship in fully endorsing what was inherently a sound and irresistible proposal promising meaningful simplification in the rate structure and real relief in tax burden to all constituencies that matter for providing either a consumption or growth impetus to the economy. The Council has been sagacious enough both to recognise its merit as well as the need for its immediate adoption—implicitly parking revenue concerns till the proposal has played itself out in the economy. In the press briefing, the revenue secretary also chose not to characterise the revenue implications of the proposal (estimated to be about Rs 48,000 crore by the government) as a “loss” owing to the positive impact the rate cuts would have on consumption and demand, thereby providing adequate buoyancy to collections.
The package has received widespread support and acclaim from stakeholders. It has focused not just on abolition of the 12% and 28% rate slabs and refitting those goods and services into either 5% or 18% (putting in place a two-tier rate structure), but also on removing several inversions in duty by migrating goods from the 18% slab to 5%. A case in point being tractors, textiles, fertilisers, and so on. Of course, the thrust has been on providing relief to a large swathe of mass consumption items such as processed foods, apparel and footwear, personal care and healthcare products, life-saving drugs, educational material, bicycles, and life and health insurance.
As promised, the rate has been lowered on many aspirational goods too, such as small cars, motorcycles, air conditioners, dishwashers, and large televisions. Then, there are sector-specific reductions for agricultural goods and farm equipment, renewable energy products, and defence. Rate changes have been complemented by process reforms for registration, and refunds where technology would be used to eliminate human intervention and ensure time-bound delivery. Together, these make a very wholesome package minimising future disputes owing to misclassification and easing day-to-day existence.
Now, the focus must shift to implementation starting September 22 when the rate changes take effect. There are challenges that businesses face. The first, which is to tweak their ERP (enterprise resource planning) systems to reflect the rate changes, should not pose a problem as they have been given a lead time of more than two weeks. Then, they have to adroitly manage the movement of inventory so that there are adequate stocks available at different stages in the distribution chain to service heightened demand during the upcoming festival season.
At the same time, in a situation of rate reduction, if they are loaded with high inventory before September 22, distributors would accumulate surplus input tax credit (and blocked working capital) without the possibility of liquidation when they resell at lower rates of tax. A fine balancing act would thus be needed. Third, prices of products whose GST rate has undergone a change need to be reset. The key question in everyone’s mind is whether these large-scale benefits would actually be passed on to the consumer or cornered by businesses, thereby thwarting the very purpose for which they are proposed.
Until some time back, it would have been possible to enforce this through anti-profiteering provisions in the GST law (Section 171) and the attendant administrative machinery for investigating complaints of profiteering and adjudicating them. While the substantive provision subsists on the statute book, the administrative machinery for implementation has already been deactivated. The Council has chosen not to revive it and to trust businesses to comply voluntarily. The unresolved issue is whether these provisions would still be enforceable by GST authorities as part of compliance verification and, if so, in what manner. A suitable clarification from the Council would help.
There are implementation issues for the government too. A critical part of the package are the process reforms for simplifying registrations and expediting refunds (both for inverted duty structure and exports). The industry awaits this with lot of anticipation. The legal framework, information technology infrastructure, business processes, and standard operating procedures for these would have been designed already. The challenge for the government would be to ensure that the system of risk-based selection is robust and dynamic so that the selection is well-targeted. Trade’s experience with identification of risky exporters in the past and the weeding out of false positives was not a happy one. The new system should be responsive and nimble in reviewing its selection lest history repeat itself.