GST: Why Chidambaram is right in his warning to Arun Jaitley on a hurried 1 July rollout

Former Union finance minister P Chidambaram is bang on about his warning to the Narendra Modi government on a super-hurried rollout of Goods and Services Tax (GST) Bill. If taken with due importance, these cautions can come handy for Arun Jaitley, the present finance minister, to avoid major troubles on his way to implementing the biggest indirect tax reform in the country.

In interviews given to media on Monday, Chidambaram made the following points:

One, a hurried 1 July rollout can inevitably lead to complications, especially for the small traders in Tier-I and Tier-II towns as they may not get enough time to prepare for the migration. “The bigger guys can employ talent and skills to quickly get on to GST. Businesses in the tier II and tier III towns who only have a local accountant to handle their accounts and are not yet completely familiar with electronic filing, it's a huge burden on them,” Chidambaram said in an interview to the Indian Express (read here).

“And they will make mistakes. My further worry is when they make mistakes, the tax official descends on them and starts issuing notices and there will be a huge backlash against the trading community and the business community,” the former FM added. This is important since the idea of GST is to smoothen the tax regime, not create a complicated unfriendly relation between the taxpayers and taxmen.

Two, Chidambaram is again bang on here about the preparedness of the new technology infrastructure (GSTN) to accommodate the new system. “The GSTN has to be proved in a trial. The finance minister (Jaitley) spoke of 30 billion invoices a day... If that number is right, it is a humongous number... Is the GSTN capable of processing all that without glitches? I think the GSTN should be allowed to run it on a trial basis for a month or two before the actual launch. I personally think 1 October, the second half of the financial year, is the correct date.”

Three, the flaws in the design of division of power between the Centre and the state governments to tax companies on the basis of turnover, could lead to major disputes between the Centre and state governments. “What happens if the turnover goes above Rs 1.5 crore in one year and then falls below Rs 1.5 crore the next year and then after 2-3 years, again goes above Rs 1.5 crore? Second example of lack of clarity is how is a compoundable offence also made a non-bailable offence,” Chidambaram said.

As per the understanding in the GST Council between the Centre and states, the latter will have powers to assess and administer 90 percent of the companies under Rs 1.5 crore annual turnover, while the remaining would be controlled by the Centre. When it comes to taxpayers with more than Rs 1.5 crore turnover, states and the Centre will share the control in a 50:50 ratio. As of now, an effective dispute resolution mechanism between the Centre and states is absent in the GST structure.

Four, the exclusion of key items such as electricity, real estate and petroleum products from the GST purview. “It’s a very unsatisfactory compromise. They have kept out 40 percent of the GDP. I can understand the states being zealous about taxing alcohol, but I can’t see why Centre could not persuade the states to include electricity, real estate and petroleum products," Chidambaram has said.

Five, the multiplicity of rates that defeats the very idea of a unified tax regime. Here again, Chidambaram is right. “It can be made less imperfect if you put 70 percent of the goods and 70 percent of the services in the rate of 18 percent. And if you manage to push 90 percent of the goods and 90 percent of the services in the modal rate of 18 percent, it becomes even less imperfect. So the fitment is the key…the whole thing will unravel if the fitments are done unwisely or with greed in your heart,” Chidambaram said.

As this writer highlighted in an earlier column (read here), GST, conceptualised as a one nation one tax rate, is everything but that in its current shape.

There are five different tax slabs, beginning with zero rate, 5 percent, 12 percent, 18 percent and 28 percent. Above this, there will be additional cess and levies to be imposed on sin goods (such as tobacco products) and luxury items. Hence, one nation, one tax rate is a myth as of now.

But, this is no major issue. A section of tax experts have pointed out that to begin with this structure is good enough and there is room for improvement later. Hence, an imperfect GST is better than no GST at all.

But, what will complicate the whole thing even further is a super-hurried roll out. This is avoidable and Chidambaram is absolutely right in pointing out these areas. Jaitley would do well listening to his predecessor in office and give time for himself and the industry until September-end.