The government is determined to launch the Goods and Services Tax from July 1. But there is a total lack of preparedness regarding the implementation of GST. The government should not rush through a reform as large-scale and transformational as GST.
The technology for GST implementation is yet to be ready for smooth and successful implementation. The GST Network (GSTN), which is handling the information technology part of it, is the backbone of the new tax regime. Unless a one-stop solution is provided, GST cannot be successfully implemented. The entire system may crash unless an appropriate set-up is in place. The GSTN model is also one of the solutions that should meet its obligation so that citizens can file their returns. But GST Suvidha Providers (GSPs) have openly come out saying only piecemeal implementation is possible by the July 1 deadline.
The Indian Bank Association (IBA) has also come out with a statement that "banks will have to make a lot of changes in their systems and other procedures. The preparedness of all banks for implementation of GST on July 1, 2017, is a question mark." The IBA further said that several services by banks to customers are centralised while several others are localised. So, banks will have to make changes in the existing infrastructure, which would be a huge challenge.
The strategy for implementing the Integrated GST (IGST) is also not in place. About 60 per cent of the present tax regime has been kept out of GST, and this will further jeopardise the entire reform measure. In fact, there is a long list of exemptions. In the final count, there should preferably be two rates. More rates will lead to lobbying, discretion and, eventually, distortion. The tax structure should be uncomplicated and transparent.
The nation has been demanding that GST rates should not be higher than 18 per cent. Now we find that some of the goods and services are to be taxed as much as 28 per cent. The GST Council has also put services in the four main tax slabs. If one looks at the entries in Chapter 90, it is apparent that the council has decided the rates on three criteria - extremely sensitive items (0-5 per cent bracket), not-so-sensitive items (12 per cent bracket) and luxury items (28 per cent bracket). Other goods and services that do not find a place in the above three brackets will automatically fall in the 18 per cent bracket.
The GST Law also proposes that all interstate movement of goods and services between two divisions of the same legal entity will be subject to taxation. The tax will be applicable even when there is no legal transaction with a third party, and there is no consideration charged by one division to the other. This provision of the GST Law will lead to significant compliance difficulties. Such complexities will be more pronounced for services sectors such as banking, insurance, telecom, consulting and aviation that have pan-India operations. Again, e-commerce companies have a virtual presence in every state, and that may lead to more complications.
There is no clarity on the critical issue of efficient tax administration. Will the assessee or taxpayer be under the dual control of central and state authorities, which could defeat the very purpose of 'Ease of Doing Business'? Any ambiguity on this issue will lead to a lot of hassles as taxpayers will have to file multiple forms and returns, and also report to multiple authorities. In fact, the administration, in the states and at the Centre, could turn out to be a technology nightmare. For instance, India must operate in 17 languages (16 mentioned in the Constitution plus English). But no groundwork seems to have been done in this regard.
Then there is confusion regarding specific transitional provisions which have been prescribed in the GST Law to regulate taxpayers' migration, ensure the smooth flow of input tax credit and handle the taxation of transactions done during the borderline period.
The government may feel confident about containing inflation through the anti-profiteering provisions under the GST Law. However, anti-profiteering as a concept is new to India, and it will take some time to impact prices on the ground. The threat will hang over us like a sword of Damocles, which may not be desirable for a smooth transition.
The GST Council has given some time for dealing with any lack of preparedness, and now the sales returns for July can be filed in September instead of August. However, small traders, still struggling to cope with the new system, should have been given at least six months for transition.
Also, we should not forget that the GST regime will bring down disparities in wholesale trade. Most fast moving consumer goods (FMCG) companies have already pointed out the areas of weakness in GST implementation. Again, 30-40 per cent of sales for some mass products come from the rural sector, which was first hit by demonetisation. GST is going to be the second blow. There have been a whole lot of problems for them under the present regime. And there is no leeway to find a solution.
GST may also bring in a hike in prices, especially in the services sector, including banking, mutual funds and insurance. Even though there is hope that the input tax credit will offset it, there is no guarantee that prices will come down. Eventually, the services sector will be affected, and there will be some impact on financial transaction and investment sectors. The rise in premiums in the insurance sector, from 15 per cent to 18 per cent, will have an adverse effect on consumers.
Industry has already expressed its apprehension that prices, in general, will rise due to GST. Prices of televisions, refrigerators and air conditioners will rise from 4 per cent to 5 per cent.
GST is the reform of the century, and it should be well executed. If not, like so many other reforms, it will boomerang on business. The present government should not implement it in haste and should not consider it just another 'mega' event. The government has a history of launching and unleashing event after event. Such experiments will put this great reform in peril.~