The goods & services tax (GST)—the most revolutionary tax reform of the country—has picked up tremendous pace, first with the passage of the Constitution (122nd Amendment) Bill, 2014, by the Lok Sabha last year, then the release of the Model GST Law in public domain in June 2016, and now its smooth passage in the Rajya Sabha. The passage of the Constitutional Amendment Bill by a unanimous nod from the Upper House of Parliament is indisputably the most crucial event in this long ride, paving way for the much-awaited GST law to becoming a reality soon.
The states appeared in tandem with the Centre on August 3, 2016, when the GST Bill surprisingly sailed through its biggest roadblock with agreement from all political parties. Much credit for this feat is attributable to the Centre and states working together. The recent amendments in the GST Bill—as approved by the Cabinet on August 1, 2016—clearly throw light on the government’s intention to cross any stumbling block for smooth implementation of GST in India.
Provisions like apportionment of the Integrated GST (IGST), wherein states’ share of IGST is set to not form part of the Consolidated Fund of India, compensation to states for loss of revenue for a maximum period of five years, specific provisions for dispute resolution amongst various governments, have been evidently introduced with an intent of protecting everybody’s interests once GST is implemented.
The amendment regarding the elimination of additional tax of 1% on all interstate trade is another welcome change. The dropping of distortionary additional tax would prove to be a game-changer for businesses across. Industries involving huge volumes of interstate business—such as e-commerce, logistics, manufacturing, trading sectors, etc—were likely to incur large costs relating to additional tax on each interstate supply, with no credits of such additional tax in the chain. The cascading effect of additional tax would have defeated the spirit and core of the GST reform. More so since, unlike normal GST which is a destination-based tax, the additional tax was an origin-based tax, meant to replace the current central sales tax (CST) for a temporary period of two years.
While the nation is rejoicing for the long awaited news of the passage of the GST Bill in the Rajya Sabha, one must not forget that it still needs to cross a few more hurdles for taking shape in the given time-frame.
The GST Bill is now required to be placed before the Lok Sabha for the approval of the amendments, pursuant to which ratification of the Bill by more than 50% of states would be required. Post this, the Bill would move for Presidential assent, followed with the timely setting up of the GST Council for making recommendations on rates, threshold limits, administrative control, municipal taxes and such other critical matters. This would require unanimity between the Centre and states for each recommendation to attain finality.
Further, certain other aspects such as roll-out of the various GST legislations by Parliament and State Legislatures, introduction of rules and regulations for execution and implementation of legislations, and timely setting up of a comprehensive GST Network (GSTN) would need to be closely monitored. Therefore, the government would have to continue its momentum which has been set by it during the recent developments for GST to see the light of day within the targeted time-line.
Having said that, given the paucity of time, industries would also need to gear up and strategise integration of GST into their operations. In light of the Model GST Law, companies should commence evaluation of key impact areas—for instance, tax structure, tax incidence, compliance and reporting requirements, etc—which will lead to a complete overhaul of almost all aspects of business operations. The pricing pattern of products or services, supply chain optimisation, warehousing strategies, information technology, accounting and tax compliance systems should also be re-looked at, in view of several cost-saving opportunities under GST.
In furtherance to restructuring of business processes, clarity about certain concepts under GST would be required to safeguard the interest of businesses during the initial years of transition to GST. While a lot of ambiguities in the current tax structure have been addressed in the Model GST Law, the precision with respect to taxation on stock transfers, software on media, import of goods, etc, are awaited. Businesses must actively engage with the government to ensure that appropriate mechanisms are introduced in the final laws to address all such ambiguous areas.
From the government’s front, in order to ensure smooth transition, it should allow suitable time to companies for responding to various GST legislations and engage with the lawmakers to address multiple industry-specific issues. Coupled with this, the government may choose to relax provisions relating to prosecution and offences during the initial phases of GST. These steps would enable industries to move to GST smoothly and implement the same within a given limited time-frame.
With all said and done, a long journey is anticipated to unify the entire nation under a single comprehensive tax net. Governments, both at the Centre and state levels, would need to be mindful of the impact of tax reforms on small and big businesses if they wish to implement GST with minimal adverse impacts on business operations and ensure ‘ease’ of doing business in the country.
(With inputs from Poonam Harjani and Nimisha Chaudhary)
The author is leader, Indirect Tax, BMR & Associates LLP