Hasmukh Adhia, revenue secretary and the government's go-to man on the country's biggest tax reform - the Goods and Services Tax (GST) - has been fighting a battle on multiple fronts. Over the past few months he has been busy giving finishing touches to the rules of the new law, attending GST Council meetings, clarifying the nitty-gritty of the law to stakeholders while at the same time overseeing the tax department's preparations ahead of the GST roll-out.
Now that GST has been rolled out, Adhia's latest battle is against "misinformation (about GST) deliberately spread by people with a vested interest". When Business Today asked him what is the biggest challenge after the launch of GST, he was quick to point out the 'information gap' that was still very much there.
"We would like our machinery to be available all the time for removing this information gap," said Adhia in his characteristic composed demeanour. "We have asked all central and state government tax officers to convert their offices into GST facilitation cells. The officers would welcome all assessees who can walk in, ask questions and satisfy their queries." Adhia admits fighting misinformation is the main work for the department for the next one month since nobody has to file returns this month.
True to his word, two days after the launch of GST, the revenue secretary took to Twitter to 'bust seven GST myths' which included the inability to generate invoices without internet, filing of three returns every month, filing of invoice-wise details by even small dealers in the return, high GST rates compared to earlier VAT, etc. It's not just the information gap. The government and the tax department are also fighting misinformation and rumours about GST. Social media is replete with all kinds of unverified information and even jokes about GST.
Some of these pass off as 'authentic' information creating panic and, at times, anger among masses. The government has been issuing clarifications whenever required. Just the other day, when messages about temple trusts being unfairly kept under GST while churches and mosques being exempted started doing rounds on social media, it quickly issued a statement saying that "no distinction has been made under GST law on any provision based on religion and that any indication to the contrary is completely untrue."
The government may have been quick with issuing clarifications and acting on suggestions and grievances of stakeholders, yet for a large section of assessees, GST remains a maze that can be solved only over a period of time. Till then there would be confusion, panic and mess. While some of this would be short-term pain, some would have a longer impact. We analyse them all.
The initial mess
The fear and apprehension about any change - especially a change of this proportion - is anything but irrational. GST is not just a change in the way taxes are levied or a change in tax rates; it is an entirely new exercise in mapping all kinds of business transactions digitally.
The entire tax administration would be based on electronic data collection through online invoice generation, online filing of returns and payment of taxes. In India where internet penetration is still at just 30 per cent (based on TRAI data of end-December 2016) and computer literacy is abysmally low, pushing through GST would take some doing.
The focus on digitising all processes under GST endangers many small traders, businesses and SMBs, which have been doing many of these processes manually. Now, all of them are required to register on the GST Network - the government's official partner which maintains the IT infrastructure of GST. They also need to install hardware and software to comply with the rules. While putting the basic technology means incurring additional cost, it also requires proprietors of small businesses to be able to handle the hardware and software to complete the processes.
Small businesses have typically been under-prepared for GST - whether it is with regards to their understanding of the law and its processes, getting registered with GSTN, availability of technology to comply with rules or migrating to GST-compliant software solutions.
Most of the smaller businesses have been dependent on their chartered accountants. Many do not even have a computer. A visit to Delhi's Kirti Nagar furniture market gives an idea of their lack of preparedness. "A 28 per cent tax on furniture under GST has been a double whammy for us after demonetisation. Most of us are yet to buy GST software, and we are dependent on our CAs and accountants, who are themselves not very sure about the new tax system," says an owner of a furniture shop in the market.
VK Bansal, president, Federation of Indian Small Businesses, says there is an acute shortage of professionals with knowledge of GST. "I have received requests from over 100 small businesses for chartered accountants or finance professionals who could help them migrate to GST. But there is a huge shortage of such professionals," says Bansal. Sachin Menon, Partner and Head of Indirect Taxes, KPMG, had told Business Today that those sitting on the fence hoping that GST would be postponed further would find it difficult to find good professionals because most would be already burdened with too much work.
