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GST – what is Amiss … So close, yet so far
By
S.Sridharan
Principal Consultant, STVAT Consulting
(In this article, Sridharan deliberates on some of the issues in implementing GST from April 1, 2016. Sridharan opines that April 1, 2016 deadline is not sacrosanct.)
The Central Government is pushing hard to meet the deadline of 1st April, 2016 for roll out of Goods and Services Tax (GST) which is undoubtedly the most significant tax reform.
Is all well with the agenda? Unfortunately NO.
Political Challenge
The first and foremost challenge is the political consensus. While the Government could push through in the Lok Sabha (lower house of the Parliament) the Constitution Amendment Bill (the Bill) to enable implementation of GST, it hit the expected roadblock in the Rajya Sabha (upper house of the parliament) where the opposition parties are in majority.
The Government was compelled to refer the Bill to the select Committee of Rajya Sabha. The Select Committee is expected to submit its report in the Monsoon Session of the Parliament which commences on 21st July and lasts for 3 weeks. The Government hopes to pass the Bill in the Monsoon Session.
It is reported that the major opposition party, the Congress party has put forth the following demands as non negotiable to support the Bill:
1. The Standard rate of GST (aggregate rate of GST -central GST plus state GST) should be around 18% and not the much talked about 24%-25%
2. The proposed 1% non creditable GST on goods in the course of inter-state trade should go.
3. Tobacco, electricity and petroleum products should be subsumed in GST
4. Constitution Amendment Bill should provide for mechanism of Dispute Resolution between States.
With the recent political developments, doubts are expressed on whether the Bill can be even deliberated upon in the Monsoon Session let alone passing the Bill. Some of the concerns, in the Bill, are real and the Parliament should deliberate and arrive at a practical consensus.
Well, unfortunately at this point of time GST implementation is more of politics than Economics.
Let us hope that the Government would sagaciously handle the political issues and go the extra mile to accommodate the dissidents to ensure implementation.
Issues in the Bill from Business Perspective
While the reference to the Select Committee may have delayed the process, it is good that all clauses of the Bill would be deliberated and the flaws ironed out. Here are some of the issues that Trade and Industry should be concerned.
1% non creditable levy on Interstate Supply
The most retrograde provision in the Bill is the proposal for the levy of 1% non creditable tax on interstate supply of goods. This 1% tax would be retained by the Origin State and is ostensibly to compensate the origin State for the cost of development of infrastructure. While there may be a case for the origin State to demand additional compensation (since under the proposed GST the tax credit on interstate supply would accure to the destination State), the compensation should not be by additional tax. Ideally, in my view, the Central Government should compensate from its share of the tax pool. In any case, the Central Government, has already agreed to compensate revenue loss to the States ( 100% in 1st 3 years, 75% in the 4th year and 50% in the 5% year) and the origin States would be compensated.
From Business perspective, the 1% levy on intestate supply of goods would be an additional cost and cascading. The 1% levy would be an additional cost on procurement and also on distribution and would have a multiplier effect when the goods move through different States, in the supply chain. Besides the levy would apply to also interstate stock transfer from one unit of an entity to another entity.
Revenue Neutral Rate (RNR)
While the States are concerned about the RNR from revenue perspective, it is also a matter of concern for Trade and Industry as well. A high RNR would push up the price to the consumer and would affect demand. Besides, high rate would encourage tax evasion and would be detrimental to the interests of the organized compliant entities.
RNR higher than 18-20% would be counter productive.
Will GST be rolled out with few States joining later?
One of the clause of the Bill ( clause 20) not much deliberated in the public domain is the Transitory Provision which provides that the present levies subsumed in GST would cease to be effective one year from the date the Bill becomes law.
While I believed that it is good that Central and State Government has set itself a deadline of one year to implement GST, the Revenue Secretary Sri Shaktikanta Das has in a interview published in the Hindu Businesline published on December 25, 2014 (http://www.thehindubusinessline.com/economy/gst-grace-period-to-deal-with-procedural-issues-says-revenue-secretary/article6725366.ece) stated that a special provision has been made in the Constitution Amendment Bill for the introduction of Goods and Services Tax (GST) allowing some States a grace period of up to one year to join the regime.
Implementation of GST without all States joining on Day 1 is impossible and not feasible in the GST framework designed to ensure seamless flow of credit to the Destination State.
Is April 1, 2016 Sacrosanct
Even assuming that the Government manages to get the Constitution Amendment Bill passed in the Rajya Sabha and also secures the approval of the State Legislature, considering the lack of ground work, it is not desirable to press ahead with the deadline without ensuring that the necessary infrastructure and framework in place.
Some of the key issues are
1. Robust IT infrastructure (GST Network) should be in place to ensure proper recording of interstate supply of goods and services so as to ensure seamless flow of credit to the destination State.
2. GST Central legislation and State legislation, relevant Rules and procedures is to be drafted and deliberated.
3. GST administration in the Centre and States have to be educated and sensitized on implementation
4. Procedural issues in dual administration by the Central and State Administration is to be streamlined
5. All Stakeholders down to the consumer have to be educated.
Besides, Trade and Industry need time to understand the law, tweak IT infrastructure and supply chain, train staff and educate suppliers and distributors.
Considering the enormity of the reform, April 1, 2016 deadline is not sacrosanct.
Let us hope for a Practical GST !
05/07/2015
Image courtesy: fairy2006.deviantart.com
The articles in Editor's page is based on inputs available on the date noted and is to be read in that context. The articles are usually not updated for later development. |
