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Ready for the GST: S Madhavan
June, 29th 2009

From setting the rates, to the constitutional changes required and the training needed, it is unlikely we will be able to implement it by April 2010, says S Madhavan.

Of late, there has been much speculation and a lot of expectations around the possible introduction of the Goods and Services Tax (GST) with effect from April 2010. Given that we are already halfway through calendar year 2009, it is pertinent to pause and consider the various challenges that need to be addressed if the country is to meet its tryst with this date. Before we do that, however, it is important to quickly note the model of the GST that is likely to be introduced in the country.

Dual GST, as opposed to unified GST, is the model that has been identified as the most appropriate one, for a variety of reasons. Thus, the GST will comprise a federal as well as a state component. The federal and the state GST would, in turn, comprise of a GST on goods and a GST on services. The goods GST and the services GST would be mutually exclusive and also operate throughout the supply chain.

Given the above context, let us look at some of the challenges.

GST rates
Clearly, setting appropriate GST rates is the fundamental challenge. The Empowered Committee (EC) has set up a Working Group to address this issue and the group is likely to finalise its recommendations in the near future. As yet, no official confirmation of the GST rates is available. According to information available in the public domain, it appears that the aggregate rate of GST, on both goods and services, is likely to be in the range of 14 per cent to 16 per cent, with a high probability of introduction of the 16 per cent rate. The question remains as to whether the GST rate on goods at the federal and state levels ought to be a single or a multiple one. It is most likely that the GST on goods would comprise at least of two nominal rates and a zero rate would also be present for exports and for specified goods. It would, thus, be a three-rate structure, at the least. There are many other dimensions to this debate. With regard to the federal and the state GST rate on services, the country needs to come to terms with the fact that the GST rate on services will be at par with that on goods. Given that there is no state service tax at the moment, this would mean a significant enhancement in the aggregate incidence of taxation of services.

Constitutional changes
Another fundamental challenge is with regard to the statute. Evidently, the GST law needs to be written from first principles and the present myriad indirect tax laws such as the Central Excise Act, 1944, the Finance Act, 1994 as well as various state VAT Acts need to be replaced by a new legislation relating to the GST. In addition, various amendments/modifications to the Constitution would also be required, based on the particular dual GST model that will be finally adopted. This challenge is a formidable one. It is unclear whether enough preparatory work has been done and whether it can be completed within the short time-frame that is available.

Inter-state transactions
A key challenge under the dual GST model concerns the taxation of inter-state supplies of goods and services. Given that the existing taxable events of manufacture and sale of goods under the present excise and VAT regimes respectively will no longer be relevant, it would be essential to draw up comprehensive rules for identifying the time and the place of supplies of goods and services in order to tax them appropriately. The problem is limited to the state GST on such inter-state supplies since the federal GST would, in any event, be charged and collected by the cederal government. Here again, it is understood that a specific Working Group has been formed within the EC to come up with recommendations on the taxation of such inter-state supplies. Since the Central Sales Tax, which is relevant for inter-state sales of goods, is scheduled to go down to zero with the introduction of the GST, and since there is presently no service tax at the state level, the final model of taxation of inter-state supplies of goods and services under the GST would need to evolve through a mature give-and-take approach between the Centre and the states in the EC. This consensual approach is key to a successful implementation of the GST.

Threshold levels
It is well-recognised that GST is inherently a tax which only reasonably-sized businesses can comply with, for several reasons. Consequently, it is the universal practice to not extend the GST to taxpayers below a certain size. Hence, a key decision needs to be taken with respect to the threshold of turnover for dealers which would determine the cut-off for inclusion within the ambit of the GST. In India, this discussion is made complex because of the present varying levels of exemption threshold that exist under the federal excise and service tax as also under the state VAT regimes. The relevant threshold under excise is Rs 1.5 crore and that under service tax is Rs 10 lakh. As regards the state VAT, varying threshold exist ranging from Rs 10 lakh to Rs 20 lakh. There are serious equity considerations that need to be kept in mind and a final decision on threshold will inevitably be influenced by political compulsions.

It is, by now, quite clear that a successful implementation of the dual GST is based on substantive IT capability both at the tax administration level and at the taxpayer level. While efforts are going on to implement an all-India VAT data exchange and validation model called the TINSYS, significant additional investment required in either scaling up this system to cater to the GST or, alternatively, to put in place an entirely independent IT infrastructure to administer the tax.

Finally, since the dual GST is considerably different from the present indirect tax regime, a massive training initiative would be required at both federal and state levels to familiarise the respective administrations with the concepts and procedures of the dual GST. However, the task is not limited to technical training but also extends to a similar effort made to re-orient the attitude and approach of the tax administration in order to achieve a fundamental change in mindset. The knowledge and awareness of the GST, at both federal and state levels, at the staff and operational levels at present is almost non-existent and the challenge in regard to training is, thus, perhaps the most formidable of all that have been discussed in this article.

Therefore, while it is now universally acknowledged and recognized that the GST, in whatever form, should be introduced at the earliest as a fundamental fiscal reform measure, it appears unlikely that the dual GST will be introduced by April 2010. If we are really serious about the April 2010 deadline, policy makers, as also the tax administrations at the federal and state levels, need to be immediately galvanised into action under a clearly laid-out timetable for implementation. Perhaps Budget 2009 could play a role in this.

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