New Indirect Tax Regime: Demerits remain, implementation will hold the key to GST success
With the GST rates for most goods and services already determined, the Centre’s ambitious ‘one nation, one tax’ goal seems close to becoming a reality. However, the biggest lesson from the demonetization exercise is that usually, the problem with most policies is not decision-making but the implementation.
The government believes that the unified tax code will bring in better compliance and better collection of indirect taxes and direct taxes. The government also claims that ultimately, GST will also lead to greater ease of doing business. However, most taxpayers are still worried about its demerits. The issue of compliance is the biggest concern. GST being a radical change from the current indirect tax regime, a proper system must be in place for a smooth transition.
The first major concern is that compliances are not getting reduced. Every taxpayer, small or large, has to file 36 returns every year. It may be quite hectic for small scale enterprises to comply. Also, the cost of compliance may be too high. They will have to file separate returns for Integrated GST (IGST), Central GST (CGST) and State GST (SGST). Even though GST brings all indirect taxes under one umbrella, the required compliances are not being reduced.
The fundamental promise of the GST framework was to put in place a uniform tax regime across states. While the implementation is expected to be uniform across states, the tax structure does not lend itself to a single rate. The GST Council has arrived at a four-tier tax structure: 5 per cent, 12 per cent, 18 per cent and 28 per cent for different commodities. No tax will be levied on certain essential commodities like foodgrains. Moreover, with states controlling certain products like liquor and fuel, despite some improvement, ease of doing business will continue to remain elusive. In most developed countries, there is one rate of GST. An example being Singapore, where the GST rate is 7 per cent on all goods.
A major reform in the GST regime is change in the tax levy mechanism. In the present system of indirect taxes, the levied tax is origin based. The revenue accrues to the origin state from where the movement originates. GST is going to be destination-based or consumption-based tax. Hence, the place of consumption will decide as to which state will collect the tax. This will be a boon for developing states who consume more than what they produce.
The GST regime vouches for seamless credit by avoiding the cascading effect, but the credit chain might be disrupted due to reverse charge mechanism pressures, legal restrictions and discretionary disallowance.
Currently, services are taxed by the Centre, and therefore the state where they are finally supplied and consumed does not matter for levying service tax. Under GST, states will also have the power to tax services, along with the Centre. This means that states will levy State GST (SGST) in case of intra-state supply of services, while the Centre will levy Integrated GST (IGST) in case of inter-state supply of services and apportion a share of the revenue to the state which is the recipient. The general rule to determine the location of the recipient is his location or address on record; there are specific rules for various services such as telecom, property and transportation.
This means that while a service may be consumed across multiple states, the tax revenue would be attributed to the state where the recipient is registered or his office is located. This could lead to higher tax attributed to states that have more registered offices. For example, company A, located in Mumbai, advertises its products in the Patna edition of a newspaper, which has its registered office in Delhi. One may argue that the service is being finally consumed in Bihar.
However, as the recipient of the service is in Mumbai, the tax would accrue to Maharashtra.
Once GST is rolled out, a huge chunk of compliance will go online, necessitating upgrading of your systems as well as the skills of your staff.
The government has launched http://www.gst.gov.in to facilitate enrolment, registration and filing returns. Small business enterprises will have to make investments to ensure that their compliance structure conforms to the GST system. They will have to train their staff to not only understand the tax implications of GST, but also on the procedural aspects like enrolling and uploading returns online.
Dealing with unorganised vendors/customers can be a major obstacle. Constant communication with vendors/customers is very crucial for a smooth transition. Taking along unorganised vendors into the GST regime is a risky affair. Many aspects such as matching concept, compliances, etc, will perturb the process if the vendors are not organised. The challenging task during vendor evaluation is that their preparedness for GST must be assessed well in advance during the transitional phase so that loose links of the chain are not carried forward.
Extensive training to tax administration staff is quite crucial. GST is a drastic change from the existing system. It requires tax officials at both the Centre and the states to be trained properly in terms of concept, legislation and procedure.
GST is mainly based on service tax and excise laws, thus asking for intensive training for local state officers. As the GST regime is computer-based there will be challenges for the officials at the local level to get themselves acquainted with the highly technical GSTN software. GSTN will avoid human interface and meeting of taxpayer and the tax officer. Some GST registrations were recently declined/rejected without any prior intimation or personal hearing because of non-communication between the registration officer and the supplier.
The present form of GST can be termed as a modified mixture of all the present indirect taxes. GST will be administered by the existing staff. Hence, it will be a very tough job for the government to train the existing employees with the GST law. It could take years to fully train the existing staff.
Last but not the least is the applicability of GST to housing societies. Housing societies are non-profit organisations but Section 2(17) of clause (e) of CGST Act includes housing societies under the definition of business. Housing societies have to pay 18 per cent tax on maintenance charges excluding property tax, stamp duty, electricity and water charges.
GST will be applicable to flat owners who pay maintenance charge of Rs 5,000 or more. GST of 18 per cent will also apply to societies with annual corpus balance of Rs 20 lakh or more. This will bring undue hardship to housing societies. If we count the number of societies just in Mumbai, we can imagine how many new taxpayers will be added. This will be an added burden on the automated system of GST. The cost of compliance will increase for housing societies. At the initial stage of implementation, it was not advisable on any count to cover housing societies under GST regime.
In spite of all the possible hurdles to the ease of doing business, we hope GST will bring in a better tomorrow and its merits will outweigh its demerits.