If implemented, GST will be the single most important tax reform in the country since independence. However, it has been in the offing for a decade now and continues to figure as a top priority on the economic agenda of the government.
What’s the issue now?
Although the model GST has been the subject of wide scrutiny and debate, most of the discussions have been centred on its road to passage or on its larger form and structure. Many issues of significance, which will be crucial to the making of a robust and successful GST, have largely been underplayed.
Issues associated with the GST:
- Dilution of uniform GST rate:
A lot has been discussed on the benefits of uniformity that the GST would usher in. It was expected that the GST would obviate potential rate wars between the states by putting in place a uniform tax rate by combining Central GST (CGST) and State GST (SGST).
- However, a Report of the Rajya Sabha Select Committee has indicated that a uniform GST rate would be diluted by giving States the freedom to impose the SGST within a band of rates in order to meet revenue expediencies or as a policy tool. Experts argue that this move undermine the true spirit of the GST Bill.
- GST Dispute Settlement Authority:
The failure to incorporate a GST Disputes Settlement Authority, as was provided for in the 2011 Bill, is a serious lacuna that must also be filled. The Authority would have reined in any deviations affecting the harmonised structure of the GST.
- Now, instead, all issues concerning rates, exemptions, and so on are to be decided by the GST Council (of which the Centre and States are members) by consensus, which may prove elusive given the political, social and revenue dynamics at play.
- Hence, the GST Council must be supplemented and reinforced with a GST Disputes Settlement Authority in toto as provided for in the 2011 Bill.
- Voting pattern within the GST Council:
It is also argued that the new GST Bill is unduly weighted in favour of the Centre. According to the new pattern, within the GST Council, the centre will get one-third share in voting rights. On the other hand, states’ collective share will be limited to two-third. In effect, each State, irrespective of size, representation and GDP contribution, will command an equal vote, a structure which militates against the basic spirit of representative democracy enshrined in the Constitution.
- This provision also opens up the Council to greater manoeuvring by the Centre on issues that it seeks to pass or veto.
- Hence, in the interests of true “cooperative federalism”, the share of the States in voting in the GST Council must be enhanced to 75% and the share of the Centre brought down to 25%.
- Rewarding destination states:
The existing tax system has typically followed a model of rewarding States where production activity is based (origin States), as opposed to States where consumption is high (destination States). Accordingly, most States have incentivised the setting up of local industries in order to drive growth and augment tax collections.
- But, GST is trying to disturb this delicate balance. GST, by nature, is a destination-based consumption tax. While origin States may chalk out measures to redress the imbalance, consumption and production patterns will not alter overnight, and industrialised States could be left in the lurch, at least in the immediate aftermath of the GST.
- In such a scenario, it will be difficult to predict the reaction of industrialised States. There is also the troubling prospect that such an aggrieved State may seek to substantially deviate from the uniform model.
- Hence, before proceeding further, it is the responsibility of the centre to make some alternative arrangements for these origin states.
- Disparity in IT connectivity:
Unlike the existing system, which has greater scope for manual intervention, the GST aims to achieve a tectonic shift to a singular digitised compliance set-up. While this would be a great leap forward if implemented well, what has perhaps been underestimated is the huge geographical disparity across the length and breadth of India in terms of IT connectivity and functionality.
- With Digital India campaign the government has planned to address this issue. But, it has a long way to go to achieve reasonable Internet penetration. As a result, in some sections of the country today, manual tax compliance remains the only option.
- Dependence of GST on IT:
The proposed GST is also highly dependent on IT. For instance, the Integrated Goods and Services Tax (IGST) mechanism, which enables the crucial fungibility of taxes across States, will be unworkable outside an automated set-up, especially given the sheer volume of transactions that the GST will subsume. The proposed IT infrastructure will have to be suitably equipped, as any snags would effectively render the levy dysfunctional.
- Conflict between the Centre and the States:
Under the GST, States will have the constitutional power to tax on a par with the Centre, bringing a host of service sectors within their scope for the first time.
- However, past precedent has shown that such dual taxing power has resulted in complete chaos at the cost of assesses.
- Issues of place of supply:
With GST in place, it is expected that issues of place of supply will also arise, with the Centre and States each asserting that the respective supply has occurred within their jurisdiction, so as to be able to garner the tax revenue. Poorly drafted rules will only aid and abet the confusion.
- Approach of revenue authorities:
With the implementation of the GST in India, many taxpayers will, for the first time, be exposed to the State authorities. It is possible that these tax payers may be abused by the state authorities. Hence, clear and objective guidelines should be put in place to whittle down the potential for any abuse of discretion.
Along the road to GST, it is also critical that these issues are subjected to the same level of governmental and public scrutiny so that the implementation of GST is a success in letter as well as in spirit.