Bill passed; now focus on GST law-making process
Chairman, EY India
The idea of a single tax that subsumes most other central and state-level taxes has tremendous appeal. The goods and services tax (GST) is expected to provide a boost to the Make in India initiative, also benefiting local enterprise by correcting existing distortions in the tax structure — including doing away with exemptions that favour imports over domestic production. Greater efficiency and reduced costs are expected.
As GST would make the tax base more buoyant and evasion difficult, tax collections are also set to increase. Overall, this should ignite a virtuous cycle of higher consumption and investments, creating a multiplier effect on growth.
Yet, implementing such a transformational change is fraught with complexity. While the Bill has been passed, there is a long journey to be traversed both from a legislative and business standpoint. The Bill would now need to be ratified in the Lok Sabha and the requisite states in the ensuing months.
It’s important that the focus now shifts to the GST lawmaking process. As experience from other countries has shown, this is not an easy legislation, with challenges, including a mildly inflationary impact, in the short term.
Policymakers need to be nimble and work closely with industry to ensure an effective legislation that is easy to comply, avoids cascading and provides certainty. In this context, a critical area will be to arrive at a consensus on the revenue-neutral rates and the final rate structure. In the next few months, we expect hectic activity to ensure that the GST law is tabled at a possible early winter session in October-November 2016.
The Model GST Law, which has been in public domain for several weeks, is an honest attempt given our dual GST structure with the need to address both Centre and state concerns. But several areas require serious discussion.
One of the fundamental objectives of the GST regime is to eliminate the cascading prevalent in the current central and state tax regimes. The Model Law has attempted to widen the input tax credit pool that is very welcome, though some minor changes may be required to ensure complete clarity.
The Model Law predicates a move to the concept of transaction value for supply of goods and services with valuation provisions akin to existing customs and excise laws.
This will be a departure from the current maximum retail price (MRP) regime for goods in several sectors and will need careful evaluation and implementation to avoid unnecessary disputes. Transaction value for taxation of stock transfers is expected to be a real challenge and, therefore, needs debate.
Another issue in the dual GST structure will be compliance requirements for the services sector, especially telecom, financial services and others, who will now have to deal with multiple registrations basis their presence in various states. A potential solution would be to carve out a regime with registration at their primary place of business and use the interstate GST (IGST) mechanism for transfer of credits to relevant states.
Place of supply rules for both goods and services is another important feature to ensure that these provisions do not impede the credit flow. Equally fundamental are transition provisions. Businesses will have inventories of both inputs and finished goods embedded with legacy taxes and duties on the date of transition. It’s critical the provisions are such that there is minimal credit loss. The dispute resolution mechanism is another area that requires attention.
GST Network (GSTN)-readiness is a fundamental aspect of the rollout. Though there is some peripheral knowledge of how stakeholders will engage in a dialogue with this portal, more awareness is required for companies to understand the compliance requirements, which are anticipated to be more stringent with electronic credit matching. This is expected to pose a bigger challenge for medium and small companies.
Importantly, small businesses with turnover below the prescribed threshold limit will not be burdened as compliances are expected to be minimal for them. Further, the concept of independent tax return preparers, as under the Income Tax Act, is also being developed to assist these businesses with applicable GST compliances.
While the government focuses on an early roll-out, industry must, at the same time, engage and prepare for GST implementation. Not only will GST impact the business but the entire supply chain comprising vendors, distributors and the like, necessitating significant changes to the entire ecosystem.
In essence, CEOs will need to be engaged through the implementation journey to reorient business structures and reorient costs, rather than the tax organisation alone.