The process of registration itself has been slow as businesses find the GST Network not very user friendly. So far, GSTN has received 3.7 lakh fresh applications for registrations out of which only 1.3 lakh have been approved. The system was opened for new registration from 25 June. Saloni Roy, Senior Director, Deloitte, says the registration process has been slow with applicants facing many problems like inability to upload documents or non-acceptance of digital signatures.
Many existing assessees of VAT, service tax or excise duties have not been able to migrate to the GST Network due to various reasons. This prevents people from doing business in case their clients do not have GST Identification numbers (GSTIN).
So far, out of 80 lakh taxpayers under the old tax system, 68 lakh have migrated to the GST Network. The readiness of GSTN itself has been questioned time and again given the enormity of the task ahead of it. And the early hiccups in registration and migration suggest the concerns were not entirely uncalled for.
"GSTN itself is not very user friendly for assessees to directly go and upload returns and invoices. It has authorised GSPs to facilitate uploading of documents but many of them do not yet have fully functional APIs (application programming software)," says Samsuddha Majumdar, partner at law firm Trilegal. GSTN chairman Navin Kumar claims that all GST Suvidha Providers (GSPs), which facilitate taxpayers in uploading invoices and filing of returns are ready.
"They had a problem as we had developed our software based on the rules of December 2016. We gave APIs to GSPs on that basis. The new rules required software changes. Half of them thought GST is not coming now and did not revamp their applications. We are giving the updated APIs time till June 28. They will take a week to make changes and be ready by July 16," says Navin Kumar, whom Business Today met a week before the launch of GST. Invoices can be uploaded on the GST Network from July 16. That is when the IT infrastructure would be put to test.
However, he insisted barring occasional minor issues, GST's IT infrastructure was ready to roll. "If we were not ready, how could we have completed migration of 68 lakh existing taxpayers to our system," he said. GSTN is confident that it can handle uploading 300 crore invoices every month. "Our network can handle up to 60,000 transactions per second going up to 1.2 lakh," claims Navin Kumar.
There are issues related to invoicing, product and services code. Every invoice raised has to have mandatory fields like invoice number, HSN/SAC Code, rate and amount of taxes, customer and taxpayer's GSTIN, etc. Tanushree Roy, Associate Director, Indirect Taxes, Nangia & Co, a chartered accountancy firm, says that it is a challenge for many businesses to determine the HSN (harmonised system nomenclature) code or SAC (service accounts code) for their goods and services.
Saloni Roy of Deloitte points out that there is confusion among businesses whether they should follow a similar pattern across all states for invoice number or should they follow different patterns for different states. Then there are situations where instead of a tax invoice, assessees needs to raise a bill of supply, a debit note or a credit note. There is no clarity on these issues yet. Since these are early days, these minor things are also creating confusion.
Multiple tax rates are creating more problems for businesses. For a grocery retailer which stacks hundreds of products, raising invoices mentioning HSN code and tax rates of each product is a herculean task. Grocery bills might already be longer if not higher.
The hospitality industry, where GST rates have been fixed based on room rents, is also grappling with a new confusion - how to levy tax on hotel stays, when room rents are seasonal in nature. If an Rs8,000 room is available at Rs6,000 in the off season, should it be taxed at 28 per cent or 18 per cent? Under the new rates, rooms above Rs7,500 would be taxed at 28 per cent and rooms in the range of Rs2,500-7,500 would be taxed at 18 per cent. Diwakar Shukla, General Manager, Crown Plaza hotel in Pune, says, "Earlier, our understanding was that we levy tax based on the billed amount. But now, it looks like tax rate would be based on the rack rate and not on the actual billed amount. We are yet to get full clarity on the issue."
Rajeev Dimri, partner, indirect taxes at BMR, says, there is no concept of published tariff in hotels. "You call up a hotel, and they would give you a different rate (from the advertised rates); an organisation may have a rate agreement with the hotel. How can you then ask hotels to decide tax rate on a published tariff," says Dimri.
