There was no last minute change of mind by the government and the Goods and Services Tax (GST) regime has come into effect from the midnight of June 30-July 1.
It was good that the government did not have a change of mind. Economic activity in the country has gone into pause mode as a majority of the taxpayers are unclear how the GST would impact certain aspects of their businesses, such as the stocks they hold overnight on June 30. In such a situation, it would be better to introduce the law in any shape or form, however imperfect. The present state of confusion may last for a couple of months.
Impact on the economy: the government has consistently maintained that the GDP would increase once the nation transitions to GST. Over the years, there has always been a natural increase in the country’s GDP simply because there has been an increase in economic activity.
As was to be expected, there was a small dip in economic activity post-demonetisation. One wonders if the government has systems in place to capture the incremental increase in GDP that can be attributed to GST. This should not pose much of a problem since the government is going to be in possession of enormous amounts of data in the GST era.
Right now, one is not sure how GST would impact inflation. Due to a large GST tariff list, one can expect increases in the prices of some goods. Most services would see an increase since they would be bracketed in the 18% tax slab. The government has taken care to see that essential commodities are either in the nil or 5% bracket.
This should prevent street inflation — increase in items of daily consumption. However, one should not be surprised to see a small increase in reactionary inflation in the first few months of GST. The GST Council should ensure that the GST rates are not tweaked too frequently on the higher side. If this were to be done, entities would have no option but to pass on the increase to consumers as a last resort.
Impact on taxpayers: there is no doubt that compliance costs for taxpayers are going to increase post-GST. The GST compliance involves filing a bewildering array of forms, many of which would take time to fill in. Since there is no provision for manual filing, entities would need to invest in systems, software and resources. Consultants would need to be paid to understand the impact that the present laws and future notifications would have in their businesses.
The new regime encourages entities to deal with GST-registered vendors. This could increase prices of inputs since registered vendors are expected to be costlier than unregistered vendors. Pricing needs to be discussed and decided whenever there is a change in the rate of tax or input credit provisions. Failure to do so could attract the attention of the National Anti Profiteering Authority (Napa).
The Napa has been endowed with supreme powers including cancelling the registration. Entities would also need to ensure that their ‘GST Compliance Rating’ doesn’t get tainted too much as this could impact future business.
Foreign suppliers and requests for proposal for tenders in India could soon be asking for a minimum compliance rating. As they stand today, the GST laws provide ample scope for litigation which would come at an additional cost.
The new structure would have maximum impact on unregistered vendors who cannot opt for the composition scheme such as small service providers. They would need to take a decision on whether they want to be a part of the GST family with all its complications. It is possible that some may even have to think of an alternative business.
Impact on the tax authorities: the tax authorities can expect a large number of instructions from the Central Board of Indirect Taxes and Customs (CBIC). They would need to interpret these instructions properly. A good portion of the present litigation in indirect taxes can be attributed to either the tax department or the taxpayer not interpreting instructions clearly.
On its part, the CBIC should ensure that the instructions are clear and leave no scope for interpretation. Since physical interaction with the taxpayers is going to decrease post-GST, they should be guided not to issue show cause notices at their whim and fancy just to see the face of the taxpayer.
Impact on tax consultants: Undoubtedly, tax consultants are the ones who gain the most from GST as the law guarantees steady business for them. Everyone with some knowledge of commerce is now a consultant in GST. They should ensure that they understand the nuances of the law very clearly. The GST law has provisions for registration as Tax Return Preparer; this should provide additional visibility to the consultant.
Impact on the government: the introduction of GST is going to be touted as one of the major achievements of this government when they start wooing taxpayers prior to the next elections.
While the government certainly deserves kudos for being adamant in making GST a reality, they should be wary not to go overboard in their claims. At present, the GST law suffers from a number of inadequacies that need to be fixed.
The state governments should not relax just because they have an assurance from the Centre on loss of revenue due to GST. In addition, they should not arbitrarily increase the local taxes that have not been subsumed into GST.
The GST journey has now begun. The journey is expected to be rocky and rough for some time after which it should be relatively smooth. One can only hope that there are no accidents on the way due to errors of judgement by the tax authorities or the taxpayer. The GST excitement will last for a couple of years. By 2020, life would be back to the routine world of show cause notices and litigation.
(The writer is a Bengaluru-based chartered accountant)
Published 30 June 2017, 18:22 IST