Finally, the first step towards implementation of the Goods and Services Tax (GST) has been taken. From a state where the entire discourse was on the benefits of GST and the failure of India to implement such a landmark tax, there will now be a shift to discussing the structure of the tax and the forms and hurdles in implementation of GST.
This is a major achievement for the government given the considerable effort put in towards consensus-building. It is also a major step for the economy since the introduction of the GST is expected to knit the economy into a single common market which, in turn, will allow investment to benefit from economies of scale and facilitate more streamlined supply chain management. In other words, efficiency in the economy can be improved. While there have been concerns about inflation, experience internationally as well as India’s experience with value-added tax (VAT) have shown that while prices might spike in the initial months of introduction, this does not result in sustained inflation. This is therefore a big moment which needs to be appreciated before we embark on the next series required to be completed before the tax rolls out in the country.
Turning to the next set of challenges that might come and need to be addressed, there are three important challenges here. The first relates to the administration of the proposed GST regime. The advantages with the GST depend on a change in perception of the stakeholders on two fronts: one, the GST needs to emerge as a regime which is easier to comply with when compared to the other regimes in existence at present. Two, the administration should be perceived as being more vigilant so that evasion becomes more difficult in the GST that in the present regime.
Why are these important? The expected benefits from the GST are intrinsically related to a larger number of potential taxpayers believing that it is an advantage to be within the GST regime and a distinct disadvantage to be outside it. Any tax system involves certain costs for the taxpayers, in terms of tax payable as well as the cost of being in the regime in terms of record-keeping and other compliance requirements. Being outside the tax regime offers certain advantages since these costs need not be borne. However, there is a potential cost if a non-compliant dealer is caught and subjected to the punitive measures defined in the system. For the GST regime to be successful, it is important to not only reduce the costs of compliance within the system but also to make more effective the costs associated with evasion so as to induce a behavioural shift.
Viewed in this light, the few details that are available on the possible structure of GST administration raise a few concerns. While the tax base for the Centre and States is to be the same, it is proposed that both would continue to have separate administrations. The GST Network, the IT backbone for the new regime, will reduce taxpayer interface with departments for activities like registration and filing of returns. But for the rest of the functions, it is not clear whether there would be coordination between the departments or whether the taxpayer will face two tax departments with the possibility of two litigations as well! For the small taxpayers, it is suggested that there might be a simplified regime, in the sense that they might be monitored by only the State tax departments. But for the rest, it looks like there would be two tax administrations.
The second challenge in the proposed regime is reflected in the form that the draft GST legislation has taken. In the recent past, the Department of Revenue has placed in the public domain a draft GST bill for comments from stakeholders. Unfortunately, parts of the draft bill appear to be too keen to safeguard the interest of the tax departments and in the process introduce an element of interpretation into the regime, thereby expanding the scope for litigation. To give an example, the tax regime proposes that the value to be subject to tax would be transaction value, which can be different from the value on the invoice. For transactions between related parties, the draft legislation lays out a number of inclusions over and above the invoice value to determine the value of transaction. This is done to guard against problems of mispricing and any potential loss of revenue on this count. But given that the GST regime would require a large number of companies to undertake related party transactions, this particular provision could lead to a number of litigations. These might not contribute to a perception of a compliance-friendly tax regime.
The tax test
The third challenge relates to the rates of tax for the GST regime. The challenge here can be summarised as follows: a high rate of tax is not considered desirable for voluntary self-compliance. This is even more applicable where the rate of tax shows up on the invoice — the consumer and the taxpayer would like to negotiate on whether the invoice is necessary or not. In other words, transactions could remain outside the domain of the GST, which would defeat the purpose of the GST. However, given that both the Union and State governments get considerable revenues from the existing indirect taxes which are sought to be replaced by the GST, the regime needs to generate enough resources. The challenge for the decision-makers in GST, i.e. the GST Council, would be to balance these two concerns. A GST regime with a single rate of tax is not under consideration.
While having fewer rates of tax is considered a desirable feature since it would reduce the incentive to misclassify supplies to minimise tax liability and incentivises individuals to remain within the ambit of GST, expanding the number of rates allows for certain supplies to be deemed luxuries which can be then be taxed at a higher rate, allowing the others to be taxed at a lower rate. The big challenge is to determine what rate structure to adopt so as to incentivise compliance and at the same time generate enough revenues. Clearly, the reduction in rates of tax cannot be left on the doorstep of improved compliance in the short run since that would place the governments at a substantial revenue risk. How this decision plays out would influence to a certain degree how successful the reform measure would be.
In other words, there are still a few major decisions to be taken before we can witness the roll-out of the GST. There are still a few challenges that need to be addressed. But given that the first step has been taken, it would stimulate efforts to iron out the other difficulties and resolve the other challenges. At least now, the commentators on the Indian economy would need to think of something else to comment about!
R. Kavita Rao is a Professor at the National Institute of Public Finance and Policy, Delhi.
For small taxpayers, there might be a simplified regime. For the rest, it looks like
there would be two