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Missing Pieces

Perceived as a panacea for India's convoluted tax structure, GST is designed to subsume taxes on production, sales and services - ranging from services tax, entertainment, luxury and purchase tax to excise duty, value-added tax, central sales tax and entry, or octroi, taxes.

(Photo: Raj Verma) (Photo: Raj Verma)

Just a day before the start of the monsoon session of Parliament, Prime Minister Narendra Modi raised the decibel levels and vociferously pushed for a constitutional amendment to pave the way for the Goods and Services Tax, or GST, in the Upper House. Perceived as a panacea for India's convoluted tax structure, GST is designed to subsume taxes on production, sales and services - ranging from services tax, entertainment, luxury and purchase tax to excise duty, value-added tax, central sales tax and entry, or octroi, taxes. The Central government believes that GST will not only make tax evasion difficult, but may also curtail inflation (as deformities in taxes only add to the cost of products).

The prime minister and his council of ministers are, therefore, marketing the new tax system as a revolutionary step to convert the entire country into one market, and want us to believe that a simplified tax system is essential for ease of doing business. This is, however, only partially true. In fact, say experts, the model draft will create 30 different jurisdictions for tax disputes.

The implementation of GST may also open up a Pandora's Box, where the Centre will have to address issues related to related-party transactions, interstate trades and, above all, the high compliance costs. Besides, complexities of doing business will remain and, in some cases, it may require legal remedies. In fact, a section of experts believes that the move to create a single market with GST will not work with the multi-layer taxation system, given that traders will still have to maintain compliances with states. At most, the new law will establish a single tax slab across the country.

In fact, once the draft GST bill released recently by the finance ministry becomes the law, traders and the services sector will be a worried lot, given the compliance cost of GST. The draft mandates businesses operating across states to maintain three accounts - central GST, state GST and inter-state GST - in each state. The Central taxes (excise and service taxes) and state taxes will be replaced by CGST and SGST, while the IGST will replace the central sales tax (CST). There is also no clarity on the existing service tax and excise tax registrations.

The provision of a single-point taxation window to help cut down the cascading effects of taxation on the end price of products may be a game changer, but the tax credit mechanism that will allow traders to claim refunds for GST-paid inputs - raw material, services, etc. at every stage of value addition - might not be possible under the given circumstances as the retailer has to reconcile all invoices within one month of a transaction to take the benefits of credits.

Life for small businesses is also going to get tough. Chief Economic Advisor Arvind Subramanian had recommended a threshold of Rs 40 lakh and international experts had put the number at Rs 80 lakh, but states wanted all businesses with revenues of Rs 10 lakh or more to come under the ambit of GST. "The current draft doesn't speak about the threshold; it doesn't let you understand the tax base, revenue neutrality rate and ultimately you don't know the rate at which GST will be levied," says Shailendra Kumar, Founder & CEO of Taxindiaonline.com, an online platform to analyse tax administration and implementation.

The draft bill is equally hostile towards bigger players, who will have to register for every product and services offering. In fact, industry insiders say, corporate houses with multiple business interests may have to set up a full-fledged department to handle GST. Many are of the view that this is anything but moving towards ease of doing business, more so at a time when India is seeking FDI in the consumer sector.

Experts believe that all these issues could easily have been dealt with, had the finance ministry studied the various GST models across the world - Japan, the US, EU, Canada, Australia, Malaysia, Singapore, Brazil. The Canadian model, where a single agency runs the administration, collects and then distributes taxes to states, is considered the most effective and liberal tax regime.

There's more. The vague definitions of the term 'supply' may result in a lot of chaos. Under the existing clause, the tax department could even tax 'inter-departmental' consultations as taxable transitions, which will affect IT, telecommunications, FMCG and consultants with multi-centre operations across states. The valuation of services, in terms of taxes, will also add to the confusion.

Experts are also against moving away from the MRP-based taxation system to a system based on the transaction value of a product. Says Bipin Sapra, Tax Partner, EY India: "We expect the government to take inputs from stakeholders before making it a law." However, it appears unlikely, as 16 years have already been spent debating this law, and the current government is in a hurry.

The model GST draft, however, is good news for the manufacturing sector and host states, more so, with the introduction of the 1 per cent additional tax on all interstate supply of goods for manufacturing states - something that led to the stalling of the UPA version of the bill by the BJP.

Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and Telangana will all benefit from this provision.

Let's hope the Centre addresses all issue before the GST overcomes the Rajya Sabha hurdle. If not, the 'biggest tax reform' may remain just a well-intentioned move, and give way to a host of meaningless debates and disputes that will be hard to overcome.