The Goods and Services Tax (GST) may be a reality by next year with the Rajya Sabha passing the GST Constitution Amendment Bill on August 3. Though this is a big development considering that the country's biggest tax reform till date was in the works for close to a decade, the nod to the Constitution Amendment Bill is just the first step and several big challenges await the Central government - finalisation and passage of the GST Bill (the Amendment Bill just changes the Constitution to empower the Centre and states to levy GST; the actual implementation will require the passage of the GST Bill), ratification of the Amendment Bill by two-thirds majority by half the state assemblies, ironing out of flaws in the Model GST law released a few months ago and rollout of the IT infrastructure that will process billions of documents and bits of information that businesses will upload every month under the new system.
The deadline of April 1, 2017 the government has set itself for the final rollout is ambitious, to say the least.
The government will have to go through the grind of Parliamentary processes again to get the Constitution Amendment Bill passed in the Lok Sabha. This will require two-thirds majority but will not be difficult given that the ruling National Democratic Alliance has 336 seats as against the 362 votes that it will need. Getting it ratified by 50 per cent (at least 15) assemblies won't be difficult either as 14 out of 29 states are ruled by the Bharatiya Janata Party, or BJP, or its allies.
"This can be done without difficulty as 12 states are ruled by the BJP and roughly two-third of India's 29 states are consumption-intensive and so will gain from GST," says an HSBC Global Research report.
The next step will be formation of the GST Council, which will have Union finance minister and state finance ministers as members. It will decide the GST rate as well as all the different exemptions and thresholds. It will also finalise the GST Bill.
The tasks listed so far are the easier ones. The real challenge will be building a consensus on the model GST law and draft rules for Central GST, Integrated GST and State GST. The rules for the first two will be mentioned in the GST Bill. The Congress and some other parties want a debate and voting in both houses of Parliament, and want the GST Bill to be tabled as a finance Bill and not a money Bill. A money Bill cannot be stalled in the Rajya Sabha, where the government is in a minority and so can be tripped. The government wants these processes to be over by the winter session of Parliament.
Model Law Flaws
The GST implementation will require the government to build a consensus on the Model GST Law. However, the Model Law, which will be the basis of the future GST law, has been poorly drafted and has a lot of ambiguities.
It also increases the compliance burden. Take, for instance, services companies, such as in banking and telecom sectors. Since states, too, will get to tax services under GST, these companies will have to get themselves registered in every state where they pay tax. A company with operations across the country will have to get itself registered at 31 places (29 for SGST, one for CGST and one for IGST). A State Bank of India report says the number of returns the bank will have to file will increase from three to 1,296. This can be inflationary as services account for 57 per cent of the country's gross domestic product. There are four types of returns that most GST taxpayers will have to file - return for supplies, return for purchases, three monthly returns and one annual return.
Another flaw that Rajeev Dimri, Partner, BMR & Associates LLP, points out is that supplies without consideration will be taxed. "This could mean supply of goods and services between, say, two branches of one entity would be taxable. The government needs to clarify on this," he says.
The model law also says that input credit will be available only on a matching concept basis, "meaning that inward supply should be matched with outward supply and tax payments made before tax credits are applied for. This means that while you will pay the tax immediately, the credit will be available with a lag, creating cash flow issues for companies," says Nidhi Goyal, Managing Director, Taxation, Protiviti, a risk, business consulting and internal audit firm.
Experts also say that having to deal with two authorities, the states and the Centre, will defeat the main aim of GST, which is to simplify the system. The Rajya Sabha also debated this with some members demanding that the turnover threshold for compliance be kept at Rs 1.5-5 crore. This would have meant that an entity with turnover below this would be regulated by state tax authorities.
"If we are going to have two authorities, what is the use of GST, which is supposed to be a uniform tax? No business would want the law in its current form," says M.S. Mani, Senior Director, Deloitte Haskin & Sells LLP.
The GST Model Law is open for public discussion and suggestions. It will then go to the GST Council.
Finalising the Rate
The biggest bone of contention is expected to be the peak rate. It will be decided by the GST Council. The GST Committee, headed by Chief Economic Advisor Arvind Subramanian, has suggested a rate of 17-19 per cent. Finance Minister Arun Jaitley said in his speech in the Rajya Sabha that state finance ministers differed with the calculation of the GST Committee.
"They (states) sought a slightly higher rate as they wanted a cushion. The first factor is that the report does not take into consideration - it is based on the 2013/14 figures - cesses that have been levied subsequent to that. The second factor it did not take into consideration was the compensation the Centre would have to pay to the states. If you take it (the committee's recommendation) as a band of 17-19 per cent, and add these two factors, it will move slightly up," he said.
The states will bargain hard over the rates. Most have their financial constraints and revenue loss fears. The states have two-third voting rights in the GST Council. There are talks about giving states the flexibility to choose from a band of rates. However, most industry players and experts believe that any rate above 20 per cent will defeat the purpose of GST, will be inflationary, and will not be good for the country.
The Centre will compensate the states for any loss due to GST for the first five years. Manufacturing states such as Tamil Nadu, Maharashtra and Gujarat have resisted GST in the past due to fears over revenue loss as it involves a shift from origin-based taxation to consumption-based taxation. This means the state where goods and services are consumed has the right to tax them. Already, many states have started giving loss figures. Tamil Nadu is claiming that it will lose Rs 9,270 crore, while Maharashtra and Gujarat are claiming losses of Rs 14,000 crore and Rs 11,000 crore, respectively, every year. The Centre will have to come up with its own estimate before decide the compensation. This could lead to Centre-state disputes and strain the former's finances.
A Crisil report says that around 300 items are exempted from central excise duty and around 90 items from value-added tax, or VAT, in the current system. The government will have to decide a final list. Mani of Deloitte says it will have to ensure a uniform list to avoid complexity. He says this is easier said than done in a country as diverse as India.
"In VAT, most goods suffer a very low rate. There is a huge number of exemptions. If you suddenly jack it up to 23 or 24 per cent, it will be inflationary. And a high rate will lead to tax evasion," former finance minister and now Rajya Sabha MP P. Chidambaram said while warning against a high GST rate. Deciding the exemption list could, therefore, become another issue between states and the Centre.
The Crisil report says though imposing GST on essential goods that are at present exempted from either excise or VAT or both will increase their prices, more exemptions will mean a high standard rate.
Training of Officers
This is one area that has not got sufficient attention. Without proper training, tax officers will raise unnecessary tax claims, leading to disputes. Also, state tax officers, who have no experience of taxing services, may find themselves at sea if not trained properly. According to a recent presentation by Revenue Secretary Hasmukh Adhia, the government is planning to train 60,000 Central and state officials. It hopes to complete the training by December this year.
The government claims that the IT infrastructure - front-end and back-end - will be ready by March 2017. However, unless the Central and state GST laws and rules are ready, it cannot be finalised. Tax officials of several states had told Business Today sometime ago that they would take at least six months after the GST rules were finalised to fix the back-end. Even if the rules are finalised and passed by December this year as per the government's schedule, the states will take another six months to finish the IT back-end work. It is unlikely that the IT network will be up and running by April 1, 2017.
Lastly, while a lot of focus has been on the April 1 deadline, many experts say even if the laws and systems are not ready by then, there is no harm in implementing the regime a quarter or so later. They say there are several precedents of GST being implemented from the middle of a financial year.