BASIC CONCEPTS OF GST (PART-9)

[Dr. Sanjiv Agarwal]

Challenges for GST Implementation

Any change in taxation is difficult to implement, and in a federal republic like India where states are as powerful as they are, problems get compounded.

The biggest of all challenges continue to be to understand the enormity of GST. It will impact every one and every part of business from manufacturing to financial reporting to tax accounting to supply chain to consumption. This will even require potential redesign of procurement vendor contracts, buying models, changes in information technology and ERP systems and logistics. The cost impact to achieve GST preparedness would differ from industry to industry and company to company. There will be issues on product mix, distribution, cash flows, working capital and ERP modules. Understanding and preparing for GST is a big management issue.

Because of the huge change costs, there could be (and likely so) inflationary pressure in the economy in initial period of GST regime. However, over a period, as things settle down, competition shall bring down the cost of production and so the prices.

On concern over inclusion of real estate transactions in GST, it can be said that real estate does not fall in the definition of goods and services. There will have to be many amendments of Constitutional provisions if it is to be included, namely Entries 63, 54,18 and 19 of State List and Entry 84 of Union List. This will bring about tremendous strife between Centre and the states. It is now prevalent only in Canada, Australia, New Zealand and Singapore.

India will have a dual GST which is not a perfect GST and has to be looked at as a less than a perfect GST. Even on dual GST, there will have to be uniformity in tax rates and tax practices among the states as otherwise, GST base shall get distorted leading to distortion in tax credits and impairing of revenue neutral rates.

India, being a federal state, there is wide disparity among the states in terms of their gross domestic production and tax base and revenue. As a result, it will affect different states and their revenues differently as also diverse impact on people.

However, it should be borne in mind that all kinds of goods and services tax (GSTs) in federal countries all over the world are imperfect. Brazil's GST is so complicated that economists have called it a patchwork quilt. In European Union also the structure is defective such that in poorer countries like Italy and Spain, etc, there is a lot of cash sale. Even in Canada, each state collects it own sales tax apart from the central levy of seven per cent. In India, we have been able to subsume the sales tax, which is a better model than in Canada.

Challenge also lies in making GST a clean and transparent tax law, unlike the present taxes. Also, we need to work out a clear and transitional phase. Economic fairness which comes from equity, fairness, certainty and clarity shall hold the key to success of GST.The problems with implementing Goods & Services Tax (GST) can be broadly classified into two major categories.

1. Legislative Challenge: The Constitution of India provided powers to the Union and the States to levy and collect taxes as per Union, State and Concurrent List. The challenge is whether this can be treated as the basic structure of the Constitution thereby restricting the Government from bringing about any change in this structure. In order to enable the Centre and the State Governments to levy GST, the Constitution of India requires amendment to provide for powers to levy and collect GST both by the Union and the States.

2. Political Consensus: India has multiple political parties and there is bound to be opposition to any proposal at any given time. The present crises in passage of Constitutional Amendment Bill is also attributable to political instability in the country and our federal structure.

3. Rapid increase in Assesses: The dual GST model will widen the tax net by taxing every economic supply in the distribution network. This will lead to rapid increase in assesses. It will require some of the businesses to restructure their distribution network to reduce additional tax burden on the consumer with a view to be price competitive. Though it will generate revenue in a neutral and transparent way, the Government will have to ensure that the ultimate consumer is not burdened with tax beyond his capacity.

4. Logistics: GST has to be implemented simultaneously by the Central & State Government. And, here Central govt can only provide the proverbial carrot but doesn't have the stick since it doesn't have constitutional authority to levy the tax without States acceptance, and hence its pretty much at the individual State's mercy to implement. And, forming a consensus between all 28 states having different political parties & their own agendas isn't that easy.

5. States reluctance to implement GST: The taxes would be levied on the basis of Destination Principle (i.e. taxed in state where goods/service is sold/ rendered) and State govts are fearful of losing money. Though Central government has put forward a tax revenue sharing program, but States aren't entirely convinced about it.

6. To allocate revenue to the respective States: In case of destination based principle of taxation, the recipient State will have to levy the tax as per the law of the dispatching State. This is bound to create problems if there is no uniform law and rates across India. This requires tax collected by the recipient State to be credited to the exporting State. For the Governments it would be a challenge to allocate revenue to the respective States. The banks as an intermediary can play a key role in collection and transfer of revenue to respective States in Dual GST model.

7. Improvement in Banking System: In the dual GST model, banks will play a very important role in collection and transfer of revenue to respective States. The person collecting the tax on his supply in case of inter-State transactions should deposit the tax in the account of the State where the supply has been made. Then on the basis of revenue reports of the respective Governments, the banks can allocate the revenue to the respective States or the Central Government, as the case may be. The banking system needs to be improved fur this purpose. The challenge can be met by proper training and up gradation of tax administration with technological interface.

8. IT infrastructure: If the Government wanted to introduce the proposed indirect tax, IT infrastructure for the Goods and Services would have to be put on fast track. IT infrastructure will play a huge role in interstate GST. IGST will be collected and passed on the states. It will have to be transferred electronically.

9. Effective Credit Mechanism: If for any reason the proposed dual GST model does not allow credit to State GST in respect of Inter State Transaction, it will lead to increase in cost and cascading effect of tax. The challenge for the Government is to introduce a seamless mechanism across India.

The success of dual GST model will depend on effective credit mechanism to avoid cascading effect of multi-stage taxation in the supply chain. The credit mechanism is the lifeline of GST. As far as Central GST is concerned, there is no difficulty in giving credit of Central GST anywhere in India as is evidenced by success of the present CENVAT scheme. But, in case of State GST presently there are issues in giving credit in relation to inter- State transactions. The challenge is to treat to both the Centre GST and State GST as one receipt or kitty to make way for credit across India in a seamless manner.

10. Place of Supply: One of the main challenges in introducing in GST is defining the place of supply in respect of certain services and intangible properties. In the existing tax regime, place of supply is not a big issue because service is taxed by the Centre and the place of levy does not affect revenue receipts. In GST, however, the place of supply will have to be clearly defined to avoid disputes among states in case of inter­ state transactions. Time of supply will explain the point at which tax would be levied - invoice date, due date or payment date. Currently, different taxes are levied by the Centre and the states at various stages. The service tax is levied on the receipt of payment, excise duty is imposed by the fifth of following month and sales tax is levied when the sale happens. These variations will be eliminated in GST.

The challenges posed by GST are no different from what other countries have faced while implementing major tax reforms. Despite the various impediments to the proposed transition, once implemented GST is likely to usher in a more taxpayer friendly regime that could help make various business decisions 'tax neutral' . Until the time GST is implemented, however, it would be worthwhile to monitor the developments closely and assess their potential impact on business operations in India.

The Constitutional (122^nd Amendment) Bill, 2014 which is now pending in Rajya Sabha for passage faces challenge from main opposition party, Indian National Congress. It mainly wants the GST rate capped at 18 percent in the Amendment itself, removal of additional one percent tax for the manufacturing states (Gujarat, Maharashtra etc) and an independent dispute redressal mechanism.

In the present dispensation, the rate of GST shall be dealt with by the Empowered Committee which has representation of all the states and union Government. The additional tax of one percent has been agreed to by Empowered Committee with consensus of all states and GST Council shall deal with the dispute resolutions.