The pain in GST is frontloaded, while the gains may be backloaded.
The NDA government has been brave to undertake this monumental task where the upfront risks are high and payback period long.
With the Union Cabinet clearing amendments to the Goods and Services Tax Bill, based on a wider consensus among states, there is a reasonable probability that the 122nd Constitutional Amendment Bill will be passed during the ongoing monsoon session of parliament. It is a huge leap of faith, both by the centre and states, on an initiative that is touted as the single largest tax reform ever attempted.
The problem is the benefits have been oversold in advance when the costs of GST implementation have not been properly calculated. There is loose talk of GST adding two percent to GDP, and how it will revolutionise indirect tax collection by reducing the sheer number of interfaces for businesses. With the GST Network now being put in place, the bulk of the indirect tax system could thus be digitised and become essentially paperless. India will become one common market for most goods and services. Ease of doing business will go up several notches.
When implemented, all central excise and indirect taxes, including service taxes, and cesses and additional duties will be subsumed in GST. At the state level, octroi, entry taxes, luxury tax, entertainment tax, and value-added tax will be subsumed into State GST. The unified GST will be Central plus State GST.
But that’s some time off. Before the gain comes the pain. The pain in GST is frontloaded, while the gains may be backloaded.
The pain will be both macro-economic and micro-economic, at the level of budgets, businesses and individuals. And we certainly should not rule out fights between centre and states when glitches come early.
The GST bargain has been sealed between centre and states, with the former offering a five-year guarantee of compensation of revenues lost after GST. So one should expect scraps between the two on how this loss is calculated, and the time-gap between loss detection and compensation.
This bargain also means that if revenues sag in the initial years of GST implementation for whatever reason, the centre will have to cough up – which could send the fiscal consolidation roadmap into a tailspin.
The second worry should be short-term inflation. GST will expand the tax net, and make evasion difficult since the tax is supply-based – levied at the point of delivery to the customer - and not manufacturer-based like excise. Since it is in the buyer’s interest to obtain deductions on taxes paid on inputs, input suppliers will necessarily have to pay tax. This will push up consumer prices in some goods and services where taxes are currently evaded.
Also, since the combined GST rate (centre and states) will be around 18 percent, the cost of services will go up once more. Services account for 60 percent of GDP. This means everything will cost more – from mobile and phone services to insurance policies, credit card services, auto repairs, pest control, the works.
Even though the idea of GST is one-country-one-rate, in the initial phase, there could be three GST rates – a central rate of around 18 percent, a merit rate of 12-14 percent for items deemed essential, and a luxury rate going up to 40 percent. SoGST is not going to be as simple as earlier assumed. The Indian preference for creating loopholes and exceptions will dominate GST thinking too. Alcohol and petroleum duties are also not part of GST in the initial phase, as states want to hold on to some revenue levers. Tobacco will be part of GST, but the centre reserves the right to impose additional excise, if needed. The only good news about the final draft of the GST bill is that the 1 percent inter-state sales tax proposed to humour manufacturing states has been dropped. It was unnecessary in the first place when the centre had already offered full compensation for losses.
Then there is the pain of implementation. At the hub of GST is the GST IT Networkbased in Delhi. The new tax requires all taxpayers to file returns, pay taxes and upload invoices electronically. At last count, there were more than 6.5 million businesses to be linked. Big or small, all taxpayers have to compulsorily go online. Consider the education and training required to be given before the GST Network, being built by Infosys, can run smoothly. Experts reckon that there will be at least a six-month hiatus between linking the taxpayers to GSTN and getting them to work with the system. And we have not even counted the back-end work at the state level, where much of the data will be captured.
There could be IT glitches confronting users in the initial phases. The GSTN CEO Prakash Kumar is quoted by IANS as saying that “the network is built for about 70 million taxpayers, who will upload about three billion business-to-business (B2B) invoices every month across the country.”
Any bets this is going to work like clockwork from Day One? The helplines will be kept busy for months on end, as small businesses try to go online to comply with the new law.
But before all that, let us not discount the legislative challenges ahead. It’s not just parliament that will need to pass this GST Constitutional Amendment Bill with a two-thirds majority. At least half the states will have to ratify the amendments (which means 16 states); after that, every state and Union territory (UT) will have to pass its own state GST bills – so that’s another 31 bits of legislation for 29 states and two UTs. That’s 33 pieces of legislation to go.
Then consider the numbers involved before GST goes live: the GST Network will have to confirm and issue TINs (taxpayer identification number) to 6.5 million plus businesses and authenticate probably twice as many digital signatures. There are millions of manhours of software training and preparatory work ahead.
There’s a hard slog. The NDA government has been brave to undertake this monumental task where the upfront risks are high and payback period long.