The recent expression of Union Finance Minister Arun Jaitley is a clear indication of the positive steps to be taken in clearing the bottlenecks of GST. He has hoped that Congress will “see reason” and help in passage of GST legislation, which is stuck in the Rajya Sabha during the coming session.
“It (GST) is the important reform of UPA Government. If I had to credit the authorship of it, I have to give credit to them. Now, if the author turns against his own script, what do I make… I have reached out (and) I have spoken to them. I have explained to them and I hope they will see reason… (and) see the rationale behind passing GST," Jaitley said, in a public function.
Further, recently, bullish on India, IMF chief Christine lagarde has hoped that the Government will be able to implement a series of “critically important” economic reforms including GST for unleashing the country's growth potential.
The entire exercise of initiating the new reform involved a tremendous amount of ground work by the Finance Commission, the Joint Working Group constituted by the Empowered Committee (EC) of State Finance Ministers, the Standing Committee, Sub-Committees and Study Groups, IT teams and all other stakeholders. The amendment of the Constitution for implementing GST before legislating associated provisions was a big challenge for the Government.
Despite the continuous resistance, the Centre is making all-out efforts to make it a reality and certainly it will be the most significant event in the fiscal history of the country. It will have great impact on all segments of the economy and also will entail a fundamental shift in the way Tax Policies are made because subsuming major Indirect Tax at centre and state level will have major paradigm shift.
In a country like India with federal structure, indirect taxes are the main sources of fiscal revenue at centre and State level, so their interest and structure have created many distortions resulting in substantial tax cascading and inefficient production and consumption structures. So, GST would bring in a modern tax system to ensure efficient and effective tax administration and would also signify the dawn of cooperative federalism, where the Centre and States will design better Tax policy in a harmonised and cooperative manner, rather than working on it in an isolated system.
The expected GST rate is likely to be 18 per cent and initially it is likely to be sufficient for the Government while collecting revenue and will also be competitive for industries. But, if it is more than 18 per cent then lowering the confidence may jerk the economic growth, though it will get some time for everyone to understand the impact. Rate of Tax is always a fiscal measure as per government calculation but lower rate with broadened tax base creates better results.
From the past experiences, the industries are looking forward in a better way as GST will be a game changer for them. Compliances will become easier and hopefully, minimum litigation with less cascading of tax and Zero-rated on exports and IT enabled facility will undoubtedly create transparency in tax administration. So, with cost of manufacturing coming down, consumers will also be benefitted by these changes.
The Central and States Government will get better revenue as Tax base will be enhanced and leakages will be plugged in. The major challenge of government is to monitor the tax administration and provide best facility to industries on time and for this role GSTN becomes very important to apportion CGST, SGST and IGST taxes among centre and states. The GST council must design appropriate timeline to provide solution if any disputes regarding rate/policy between states.
Keeping few goods like Tobacco and Foreign liquor, alcohol out of GST won't have severe consequences as it is mostly end user and consumer goods. However, alcohol for industrial use should clearly be part of the GST network.
Regarding petroleum products, which will be out of GST net for few years and no credit on input tax will certainly have cascading effect, which is not good move of country. But in consideration of fiscal policy and tax administration, the Centre and states won't want to lose major revenue initially which will be later decided as per tax collection in future.
Export as Zero-rated will be very good move as it will increase export and so it is a welcome step. Foreign investors will also establish manufacturing setup resulting overall growth of economy and Make in India concept will get a boost.
The most growing sectors like E-commerce and Real estates are eagerly waiting GST as it will suffice to address their compliances in a better way.
Since GST/VAT is implemented in most countries and transition has been very challenging and different countries have different structure as Single GST, Dual GST and also Dual GST + IGST. India being federal structure is planning Dual GST ( CGST+SGST ) + IGST model and so though we are expecting seamless function, it requires robust IT system and well developed GSTN which will monitor all transaction properly and must provide credit/refund/adjustment on time.
If we develop robust IT system and with system based compliances, it would be win situation for all stakeholders. We must learn from other countries how they have experienced this transition. Best example- In Denmark where automated, web based and IT- driven tax system has reduced compliance costs and authorities are involved in more complex situation of auditing or questionable returns.
Keeping in mind with all past experiences, there must be appropriate collaboration among all stakeholders and IT system must be designed in such a way so litigations are mitigated and if any then addressed timely. Draft GST Act/Rules must be shared for discussion with industries people and Awareness and Training must be planned for the success of GST.
The tax administration would also require changing their mindset, approach and attitude towards the tax-payers. And for this, would have to learn, unlearn and relearn the GST not only in letter but in spirit too.
The author is a former JFS officer, working with a prominent industry in the steel and power sector and the views expressed in the article are his own.