Prashant Deshpande on the challenges in implementing GST from April 1,2016 and highlights ofn some areas that need urgent attention by the government
Goods and Service Tax (GST) is rightly seen as a panacea to most of the indirect tax challenges which are presently faced by the tax payers. Government expects it to play a transformative role in the way our economy functions. The Government has been making all efforts to ensure that the Bill to amend the Constitution is passed and GST is in April 2016.
The ambitious goal of Government of implementing GST from April 2016 is welcomed by all. However, the continuous deliberations of the Central and State Governments and their inability to arrive at a consensus, in spite of negotiations which have stretched for a number of years do suggest that there is a lack of preparedness in facing the challenges of GST. The resistance of the States is on various fronts and the same is reflected in their demands to compensate for losses and demand for exclusion of certain taxes and goods from GST purview. It is a known fact that the success of GST depends on trust and consent of both Central and State Governments. Thus, such challenges are required to be overcome by the Government at the earliest for effective and successful implementation of GST.
State of Readiness of Goods and Service Tax Network
GST is intended to be administered fairly and transparently, with incentivizing compliance by taxpayers and ensuring that tax evasion is dealt with firmly. To achieve this objective, information technology is going to play a crucial role and for which Goods and Service Tax Network (‘GSTN’) was set up in 2013. GSTN is a not for profit, non-Government private limited company and is going to act as the backbone of the GST operations. It is seen that while there are some States which have reached an advanced stage of using IT infrastructure, there are still several States which are probably only halfway through the process of building a robust infrastructure. Moreover, both Center and States will have to align their databases to the requirements of GSTN. There is lack of clarity of status of GST solution design by GSTN and state of readiness for its implementation. The potential benefit derived from GSTN is huge, however, without a functional GST network, GST cannot be implemented
Schedule of Implementation
The time between the introduction of the Constitutional amendment bill and the scheduled date of implementation is very short with many tasks to be performed in the interim. These include framing of laws and rules and getting the administration ready for radical changes that this reform proposes. There has been a long standing demand of the trade and industry to provide and commit to a schedule of implementation. Industry is well aware of the fact that GST will not only impact their entire supply chain but would also trigger a need to relook at its internal organizational structure and IT system. Thus, a sufficient time would be needed to get its act together for complying with the new laws and rules. The Government therefore has to provide a roadmap for GST introduction and detail the steps that are necessary to facilitate the Governmental machinery and the trade & industry to meet the challenging deadlines within this short period.
Communication to Stakeholders
It is a known fact that GST is not only a tax reform but goes to the root of every transaction. GST will require a transformational change in manner of conducting business. The burden of GST is going to fall on the consumer who is long accustomed to pay multiple and high taxes. It is widely expected that if the GST rates are reasonable, the consumer will benefit. Thus, for the success of implementation of this reform it is necessary to have on board every stakeholder, which means practically every one of its citizens. However, a very unfortunate thing is that till date, not much has been done to promote the understanding and awareness of the reform amongst them. Stakeholders have been wanting a constructive dialogue on issues going into policy making. Collaborative efforts of Government and Stakeholders is essential for designing a world class GST system. The communication strategy of the Government to gain wider acceptance of the stakeholders to this reform process is crucial to the success of this reform.
Readiness of States to Join GST Implementation by April 2016
GST is desired to be implemented in the entire country in a unified manner taking all the States together and at present, the GST reform process is proceeding on the assumption that every State will implement the GST from April 1 2016. However, there can be political and economic compulsions or simply lack of readiness of States because of which they might not be able to join the reform in April 2016. It is necessary that the Government has factored in the possibility of some of the States being unable to join the GST implementation. The importance of being prepared in dealing with this situation lies in the fact that a partial implementation of GST may in a way defeat the entire purpose and the Government must be prepared to deal with this eventuality if it occurs, before committing the nation to its GST program.
Impact on Economy on Exclusion of Certain Sectors from GST fold
An ideal GST system warrants inclusion of all goods and services within its ambit. However, there are certain revenue compulsions that appear to have prompted the exclusion of certain sectors from the GST fold. These sectors comprise of alcohol which is fully excluded, tobacco which will attract both GST and present taxes and certain petroleum products which though included in the GST structure are proposed to be kept out of GST for an uncertain length of time. The unfortunate consequence of the exclusion is that the present high structure of taxes will continue on these products and the situation gets further compounded due to break in GST credit chain at either end of the supply chain. The resulting cascading burden appears to be substantial and is surely going to impact the economy. It will be interesting to know whether Government has taken any steps in addressing this issue and analyzing the impact on economy due to omission of these sectors from the GST fold.
The industry has been awaiting introduction of GST since long and the wait has been an arduous one. The fact that GST proposes to derive tremendous benefits and opportunities to business has assured continuing enthusiasm for GST. However, the anticipated benefits and opportunities can only be derived from a flawless GST model. If an efficient GST is to be implemented in an effective manner by April 2016, both Centre and State Government need to show their state of readiness in meeting the above challenges.
The author, Prashant Deshpande, Senior Director,Indirect taxes, Deloitte in India.