Legislation is only the first step in the process. The hard part is shaping the GST regime and preparing businesses, consumers and taxmen for the changes ahead
As someone heavily invested in the idea of reforms, I served enthusiastically as a member of Parliament on the select committee on the goods and services tax (GST) in 2015, which worked on and finalized the Constitutional Amendment Bill for GST.
The Bill was passed on 3 August with near total consensus in the Rajya Sabha. After the passing of this historic indirect tax reform, I was asked by a reporter outside Parliament about the 1 April 2017 deadline. I had replied that it would be a tough and uphill climb to achieve it—difficult but not impossible.
About a month and a half on, it’s a good time to review where we are. The government is now focused on rolling out the GST. The finance minister has announced a “war room” to monitor the GST’s implementation.
The big institutional step of forming the important GST council has been completed. The council is needed for formulating the tax structure under the GST. For starters, the council has to decide its own operating rules. Apart from that, it has some important things to decide, such as standard GST rate, other tax rates/slabs and the dispute resolution mechanism. There is some concern about a high standard rate. To me, it’s quite clear that all the concerns of revenue loss by states are misplaced. As the GST kicks in and covers services and products with better compliance, the base and revenue will only increase. As the GST settles down, the council could progressively include products like petroleum—which is not currently included—making GST rates moderate further in the future. The smooth working and deliberation of the council on these issues is critical, given its consensus approach of 75% votes for decisions and the complex set of issues it needs to resolve before the GST can be made real. In my understanding, it is only after the council clears these important decisions that the legislation for central GST (CGST) and integrated GST (IGST) can be taken to Parliament.
The legislative road map isn’t complete with just the passing of the Constitutional Amendment Bill. There are two specific laws that have to be passed by Parliament relating to the IGST and CGST. These Bills will have to cover the details as agreed to by the GST council on the structure of the GST rate, list of exemptions, compensation mechanism for states, the issue of dual control of state and Centre, and dispute resolution mechanisms. These Bills are in draft form at this stage and the government would be best served if there is consensus on these before they are introduced in Parliament. Media reports indicate that the winter session will be brought forward to ensure that these are passed smoothly and well in time. The passing of these Bills and the state GST Bill by state legislatures will complete the legislative requirements for GST. That brings us to the most important part of rolling out the GST—the preparation for how it is to be administered.
As I said during the debate on the Constitutional Amendment Bill, the GST is not just a significant indirect taxation reform to create a single open market, it also marks a significant reform in tax administration and ease of doing business. The readiness of the technology backbone of the goods and services tax network (GSTN) and the tax administration structures is, therefore, critical.
The GSTN is a not-for-profit, non-government, private limited company promoted by the Central and state governments. This is going to be a very crucial task and will need to be completed by the end of this year if the GST is to be rolled out by 1 April 2017. At the same time, information technology changes and upgrades would be required at the Reserve Bank of India, Central Board of Excise and Customs, banks, state accounting authorities and principal chief controller of accounts and other state and Central financial institutions. Along with the software development, the GSTN will also ensure migration of the existing payers of value added tax (VAT), which number about 6.5 million, and about 2 million service tax payers and about 300,000-400,000 Central excise tax payers. This migration process is critical to the 1 April launch, since it’s expected to take around four to six months, and a further period of trials, testing and soft launching before it’s fully ready for nationwide operation.
Then there’s the question of advocacy and preparing businesses with regard to the new GST and its compliance requirements. A lot of businesses, especially the e-commerce companies and firms delivering pan-India services, have expressed concerns over the possible increase in documentation, administrative costs and multiple registrations. The government’s objective must be to make this transition from the current taxation regime as smooth and orderly as possible—both for itself and for businesses and consumers. The government will also need an advertising/advocacy campaign soon after legislation is passed—aimed at businesses, especially the small and medium businesses, to be GST-ready and apprising them of the significant changes to the entire indirect tax system.
Organizationally, a GST secretariat or office in each state will be needed for coordination between states and the Centre. Training and preparation of the Central Board of Excise and Customs and state taxation departments is another critical component for making the promise of smoother tax administration a reality—to come to terms with the nitty-gritty of the new law, its implementation and spirit. The government is planning to train more than 60,000 officers by March 2017 and the states would have to undertake similar training exercises. Unprepared tax staff can affect the transition, leading to consequent litigation and loss of revenue. Reforming tax departments is not an easy task, and preparing the administration for this is yet another challenge.
Hasty implementation usually ends up in short cuts and, consequently, chaos. India has had several experiences with well-intentioned laws creating chaos due to inadequate focus on meticulous and planned rollout and execution. The GST is a vital and important part of the transforming India agenda. The next few months of execution will determine, to a large part, its success and make this historical indirect taxation reform a real game changer in the progress and growth of our economy.