Perhaps stung by the constant carping about the lack of big ticket reforms by the government, finance minister Arun Jaitley, speaking at Davos, listed several things the government had done. One of them was the goods and services tax (GST), the bill to enable which has been tabled. “GST, which everyone thought will never see the light of the day, is that not big bang?” he asked.

Sure it is, but there’s a lot more creases to be ironed out before it can start yielding the many benefits it is supposed to bring in its wake.

A major roadblock that is not getting addressed, according to R. Kavita Rao, professor of the National Institute of Public Finance and Policy (NIPFP), is the issue of how GST will be administered. “Generally people believe GST means one administration. But it means two – central and state.” Firms, she notes, will file returns at one place – a portal – but after that there could be separate tracks going on in parallel. “It is not a fair system.”

Both governments, says Rao in an interview, can do separate audits and take a different view on the same transaction. What happens then? Only dealers with an annual turnover of less than Rs 1 crore will be audited by the states; all others will be subject to dual audits. Even in the case of dealers below the threshold, the state will audit their returns and give a report to the Centre. The Centre can act separately, she notes.

“Nobody wants to talk about it. Nobody wants to be identified as the guy who is pointing out problems,” Rao rues.

There is also the question of what the GST rate will be. There’s a lot of concern that it could be a very high rate, given reports that the revenue neutral rate – the rate at which revenues of the Centre and the states will not be affected in a major way – has been set at 27 percent.

Don’t worry about the revenue neutral rate – it’s not relevant, says Rao, who was the lead author of a 2013 study for the Empowered Committee of State Finance Ministers Revenue Implications of GST and Estimation of Revenue Neutral Rate: A State wise Analysis.

It’s not the rate at which GST will be implemented; it only gives a sense of what the revenue implications could be under various scenarios.

The rate itself will be a political decision and will not be known until after the 2016 budget. “Rate is the last decision. Everything else needs to be brought to the plate before you announce the rate.” If the number of goods that are to be included in GST increases, the rate will be lower; the exclusions go up, the rate will be higher. The rate will also depend on the transactions for which input tax credit is given; the more the transactions for which credit is denied, the lower the rate.

Since it is a political decision, Rao thinks the prime minister should step up and announce a rate, instead of leaving it to political and other bickering. Let the prime minister, she suggests, announce that the country will do, say, a single rate of 20 percent, with the Centre taking 8 percent and the states 12 percent.

The states will be happy and the Centre, she notes, can always go back to the GST Council the following year and say 8 percent is not enough and it needs 10 percent. Once a rate has been announced, increasing it by 2 percent the following year will not dramatically rock the boat. “Someone has to take the first step; the first step is seen as a very strong, confident measure.”

It is for the Centre to take the first step and the risks involved, says Rao. “If GST is going to be the biggest reform the country is going to undertake, then take some risks. Don’t expect states to take the risks. You are the Centre; you have more resources at your command; take the risk.”

But won’t a high rate affect compliance and push transactions underground? After all, one rationale for GST was to capture transactions that currently go below the radar. Could it not adversely affect the services sector?

For compliance to improve, more than the rates it is the billing culture that will be the key, feels Rao. A final consumer, who does not get a tax set-off on something he is buying will not ask for a bill and the service provider/supplier does not have an incentive to give a bill.

“The system doesn’t deliver the great efficiency benefits that we are expecting unless the billing culture improves. Somewhere integral, or subsequent, to the introduction of GST we have to address the issue of how we will improve the billing culture in the country. Without addressing the question, the transformation effect will not be fully realised.”

As for the services sector, Rao feels it will see prices increasing but that will not dramatically affect consumption patterns. People have got used to telecom and a hike in prices may affect consumption for a brief period and then it bounces back. “One section of customers who have just entered at the margin may back out. If we believe that is the largest section of the economy, then our economy is very precarious.”

Large service sector segments like telecom, electricity, transport, Rao points out, collect tax while billing the consumer and there is not much scope for evasion. There could be a problem in the case of stand-alone services – lawyers, chartered accountants, beauty parlours, sundry consultants – who could still provide service without a bill.
“Big ticket services cannot go underground. If we are banking on small and stand-alone service providers to be the main pillar for GST, then we are doing a wrong design.”
The current GST model, according to Rao, will get big players on board first, with the smaller ones coming in depending on how they benefit. She expects some coercive activities by the authorities, following which people will bill certain part of their transactions to keep the tax department off their back. “That will change only when people start asking for bills.”

Rao points out that VAT was a big improvement over sales tax in terms of compliance and GST will be an improvement over VAT. “Will it dramatically change everything so people ask for bills? Maybe not.”

Compliance in the case of GST will be better because it involves both the Centre and the states, Rao points out. There will be tallying between the two levels of the government, making evasion more difficult than in the case of VAT, which was levied and collected only by the states.

GST will also end the current practice of goods being shown as in transit from, say, Uttar Pradesh to West Bengal and getting disposed of en route in Bihar. Transactions now will not just be tracked state by state, they will also be mapped at a global level. Since the central tax will have to be paid in the Bihar transaction, there will be a bit more vigilance, bringing down evasion.

Rao repeatedly comes back to the need to improve compliance culture. The next set of experiments, according to her, should be on how to incentivise people to take bills.
She cites the example of some states which tried to net sweet sellers who try to evade tax. During festival seasons, when large amounts of sweets are sold, the tax department promised customers a lucky draw on bills that were to be deposited in a box. South Korea tried to incentivise payments through credit and debit cards.
“Unless we can change the compliance culture, GST will not have the transformational impact that everyone expects it to.”