The one immediate impact of GST that almost all businesses would face is a constraint on working capital. The working capital cycle of companies would be hit for many reasons. One is unavailability of input credit balance from the previous tax regime. Usually, businesses pay indirect taxes net of input credit in their balance. In the new system, they will start with nil input credit balance.
Chandrajit Banerjee, Director General of industry body CII says that the disruptions to working capital and input credit will not settle down before 6-8 months.
In the longer term too, tax on inter-state stock transfer will increase working capital requirements. According to a Crisil report, "GST will increase working capital requirements across major manufacturing sectors on account of tax liability on inter-state stock transfer. Businesses will not be able to claim tax credits until goods shipped are sold." The time lag in claiming input credit against tax paid on inter-state stock transfer will also increase working capital requirements. Stock transfers do not attract any tax in the current regime even in case of inter-state transfers. There will also be the issue of delays in claiming tax credits due to mismatch in returns filed by suppliers and buyers or non-payment of tax by suppliers.
Another transitional problem for businesses could arise because of GST is the possible harassment in the name of anti-profiteering clause. Anti-profiteering provision which seeks to ensure that businesses pass on the benefit of lower taxes after GST is both too ambitious and regressive in nature. As per the provision of the law, an authority would be formed for two years to look into complaints of profiteering. If it finds a company or entity not passing on the benefits of reduction in tax rates post GST, it can cancel the registration of an entity.
"The anti-profiteering law should have been applicable to basic goods like cement and steel and not on all goods and services. It would be virtually impossible for anyone to determine profiteering in most goods and services, and the law would only lead to harassment of traders and businesses," says MS Mani, Senior Director, Indirect Taxes, Deloitte India. Most experts believe that anti-profiteering provision is an unnecessary clause because in a free market, competition determines the price of goods and services.
Mixed long-term view
GST ends multiplicity of taxes, makes tax administration more effective and formalises a large part of the country's economy. But the collateral damage of these changes is on a large part of the informal sector. It is suggested that unable to cope with the tax burden and compliance costs, many units in the may shut or scale down operations.
And the government doesn't seem to be lenient on this sector. Talking about the impact of GST on the informal sector, revenue secretary Adhia says, "It is very difficult to predict the impact on the informal sector, but yes if tax evasion was the model for increasing someone's competitiveness that model goes."
Though the government has exempted entities with annual revenue of up to Rs20 lakh from GST, it doesn't help much because the law has been framed in such a manner that exempted sectors set to lose under GST. Under GST, the law requires entities purchasing goods and services from these exempted businesses to pay tax on their behalf. This makes doing business with exempted entities difficult, forcing smaller businesses to either register with GST or shut shop.
"If exempted entities are only buying from larger companies, it is not a problem for them. However, if they are selling to large companies and purchasing companies also want input tax credit, then it is better for exempted entities to get themselves registered because otherwise the bigger player would not buy from him," says Adhia.
In order to save many smaller businesses from hard landing under GST, the government has launched a composition scheme for registered businesses with turnover of up to Rs75 lakh. Under this, a registered taxpayer can get away by paying a lower tax rate (up to 5 per cent) and following less stringent compliance rules. However, except for restaurants, all other services have been kept outside the ambit of composition scheme dealing a deadly blow to many small time service providers.
Nonetheless, many informal sector players would be forced to join the formal economy. Besides, many sectors exempted under the previous tax regime would now be taxed under GST. According to Navin Kumar of GSTN, there could be 10 lakh such businesses which may come for registration by 16 July.
Would that add to the GDP growth rate in the long term or will it increase revenue collection in the coming year? Most countries, which had implemented GST in the past, experienced a drop in GDP growth rate in the year of implementation. However, Singapore, Portugal, New Zealand and United Kingdom saw a rise in growth rates.
