Preparedness for GST

Economic Affairs Tax System

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With less than one year left for the roll out of the much awaited GST, various apprehensions have emerged regarding the preparedness of the Indian Economy for such a gigantic step. These apprehensions bring out a typical case of the dilemma between time and perfection.
These apprehensions can be discussed in terms of four aspects:
a.) Standardisation Rates
b.) Mapping of Products and Services
c.) Ambiguities in Legal Framework
d.) Degree of Compliance

The first one deals with the “Standard Rate”. A large number of rates can distort supply chains and complicate administration as well as compliance, introducing undesirable discretion in the system. At the same time, just one standard rate may fail to offset the regressive nature of indirect tax and may cause inflation for the poor [because currently each of excise (a central levy) and (state) sales tax schedules has a low band (4-6 per cent) and a standard one (12-14 per cent)].

Secondly, the process of Mapping the hundreds of product and services categories to the few GST rate slabs would be a trivial exercise and would also raises certain concerns. The costs of commencing a major simplification of rates i.e.
a.) the time it may take,
b.) the one-time disruption, and
c.) getting all states to agree to a completely new rate schedule
pose a challenge in this regard.
Moreover Some rates also embody efforts to incentivise “Make in India”: A hurried mapping effort therefore could distort such incentives. Absence of any official assessment of the impact of GST on India’s trade competitiveness raises further apprehensions regarding the impact of GST.

The third aspect entails the legal framework behind the GST Law. Release of GST law into Public Domain has invited huge public scrutiny, the list of associated changes to harness the benefits of GST is therefore growing rapidly (especially because many changes are first time in India such as service tax by States). Besides this draft of the IGST law, which will deal with contentious inter-state transfers, has not been made public yet. A hurried passage may therefore be inappropriate. The ambiguities in legal framework thus arising need to be sorted out

The fourth aspect deals with the degree of compliance: which is believed to be the most important expected gain from GST. However, without a simplification of the compliance process, this improvement could prove illusory. For example, small enterprises are concerned about the complexity of compliance more than the cost of the tax itself (dealing with the day-to-day maintenance of registers and sometimes with corrupt officials).

Thus in the light of above arguments, it is evident that dilemma of preparedness is associated with a trade off between time and perfection.

As a Way Forward:

With a limited time left, Clarity on rates must emerge in the next few months for the next year’s budgets. Rollout close to 2019 elections must also be avoided lest the distortions arising out of GST should become a poll issue.
An incremental development regarding GST rollout may also seem to be tempting but only in short term. The best time to make structural changes is when a new system is starting; making them later risks creating a patchwork that can never be as efficient. As the GST Council’s internal politics evolves, it may become tougher, not easier, to build consensus on structural changes.
A handful of taskforces working in parallel over four to six months could make the whole plan much more considered.
A senior bureaucrat appointed to the GST secretariat and put in charge of the whole GST project could improve coordination.
It could also help build the necessary conviction among those who need to contribute to the change.
Easier and possibly automatic filing of returns is likely as important as the invoice matching that is expected to widen the GST tax net
draft of the IGST law must be made public and desired modifications be incorporated before the GST rolls out.