Indian government is in hurry to implement GST rather solving intricacies of tax reforms
By Asit Manohar
The goods and services tax (GST) is finally going to see the light from July 1st this year. However, the way it has been changed in last few years, there are some intricacies that small manufacturers might not like as it is completely against the general perception about the GST. For example, a small manufacturer will have to file at least 37 return while in current tax structure, it’s only 13. Similarly, GST means uniform taxation system but in India, there will be dual GST and in one nation people would be paying in eight tax structures. So, it’s high time for the people of India to know the zig-zag being done with the GST we will be facing from this July 1st.
HIKE IN PAPER WORK
A small-scale manufacturing company with operations in only one state will have to file a minimum of 37 returns instead of the current 13 once the goods and GST goes live from 1 July, 2017, increasing work for industry, accountants and banks, according to an IndiaSpend analysis.
With the deadline for GST less than a month away, finance professionals, banks and industry seem unprepared for the challenges of implementing the one nation-one tax idea, work towards which began 13 years ago.
“The entire ecosystem needs to be changed to accept GST,” K Raghu, former president, Institute of Chartered Accountants of India, told IndiaSpend. “An ideal date for implementation would be 1 September.”
The Indian Banks Association, a body that represents 237 banks, has informed a parliamentary panel that their members were unprepared to implement the new indirect tax regime.
“Everything will now be online and will need to be updated regularly. A business will have to file 37 returns in a year (three returns per month and one annual return) per state,” The Economic Times reported. “If it does business from offices in more than one state, the number of returns will go up accordingly. A business with offices in three states will have to file 111 tax returns in a year.”
With the government announcing GST for four tax rates — 5 percent, 12 percent, 18 percent and 28 percent — industry will face implementation challenges that include system upgrades, manpower training and understanding new taxes. Every transaction, sale or purchase, will now have to be recorded online to benefit from the tax paid earlier.
India is implementing a dual GST with the Centre and states together levying it on a common tax base. “The GST to be levied by the Centre on intra-state supply of goods and/or services would be called the Central GST (CGST) and that to be levied by the states would be called the state GST (SGST),” according to this list of frequently asked questions published by the Central Board of Excise and Customs (CBEC), the central body of indirect taxes.
“Similarly, Integrated GST (IGST) will be levied and administered by the Centre on every inter-state supply of goods and services,” said the FAQs added.
A dual GST adheres to the constitutional requirement of fiscal federalism, since both the Centre and states have the powers to levy and collect taxes. “The central GST and state GST would be levied simultaneously on every transaction of supply of goods and services, except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits,” the FAQs noted.
While 24 states have passed state GST acts, seven have not done so yet.
While the location of the supplier and the customer within the country is immaterial for the purpose of CGST, SGST would be charged only when the supplier and the customer are within the state.
An illustration from the FAQ published by the government: Suppose the CGST rate is 10 percent and the SGST is 10 percent. When a wholesale steel dealer in Uttar Pradesh supplies bars and rods to a construction company within the state for, say Rs 100, the dealer would charge CGST of Rs 10 and SGST of Rs 10, in addition to the basic price of the goods. The wholesaler would be required to deposit the CGST into a central government account and the SGST into the account of the state government. “Of course, he need not actually pay Rs 20 (Rs 10 + Rs 10) in cash, as he would be entitled to set-off this liability against CGST or SGST paid on his purchases (say, inputs),” said the FAQ.
This is where implementation challenges arise, as former ICWAI president Raghu explained. Every invoice from buyers and sellers must be entered in the GST system correctly to ensure that benefits accrue down the chain.
“We have a system today across a majority of small units where an accountant comes (in) once a month, makes vouchers and inputs details for taxes,” said Raghu. “That will have to end now because we are moving to an online, almost real-time system that will need a lot of manpower.”
The finance industry is ready by training its professionals, said Raghu, who predicted many job opportunities over the next 5-6 years. But, as he added, it would take at least 12 to 18 months for the system to “settle down”. “I do see a lot of CAs and other finance professionals being trained for indirect taxes in the coming years,” he said.
