GST implementation: A race against time

The Goods and Services Tax (GST) will be a reality come 1 July with the government and the GST Council providing the finishing touches on rates, transition provisions, return formats etc. in the meeting that concluded over the weekend.

When we conjured up this unique idea of the GST Council where both centre and states will sit together in the spirit of cooperative federalism and formulate transaction tax policy for the nation, many doubted the consensus building capacity and efficacy of this august body. But the manner in which the Union finance ministry and members of GST Council in their various meetings have handled this complex law-forging exercise is indeed commendable. This wouldn’t have been possible without the tireless efforts of GST working committee members both from the centre and states and their innumerable deliberations with industry bodies.

While we may critique the outcome of the GST framework, rates etc., and continue to engage and improve as we go along, to begin the GST journey, this pragmatism was inevitable.

The rate fitment both for goods and services was along expected lines, maintaining rates closer to existing indirect tax rates, with a focus on socio-equity. The idea was to keep mass consumption sectors either exempt or at reasonable rates and continue with existing exemptions in services to cushion inflation. An exercise of this magnitude where several stakeholder concerns are involved is complex and has expectedly resulted in a multiple rate structure for goods and services with price points used for rate differentiation for the same goods or services which is far from ideal. The hope is as GST matures, we will move to a two- or maximum three-rate structure over the next few years.

Sectors like fast-moving consumer goods (FMCG) and others have expressed their concern on higher rates on goods of mass consumption, that need to be addressed and treated on par with other such goods at lower rates to maintain parity. There are concerns of sectors like aviation and shipping where credit rules need to be tweaked to avoid cascading, while GST on imports of relevant goods needs to be exempted to avoid significant costs. The impact of increase in rates for services like telecom and financial services which have a wider consumption remit will have to been seen as we go along. The telecom sector believes and rightly so that GST credit efficiencies may not be enough to cushion increase in rates, while the government believes otherwise.

Also, ambiguities of rate classification which have crept in need to be clarified. Some have been addressed while others await clarification. Hopefully, by 11 June, these issues will be ironed out and provide much-needed relief and clarity to the industry.

One of the most contentious issues that needed redressal was around the 40% presumptive credit on transition stocks embedded with excise duty. This presumptive credit was way below the actual duty embedded in several sectors and led to de-stocking by distribution chains ahead of GST. The council was receptive to this feedback and has addressed this issue by raising presumptive credit to 60% for goods that attract GST rates of 18% and above and maintaining at 40% for others.

Also, for goods above a value of Rs25,000 like televisions, refrigerators and automobiles where either the item serial number or chassis number can be tracked in distribution chain, a credit transfer document indicating excise duty paid will be sufficient to claim 100% credit. While the fine print of these changes is awaited and will be important, these will cushion companies’ financial impact on such transition stocks and also address the de-stocking. Another area that still awaits clarification is treatment of area-based excise incentives and state incentives. While we hear these would move to refunds net of credit, details are still awaited and it’s critical for industry to know this before 1 July.

With rates finalized, the focus has shifted to pricing and hence anti-profiteering provisions. Wherever there are credit efficiencies and rate reductions, the expectations are that commensurate price reductions are passed on. While companies will pass on such reductions as appropriate, the issue is around execution; hence, clarity in the form of guidelines is required to ensure transparency and avoid unnecessary audits/disputes. It appears from comments that the body that will monitor anti-profiteering will address complaints when raised, more like a watchdog. However, this aspect needs to be clarified.

The GST Council has also tweaked return formats to ensure simplification, which is welcome. But the issue is we are moving to an era of complete electronic compliance at the transaction level which requires GSTN, companies, ERP solution providers, GST Suvidha Providers (GSP) and Application Service Providers (ASP) to build technology-enabled solutions to handle such returns.

All these have been working round-the-clock for the last several months, to get ready for testing and going live on 1 July. This could be ominous for GST compliance and could result in significant challenges in the first few months.

Changes in return format at this late stage mean changes to IT developments both in GSTN and across industry/compliance facilitators in the next few weeks (next to impossible) with no time for testing of any kind. This could be ominous for GST compliance and could result in chaos in the first few months. While we hear GSTN is ready, it’s equally important that other stakeholders are ready to integrate with GSTN. If there is one serious concern for 1 July implementation, it’s the GST compliance piece and it’s important that the government understands this challenge and finds a solution in the interim or else this would be a difficult transition piece for the industry.