Now that the constitutional amendment bill on GST is getting passed by a majority of states, with the BJP-ruled ones taking the lead, the series of steps that are required to be taken further to implement GST would inform us of the complexities which the Centre, states and the assesees are most likely to face.
The passing of the GST constitutional amendment bill itself was a function of negotiation on political issues and the extent of surrender of sovereignty by the Centre and the states.
A GST Council with the Centre and the states will be constituted once the constitutional amendment bill is signed by the President. The display of willingness and seriousness by the Council to conclude quickly the tasks before it will determine when the governments will be ready to operate the GST regime. The preparedness of the industry in the country is another serious issue and from available reports, industry is not likely to be in a position to put in place the system and train the persons involved before September 2017.
The most important task before the Council will be to determine the standard rate of GST. The standard rate will be used by the states to maintain the scope to increase revenue and a limited wrenching away of sovereignty already conceded by the states. The states would press for having a narrow range around the standard rate for shoring up revenue in times of critical need. The Centre will be guided by the fact that a higher standard rate will push up prices, but will also strive to strike a balance to see that the Centre is not saddled with fiscal deficit on account of meeting the shortfall in revenue of the states for five years. According to a study, at a standard rate of 22%, the effect on inflation is likely to be 0.3%-0.7%. Under this circumstance, though the Revenue Neutral Rate (RNR) is projected to be 15.5% by the group under Arvind Subramanian, the number of large revenue items that will get into the exemption list and the essential list will determine the standard rate. The narrower the number of items in these lists, the higher the scope for a lower standard rate. This is a matter of hard negotiation in the Council. It is worth recalling that in the list, there are likely to be five categories. They are exemption list for merit goods with 0% rate, essentials with 12%, the standard rate items and the fourth being the sin goods, which could be around 40%. Gold and precious items in the fifth category are likely to be in the 2%-3% range. The Indian National Congress has been keen not to let the standard rate go beyond 18% and bind it in the GST law, since it feels that any standard rate beyond 18% would lead to inflation. Experts believe that the standard rate will be finally between 18%-20%.
There is bound to be some extra paperwork for those who manufacture or trade in goods as the threshold limit for exemption from GST on goods is likely to be around Rs 25 lakh. Currently, for manufacturers, the exemption limit under Central excise is at Rs 1.5 cr. Those in the services business may see their exemption limit go up from Rs 10 lakh to Rs 25 lakh. The present discussions on threshold on all goods and services vary between Rs 10 lakh to Rs 25 lakh. The benefit of maximising compliance for revenue foregone should guide the decision on the determination of threshold.
The Model Law for GST available in the public domain has evoked mixed comments from users. Though some feel that it is badly drafted, most apprehensions are around interpretation issues, which if not addressed, could lead to litigation. Some issues on simplifying administration also require attention. A vociferous group on e-commerce wants computation of assessable income to apply only to the service income and the advertisement revenue they receive and not on the goods that are traded on their platform. This is perfectly justifiable as the goods are not bought and sold by the e-commerce entity. Entities also want to avoid separate state-wide registration as it would increase the compliance costs. They also fear that the law as it is worded now could lead to creation of multiple documents for interstate transfer, leading to delay and creation of transaction costs. They want a mechanism by which un-availed input credit can be refunded at the end of the chain. The way in which the concept of valuation has been handled in the law also could lead to litigation and uncertainties. In the dispute settlement mechanism outlined, the assesees want some modifications to be carried out to relate them to the existing methods of dispute settlement. These are issues on which the empowered group of ministers have already started applying their mind. These issues are required to be determined early as changes will be required to be made to the GSTN network, linked networks of various government departments and those at the level of the entities.
The GSTN, a network mechanism to link finally all transactions up to the consumer level is reported to have advanced as per the need to put into operation the GST regime by 1 April 2017. There seems to be some apprehension that the backbone is not sufficiently strong enough to carry the load of a large number of transactions connecting various users that may arise. While this is a problem that can be overcome with renewed focus, what bothers more is the preparedness of the industry to put in place the network and systems to make a seamless transition by 1 April 2017. The problem will be more accentuated in respect of MSMEs above the finally agreed threshold. Their lack of preparedness could result in breaking of the chain of reversal of credit, leading to accumulation credit and ultimately the consumers will have to pay a higher MRP. This is an area which requires immediate state assistance and monitoring. With increase in the service tax component under GST to 18%-20% from the present 15% and inability of the MSMEs to reverse input credit, there is a genuine worry on their impact on inflation.
That leads to the last issue of how we are going to ensure that the traders are going to pass on the benefit to the consumers. Though we expect market forces to correct this, we should be wary of this issue and institute mechanisms at the consumer level to monitor them.
The GST mechanism is transformational in scope in our economy and all stakeholders must play their part to ensure that ultimately the fruits of this measure reach the common man.
R. Gopalan last served as Member, PESB. He was Secretary in the Ministry of Finance in the Department of Economic Affairs and in the Department of Financial Services. An IAS officer from Tamil Nadu, he conducted negotiations at the WTO on behalf of India. He has wide experience in administrative matters, and in international economic, financial and strategic issues.