EXTRA WORKLOAD ON INDUSTRY, SERVICES
India’s industry and banking system will have to change systems, train personnel and accept the extra workload for the new taxation system. The banking system has clearly said it is not yet ready; industry is ambivalent.
“Nearly 50 percent of Indian businesses are not aware of the changes that GST will usher in,” Bharat Goenka, managing director, Tally Solutions, was quoted as saying in The Economic Times on 5 June.
Tally accounting software is widely used by Indian companies. The company is waiting for the GST rules to be finalized, so that it can roll out its GST software for Indian companies, the report said.
A senior official of Federation of the Indian Chambers of Commerce and Industry (FICCI), requesting anonymity because the launch date was close, said GST was “now a fact”, and industry was trying to adapt. FICCI has been conducting awareness sessions among industry verticals to help understand the new structure, he added.
The industrial sector, especially the services sector, is waiting for more clarity on tax rates, processes and the time frame for the systems to settle down.
“What we still don’t know is which tax slab we fall in,” a marine service provider operating in Goa told IndiaSpend, on condition of anonymity. “While it is good that the taxation system will be streamlined and we will not have to deal with multiple tax payments like excise, service tax and value added tax, we still don’t know how much time it will take for everybody to be on board.”
ONE NATION, EIGHT TAXES
Now, we have a one nation, eight tax rates structure under the proposed Goods and Services Tax (GST). Here’s how the new tax structure will look from 1 July: There will be zero tax rate for essential items that is used by the common man–fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom etc. Then we have the 5 percent, 12 percent, 18 percent and 28 percent slabs as decided in the beginning by the GST council. With additional cess on luxury goods, there is a sixth slab. The seventh slab will be at 0.25 percent for the rough diamond and the eighth and final is for gold at 3 percent.
That makes one nation and eight tax rates. Also, there are exemptions for alcohol and petroleum products. It is not so bad, after all. Among the GST compliant countries, there are economies like Singapore where there is a flat rate. There are also countries like Indonesia where there is a multiple tax structure.
For Indians, GST began as an idea of one tax rate across the country and hence the eight slab structure will make the final GST structure look like far from a perfect GST. Beyond the multiple slabs, there are confusions about potential trouble arising from the tax brackets into which nearly identical products and services will fall into. As this Financial Times report (read here) rightly points out, “curd and lassi will have a tax rate of zero but yoghurt — which many Indians consider as equivalent to curd — will be taxed at 5 percent. Dahi — a Hindi word often used to describe both curd and yoghurt — is not mentioned in the schedule.” That apart, there are concerns about the compliance process as well.
But, the fact India finally managed to get the much-difficult political consensus to take GST to the launch stage and managed to give it a final structure within the expected schedule, largely addressing the concerns of majority of the common man and industries is a good signal for India’s aspiring economy. Finance minister, Arun Jaitley, said in an interview with CNBC TV18, that a single rate would have been ‘disastrous’ given the complexity of an economy like India and the varying culture and character of different states.
Yet, there is room for improvement in the future. The rates can be narrowed down and consolidated at a later stage. In 2015, a panel headed by Chief economic advisor (CEA) Arvind Subramanian had proposed a three-tier structure fro GST. A concessional rate of 12 percent for public goods that concerns the deprived or weaker sections, a standard rate of 17-18 percent that would concern majority of items and a rate of 40 percent for luxury items and tobacco, aerated drinks and pan masala etc.
The fine tuning wouldn’t be difficult since the GST rate is not part of the legislation and is up to the GST council to decide. The big relief from the GST rate structure is that common man will be insulated from price shocks with most of the daily used items out of the high tax slabs. This will also likely contain the pressure emanating from GST roll out on the inflation—a big worry for the central bank and the monetary policy panel. But there are big positives. Global investors will finally see India cracking a major reform, albeit with inadequacies after a long period of time. All in all, even in the current shape, GST is still better than having no GST at all. It is a one nation, eight tax rate structure; but it isn’t bad to start with.