Implementation tough

LAUNCHING OF GST : In most cases, the goods and services would be fitted into the bracket higher than the one in which they are now.

Will the Goods and Services Tax (GST) make it’s arangetram on July 1? The ones who matter have been positive about this date after the latest meeting of the GST Council where some key decisions were taken including passing the Central GST (CGST) and Integrated GST (IGST) laws and levying a 5% tax on eateries and dhabas with a turnover up to Rs 50 lakh.

Yet, the date of implementation would remain only a landmark since the law has to be implemented by mid-September in any shape and form due to commitments made in the Constitution Amendment Bill that introduced the law. Implementing a common indirect tax law in a country as diverse and vast as India is undoubtedly an extremely tough task.

The GST Council has made some announcements on the administrative aspects of the law — filing of returns and payment of taxes have been eased, basic agricultural activity is out of GST and an express refund mechanism has been announced for exporters. While the GST Council deserves kudos for doing what it has on the administrative aspects of the law, the lack of attention to the critical economic and commercial aspects of the law remains a cause for concern.

A convenient rate of tax is one of the primary pillars on which a Model GST law should stand. In the first version, the charging provision in the Model GST law read, “There shall be levied a tax called the Central/State Goods and Services Tax (CGST/SGST) on all intra-state supplies of goods and/or services at the rate specified in the Schedule to this Act and collected in such manner as may be prescribed.”

In Version 2.0 of the Model GST law that was released on November 25, 2016, the clause read: “There shall be levied a tax called the Central/State Goods and Services Tax (CGST/SGST) on all intra-state supplies of goods and/or services on the value determined under Section 15 and at such rates as may be notified by the Central/state government in this behalf, but not exceeding 14%, on the recommendation of the Council and collected in such manner as may be prescribed.”

Even before Version 3.0 could be unleashed, the charging section has been amended and now reads as follows: “There shall be levied a tax called the Central/State Goods and Services Tax (CGST/SGST) on all intra-state supplies of goods and/or services on the value determined under Section 15 and at such rates as may be notified by the Central/state government in this behalf, but not exceeding 20%, on the recommendation of the Council and collected in such manner as may be.”

Due to this latest amendment, the maximum rate of CGST and SGST would be 20% which would arithmetically peg the IGST rate at 40%. The reason given for this change being touted by the GST Council is that parliamentary approval is not needed for slapping a levy on 40% on certain goods and services. While this could be one of the reasons, a more plausible explanation could be that the government is strategising to keep their promise of compensating the state governments for their losses due to the transitioning to GST from tax collections from GST itself.

While we are hearing that luxury cars, tobacco and such non-essential products would only be taxed at 40%, an insertion in the main charging section itself even before the fitment of rates with all goods and services would mean that virtually anything can be taxed at 40%. In addition, the penchant of the government to levy a cess whenever they get bored with levying normal taxes would make the rate well over 40% — which would be a very steep rate of tax even for luxury and sin products.

No messy cesses

It is imperative that the GST Council should immediately notify which goods and services would fall in the 40% bracket and also provide an assurance that there would no messy cesses levied over and above the 40% rate. Apart from the peak rate of tax, we have an indication that the other rates of tax would be 5%, 12%, 18% and 28%.

Everyone who is involved with GST in India would be keen to know how the vast diversity of goods and services would be bracketed within these four rates. We have heard that the rate of service tax would be 18% which gives us a hint that goods presently taxed at 14.5% under VAT laws would also be taxed at 18% while those below 10% would be fitted into the 12% bracket. In short and in most cases, goods and services would be fitted into the next higher bracket than in which they are now.

It is important for the GST Council to finalise the fitment of goods and services into the announced rates at the earliest. This would enable taxpayers to understand the impact that transitioning to GST would have on their business. In turn, the impact analysis would enable them to take critical decisions on reorganising their business to meet the requirements of GST.

Despite some initial hiccups in transitioning registrations to the GST regime, the administrative aspects of the law should not pose much of a challenge to both the taxpayer and the tax collector. Taxpayers in India are used to filling in a plethora of forms and experience glitches in filing forms online. They are also aware that there is only one solution for the above — possessing huge patience. From first experiences, they can expect more of the same post GST.

During the remaining meetings of the GST Council prior to the introduction of the law, the GST Council should focus on the economic and commercial aspects of the law. They could make a start by notifying a negative list that is not too long but contains essential goods and services that the government does not want to tax. They should also keep in mind the fact that the list should be comprehensive enough to ensure that it is not fidgeted with every year.

(The writer is a Bengaluru-based tax expert)