Initially, experts in India had projected 1.5-2 per cent increase in GDP growth after implementing GST. However, economists now think otherwise. Recently, at a GST conclave, NITI Aayog member Bibek Debroy said, "Figures floating around that there will be 1-1.5 per cent increase in GDP after implementation of GST are utter rubbish. Indian GST is not an ideal one because of the country's federal structure while a multiple rate structure was also a problem to the new tax."
"GST is an important tax reform, but there is nothing great about it. It is applying the principle of VAT at a national level. However, to say that India's GDP will jump 2 per cent is absolute nonsense," says Thomas Isaac, Finance Minister of Kerala.
"Volume growth is expected to falter in many sectors in the second half of Q1 as wholesalers and retailers trim inventories prior to the shift to GST. However, we expect an equivalent upswing in the second quarter, led by restocking of inventory to normal levels. In contrast, the up-fronting of purchases by consumers to take advantage of the discounts offered in the run-up to GST to reduce inventories, are likely to result in a dip in consumption growth in the subsequent quarters, particularly during the festive season," says Aditi Nayar, Vice President and Principal Economist, ICRA.
One of the key considerations for adopting a multiple-rate GST was keeping inflationary pressures in check. Arun Jaitley had stated at a recent event on GST:"If the tax rates on goods, currently at 4-5 per cent are increased to 12 per cent or 18 per cent, there would have been a sharp increase in the inflation." But would GST keep inflation in check? Approximately 40-45 per cent of the CPI basket would be exempt from GST. However, experts say higher taxes on most services may keep the real feel of inflation higher even if it does not show in the consumer inflation figure.
"A potential rise in prices for items, which have a marginal/nil weight in the CPI basket, such as premium air travel and hotels, entertainment and fertilizers, may well keep inflationary expectations stubborn," says Aditi Nair of ICRA.
On tax collection, the revenue secretary said that they are keeping their fingers crossed. However, he said that he did not see any major gain in revenue from GST in the current financial year. Global experience shows that in most cases there has been a minor rise in tax collection as a percentage of GDP.
One worry is whether states could check the temptation of increasing local taxes kept outside the ambit of GST. Already a couple of states have started increasing local taxes. Maharashtra increased the registration tax on two- and four-wheelers by 2 per cent to compensate for losses due to abolition of octroi. Tamil Nadu has imposed a 30 per cent local body tax on movie tickets over and above 18 per cent GST (tickets priced up to Rs100) and 28 per cent (tickets over Rs100).
"Although states have the statutory right (to increase local taxes) but it is not in the spirit of GST because the idea was to have one nation, one tax and not state and municipal level taxes. The constitution of GST says that states can levy local body taxes on entertainment and even entry taxes but it was expected that states would not do that on the first day of GST," says Dimri of BMR.
For larger companies though, GST necessitates change in their business strategies. They have to rethink their inventory, pricing and warehousing strategies. In the current system, tax is applied only after sales, but under GST the tax is levied once goods move. This would require companies to change their inventory, stock and sale strategies. There is now no incentive in having warehouses in different states. Businesses may also relocate their units from states with tax exemptions to more business-friendly states.
Compliance costs could go up with 37 returns in a month, mandatory online filing of returns and uploading of invoices and stringent conditions laid down for claiming input tax credit. Under GST, one can claim tax credit only when everyone in the supply chain has paid their due tax to the government. This would push non-compliant entities out of business.
One consequence is that smaller companies which are under-prepared are set to take bigger hits. "Larger companies are better prepared in making their suppliers and vendors GST compliant, and therefore, will be able to get input credits quickly. However, the ill-prepared smaller companies would be hit because not all of their suppliers and vendors are fully ready for GST," say Majumdar of Trilegal.
Despite the early confusions and panic, once the system is in place, GST would lead to bringing more people under the tax net, standardise processes and make filing of returns and refunds smooth.
With inputs from Joe C. Mathew