Twists in GST saga

It's been a fortnight since the much-awaited launch of the Goods and Services Tax (GST) on July 1, 2017. Contrary to expectations, no disruptions have so far been witnessed in the economy! Nor has economic activity ground to a standstill. Sure, there have been reports of protests in various parts of the country — the film and cracker industry in Tamil Nadu, textile traders in Gujarat, cloth merchants in Ludhiana, traders in Kolkata, and so on. But these have mostly been short-lived and more in the nature of minor disturbances, not catastrophes threatening the continuance of GST. The government, on its part, is certainly leaving no stone unturned to ensure that the rollout faces no hurdles.

From directing ministers to travel from Kashmir to Kanyakumari for selling the benefits of GST, to publishing a series of advertisements in major dailies in the run-up to the launch, to the daily blitzkrieg of full-page ads post launch on the nitty-gritties of GST, to bilingual master classes conducted by senior government functionaries, the government is pulling out all stops to make GST a success. Supply chains seem to be working quite well. Credit is due to the government officials who have been overseeing this difficult transition in the tax system. The technology backbone, the GSTN, has also worked without any glitches. These are still early days, and the true extent of the success will only be known when the first online GST returns are filed in September. The chances of muddles should not be ruled out. The government needs to instruct the tax department that firms who have made mistakes in their tax filings should not be automatically treated as evaders. Honest mistakes are very likely. A heavy-handed approach is not needed at this juncture. GST has replaced the complex regime of indirect taxes that we've lived with since Independence by a much simpler tax regime subsuming 17 taxes and 23 cesses into a single tax, to nullify the plethora of taxes on goods and services in the pre-GST era. With this, the Modi government has created history. On paper, this should be hugely positive. Particularly since GST ends cascading, wherein taxes were levied on goods whose prices already included an element of tax at an earlier stage and hence, added to inefficiencies in the competitiveness of our goods in world markets. GST also ends the fragmentation of domestic markets that results from different states levying taxes like entry tax, octroi and so on.

Delays caused by the pile-up of trucks at state borders were commonplace in the pre-GST era. It is estimated that India lost as much as $21.3 billion annually due to transportation delays and additional fuel consumption. The benefits of GST are, therefore, far from trivial. If despite this, anxieties are abound, it is only because GST, as is being presently implemented, is still far from an ideal GST. And that is the crux of the problem. In fact, the use of price differentials to determine tax rates means classification disputes will continue. Thus, readymade garments below Rs 1000 are to be taxed at five per cent under GST, while those above Rs 1000 will attract 12 per cent tax – like it is happening with Khadi. Likewise, in the case of footwear where the dividing line is at Rs 500; footwear costing less than Rs 500 will be taxed at five per cent, all others at 18 per cent and so on. Most critically, the success of GST rides almost entirely on how quickly and successfully we are able to shift from a paper-based, sometimes informal regime to a technology-driven, paperless one. This is where the GSTN (GST Network) and the IT backbone for GST come in. GSTN is responsible for registration, forwarding tax returns to Central and State authorities; computing and settling IGST; matching tax payment details with banking network; running the matching engine for matching, reversal and reclaim of input tax credit and so on. Preliminary estimates suggest GSTN would be required to handle a minimum three billion invoices a month. Unfortunately, neither the ability of businesses, especially of small and medium businesses, to shift to a technology-driven regime nor the ability of GSTN to handle this huge load has been tested. For now we have a bit of a breather. The first test will come in September when the first lot of returns for July 2017 transactions are filed. These are but some of the bigger challenges; there are many others ahead. Reports suggest some states are already reneging on their promise not to levy new taxes or raise taxes. Entry taxes by municipalities, entertainment taxes by local bodies and stamp duties, for instance, are outside the purview of GST. The bottom-line is we are in for the long haul. For now, we have only crossed the first few hurdles, so the proof of the pudding will come only after eating!