GST: Regime imperfect, but there is time to fix the flaws

GST: Regime imperfect, but there is time to fix the flaws

The GST rate structure needs to be announced soon as companies will need to make corresponding adjustments to their business models and budgets


The last GST Council meeting (the eleventh since the Council’s inception), though scheduled for two days, got concluded in a day as the revised CGST and IGST Laws were approved by the Council. The proceedings turned out to be very productive and many a decision regarding composition scheme for small hotels and restaurants, raising the cap of GST rate to 40% (CGST+SGST), etc, were taken at the meeting. In the next meeting, scheduled for March 16, the SGST Law and the Union Territories GST (UTGST) Law would be discussed and agreed upon. While the four Central laws, namely CGST, IGST, UTGST and GST Compensation Bill would be approved by the Union Cabinet before they are presented in Parliament, respective state assemblies have to pass their SGST Laws with simple majority. This might pose a big challenge for the July 1, 2017, deadline as all the states need to pass the SGST Law in their respective assemblies as also notify the rules and forms well before the implementation date. As it is seen now, it might be a photo finish!

In all the melee, the crucial discussion on GST rates is yet to happen. Also, the changes to the CGST and IGST Laws as agreed upon by the Council have not been shared with industry, clearly to save time on one more round of representations. In fact, it would be prudent to share these changes now as the suggestions, if any are to be made to the CGST Laws, need to be reflected in the SGST Laws as well in toto. If the changes suggested by industry to the CGST law are reflected in the draft SGST laws before they get presented in the respective state assemblies, uniformity in both the Laws can be maintained easily. Else, it would be a long drawn logistical process to carry out the amendments in each and every SGST Law after it is passed by the state legislatures. This might delay the roll out of the Goods & Service Tax.

Industry is waiting with bated breath for the draft GST rates to be announced. This is because of a variety of reasons. Most of the businesses in India firm up their budgets for the next financial year well before the beginning of the new financial year. These budgets include the procurement budgets, sales budgets, capital expenditure budgets, etc, among other budgets. Industry is currently guess-estimating the GST components on various products and services in the absence of any formal communication from the government. On top, an anti-profiteering clause has been added in the Model GST Law which would compel taxpayers to pass on the benefits arising out of lowering of GST rate or increase in input tax credits to customers. Now, it is apparent that all the service providers would be getting incremental input tax credit of the SGST paid on inputs and capital goods used for providing services, which hitherto was not allowed as they were not subjected to state VAT. Similarly, all traders in goods who were ineligible to take credit of CENVAT paid on input services in the current service tax regime would be able to claim input tax credit of GST paid on input services in the GST regime.

These and many such examples can be cited where there would be substantial savings in the input costs. However, businesses have spent time and money in getting ready for the switch over to the GST. Many have been working on the transition for couple of years. Further, training of staff, changing IT systems, increased compliance costs, etc, are the key incremental expenses incurred/to be incurred by businesses in embracing goods and service tax. Can these expenses be off-set against the savings accruing due to GST rates and GST credits? What is the proportion of the savings that needs to be passed on to various class of customers? Before introducing such a clause, all the facets need to be deliberated and discussed. It is estimated that not less than 6 million taxpayers would be registered under GST. One can imagine the magnitude of this clause and the mechanism that would be required to track compliance of the same.

That India would be implementing an imperfect GST, wherein crucial sectors like oil & gas, electricity, have been left out of the GST net and they have to continue with the perils of the complex indirect structure that we currently have, is a foregone conclusion. The GST dream and the promise made more than a decade ago on bringing in a flawless GST has withered away over the years, owing to various concessions and deliberations to bring everyone on board. However, there is still a window to correct many flaws and this can make the GST less imperfect. It is up to the rejuvenated government to reconsider its earlier decisions and make quick amends. Especially, the decisions which were insisted upon by the states can be relooked now that the majority of the states have become like-minded. Surely India deserves a much better version of the GST when the wait has been of more than a decade?

The achievements of the Council in such a short time are certainly laudable. In order to get the ball rolling faster on Good and Service Tax, all stakeholders now need to switch to the top gear and ensure that they get things done without any further delay. Now that the dust of the poll results in five states has settled, all hands now need to be on the deck for implementing GST on July 1, 2017!

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