GST: A second ‘tryst with destiny’
VS Krishnan, Senior Advisor, Tax Policy Group, EY India Business Standard
With the passing of the main GST legislation by the Parliament, the country is on the cusp of a truly transformational tax reform, which began with the circulation of the first discussion paper on GST in 2009. Over the last eight years, there have been enumerable discussions within the framework of sub groups and committees in which representatives of the Center and the states have jointly participated and interacted. The passing of the GST is therefore a triumph for both cooperative federalism and deliberative democracy. However, as the implementation date stares at us, there are some important issues that need clear resolution, which can be divided into the following:
A) The technology issue
B) The procedural issue
C) The rate issue
D) The institutional issue
The technology issue
The successful rollout of GST depends critically on the successful working of the common GST portal created by the Goods and Services Tax Network (GSTN). The Central GST law provides for the creation of a common GST electronic portal for facilitating registration, paying tax, furnishing return, computing and settling integrated GST, electronic way bill and carrying out any other function as may be prescribed. The biggest challenge here is that out of the 75 lakh registrants, 65 lakh are likely to be small and medium registrants who will upload their returns and pay duty using the offline utility created by the GSTN. These small and medium registrants will need to take the help of Tax Return Preparers in this task. A massive outreach campaign is required to reach these registrants. It is expected that 2 billion transactions will take place every month.
The procedural issue
One of the main objectives of the GST, which is incorporated in the Statement of Objects and Reasons in the GST legislation, is to reduce the high compliance cost for the tax payers created by tariff and non-tariff barriers such as octroi, entry tax and check posts. Unfortunately, the existing GST legislation does provide for inspection of goods in movement and stipulates the carrying of documents. This provision has created a doubt among the assesses that the gains achieved through the abolition of Entry Tax should not be diluted by the continuance of check posts. GSTN could issue a Meta Permit, much like the All-India Permits issues to trucks, which can be shown for free movement of goods. A recent article in The Economist has observed that 16% of the carriage time by a truck is spent at check posts.
Compliance verification for pan India services such as banking, telecom and insurance should be centralized. Valuation of self-supplies should be accepted without verification.
The rate issue
Ideally, the rates structure should be simple and also be uniform between goods and services. Value addition in hair clips should be treated on par with haircuts. The GST Council has decided on a 5-tier structure of goods: 5%, 12%, 18%, 28% and 28% + cess (for four specified commodities). It has been decided that the cess amount would be used to compensate the states. In the case of services, the current thinking is to have most of the services in the standard rate of 18% with the merit of 12% for some essential services. While a multi-tier rate structure is inevitable given the consumption pattern of various goods, some rate changes are warranted. The GST Council has broadly decided that goods should be fitted into rate slots nearest to their existing rates and duties (Central Excise + State VAT). Notwithstanding this, there is a case for bringing in a large number of goods that are currently in the 28% category to 18% as these are not luxury goods. However, in view of the revenue implications, this can only be done by raising revenues. The Government can think of raising the rate of duties on gold jewelry, which, according to the Economic Survey of last year, is mainly consumed by the top 20% of the income bracket. GST on unmanufactured tobacco could also be considered to be charged at the hands of the purchaser. Revenue from these two measures could help the Government move items from the 28% to the 18% rate slab.
The other advantage of this would be that arbitrage opportunities between goods and services would be obviated. Otherwise, in some cases, manufacturers may prefer leasing arrangements to outright sale.
The institutional issue
There is an institutional void at the level of the states as there is no body that trade and industry can go to for resolving matters of a non-policy nature. Therefore, it is suggested that GST Secretariats be created in each state, which can bring together senior Central and state officials in an institutional framework. These bodies can be registered under the Societies Act, just like the Empowered Committee of State Finance Ministers, and provided with a dedicated Secretariat and funding. These bodies could be created on the basis of a resolution passed by the GST Council, which could be followed up by the Cabinet Secretary writing to the Chief Secretaries of the States.
While the GST ushers in a new rate policy regime, there is also need to reform indirect tax administration both at the Center and the states. Recently, the CBEC has formulated a restructuring plan that strengthens the Directorate of Systems, the Directorate of Tax Intelligence and the Directorate of Training besides creating a new Directorate of Analytics, which will help to crunch tax data for policy making. The states also need to restructure their commercial tax departments. A clear distinction needs to be made between the three prongs of compliance verification, namely, return scrutiny, audit and anti-evasion. Similarly, states can also think of creating a risk assessment directorate that could help in selecting delinquent units for compliance verification using data from financial records. Similarly, administrative units must be organized on a functional basis around key business processes rather than around individual assessees.
In conclusion, GST — by providing more resources — and the JAM Trinity (Jan Dhan, Aadhaar, Mobile) — by ensuring more efficient delivery — can help in delivering the basic services to the citizens of India. Then, perhaps, what Martin Wolf called the second “tryst with destiny” may be a moment to cherish and celebrate.
(Views expressed are his personal)
The author is Senior Advisor, Tax Policy Group, EY India
(This column first appeared in Business Standard)