By Rohit Jain & Harsh Shah
The proposed Goods and Services Tax (GST) is clearly the biggest and the most awaited indirect tax reform in the country. GST, as proposed, is likely to be a tax on goods and services with a comprehensive and continuous chain of set-offs from the point of production of goods/provision of services up to the retailer level. This is a much awaited tax reform by the industry as well as the Indian economy, especially since it has the potential of pushing India’s GDP by one to two percent.
The success or failure of the GST regime in India is dependent on PILL, viz:
- P – Parliamentary Process
- I – Infrastructure
- L – Legislations
- L – Lead Time
Parliamentary Process
While the hope of GST might have painted a scenic image of the Indian economy, the task at hand with respect to the passage of the Constitutional (122nd Amendment) Bill 2014 (CAB) was finally taken up by the Rajya Sabha at the Monsoon Session of the Parliament. The Bill was subjected to amendments, which included deletion of 1% additional tax on inter-state transactions and the Centre compensating the States for deficits for a period up to five years. Within less than a week’s time, the Lok Sabha adopted the amendments passed by the Rajya Sabha. The next step at hand is ratification of the Bill by the legislature of not less than half of the states. Subsequently, the Bill would be presented to the President for his assent.
Infrastructure
Moving beyond politics, preparing an IT infrastructure to support the GST regime is of utmost importance. While India is still at the dawn of the digital age, a seamless credit flow under GST would be dependent on a flawless information technology network. Linking millions of taxpayers across the country to a central processing unit, monitoring the supply transactions, tax returns and the corresponding flow of credits is definitely a humungous task in itself. It will therefore be essential that the implementation of GST is proposed only when the GST Network has been thoroughly tested. A slight delay may be worth the wait, as compared to a tax regime operating with an IT handicapped infrastructure. In the said context, the GST Network would have a pivotal role to play in the success of the new regime.
Legislation
Under the new regime, all transactions in goods or services will simultaneously attract a Central GST, levied by the Centre and a State GST which will be levied by the respective State. This dual GST model would be implemented through multiple statutes (one for Central GST and State GST statute for every State). Clarity is still awaited on several aspects such as the rate of tax, list of exempted goods, list of goods chargeable to a lower rate of tax etc. GST is set to subsume various existing indirect taxes at the Centre and States level and one of the clear anticipated benefits is removal of the cascading effect of taxes. A step in the right direction may therefore be a timely formation of a GST Council for the purpose of appropriate legislations. This Council would give its recommendations on important aspects under the GST regime to the Union and the States to formulate the GST legislation. With each State and the Centre having its own set of laws and rules, consistency and uniformity would be the key aspects for a cohesive and holistic implementation of GST. Historically, while the country has experienced a fragmented implementation of VAT, one can only imagine the turbulence in a scenario where some States have transitioned into the new regime, whereas the residuary States are still heading towards the light at the end of the tunnel.
Lead Time
Lastly, it is very important that adequate lead time is provided to various stakeholders. The process of transition into a new regime has never been an easy task in the past. Taxpayers would require sufficient time to overhaul their business practices to be compliant with the GST regime. This would also include aligning one’s ERP network and evaluating alternative business operating models to optimize tax costs and gain an upper edge under the upcoming new regime. Similarly, adequate timelines and training would be required for the departmental officers to ensure that they are well conversant with the law before the zero date. With the GST subsuming majority of the indirect tax levies at the Centre and State level, providing a lead-time to adapt to the new regime would be of utmost importance. On a concluding note, the bitterness or sweetness, which the GST regime would bring to the industry, is dependent on the effective enactment of the PILL. Would this prescription turn out to be a cure for the existing deficiencies of the current tax regime or come up with its own side effects, only time will tell. For now, the first PILL is acting as a spoon full of sugar, and it is hopeful that the GST PILL goes down with the Indian economy, in the most delightful way.