GST: Picture abhi baaki hai!

Mythili Bhusnurmath

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IT’S been a fortnight since the much-awaited launch of the Goods and Services Tax (GST) on July 1, 2017. Contrary to expectations, the heavens haven't fallen! Nor has economic activity ground to a standstill. Sure, there have been reports of protests in various parts of the country — the film and cracker industry in Tamil Nadu, textile traders in Gujarat, cloth merchants in Ludhiana, traders in Kolkata and so on.

But these have been mostly short-lived and more in the nature of minor disturbances, not catastrophes threatening the continuance of GST. And with the sole laggard, Jammu and Kashmir, falling in line and passing the GST bill in the second week of July 2017, almost nothing, it would seem, can come in the way of GST implementation; a truly watershed event in the history of taxation in India.  The government, on its part, is certainly leaving no stone unturned to ensure the rollout is smooth. From directing ministers to travel the length and breadth of the country to sell the benefits of GST, to a series of advertisements in major dailies in the run-up to the launch, to the daily blitzkrieg of full-page ads, post launch, on the nitty-gritty of GST, to bilingual master classes conducted by senior government functionaries, the government is pulling out all stops to make GST a success.

 Will these efforts suffice? Will the short-term pain be brief enough, and mild enough, to compensate for the long-term gain? Will the gain be large enough and enduring enough? These are just some of the doubts assailing many of those who were fervent advocates of GST in the run-up to the launch. The reasons for their lingering disquiet are not far to seek. They arise essentially from two key features of GST as it is being implemented presently: one, the sheer enormity of the change in systems and business processes that it entails and two, the numerous compromises necessitated to get GST off the ground. 

 Take these one by one. GST replaces the complex regime of indirect taxes that we've lived with since Independence with a much simpler tax regime. By subsuming 17 taxes and 23 cesses in a single tax, the plethora of taxes on goods and services in the pre-GST era, (where the union government taxed goods at the production stage, states did likewise at the retail stage while taxation of services was the preserve of the union government under the residuary powers of taxation laid down in Article 246, Schedule 7 of the Constitution) is now history. 

 On paper, this should be hugely positive. Particularly since GST ends cascading, wherein taxes were levied on goods whose prices already included an element of tax at an earlier stage and hence, adds to inefficiencies/reduces the competitiveness of our goods in world markets. GST also ends fragmentation of domestic markets that results from different states levying taxes like entry tax, octroi and so on. Delays caused by the pile-up of trucks at state borders were commonplace in the pre-GST era. It is estimated India lost as much as $21.3 billion annually due to transportation delays and additional fuel consumption (according to a recent report co-authored by Transport Corporation of India and IIM Kolkata). 

 The benefits of GST are, therefore, far from trivial. If despite this anxieties abound, it is only because GST, as is being presently implemented, is a far cry from an ideal GST. And that is the crux of the problem.

 How is it different? For one, many sectors — fuel, real estate/construction, alcohol, electricity, natural gas — accounting for close to 50 per cent of the GDP (gross domestic product) are out of the ambit of GST. For another, political economy compulsions underlying the need to find common ground between 29 states, seven union territories and the union government have meant that the advantage of a single tax rate had to be sacrificed in favour of a multiple tax structure with rates ranging from zero in the case of exempt items to 5, 12, 18, 28 per cent with a cap of 40 per cent on certain items in the 28 per cent bracket that are also subject to cess.  

 Multiple rates immediately open up Pandora's box on classification of items. Is coconut oil, for example, cooking oil or a cosmetic? In Kerala, it is both! But in the rest of the country, it is almost never used as a cooking medium. There are many such examples; as is inevitable in a country of our diversity. To the extent that all goods are required to be classified using the four-digit HSN (Harmonised System of Nomenclature) in the GST regime, the scope for confusion might be less. But it will not disappear.

 In fact, the use of price differentials to determine tax rates means classification disputes will continue. Thus, readymade garments below Rs 1000 are to be taxed at five per cent under GST,  while those above Rs 1000 will attract 12 per cent tax. Likewise, in the case of footwear where the dividing line is at Rs 500; footwear costing less than Rs 500 will be taxed at five per cent, all others at 18 per cent and so on. Most critically, the success of GST rides almost entirely on how quickly and successfully we are able to shift from a paper-based, sometimes informal, regime to a technology-driven, paperless one. 

This is where the GSTN (GST Network), the IT (information technology) backbone for GST comes in. GSTN is responsible for registration, forwarding tax returns to Central and state authorities; computing and settling IGST; matching tax payment details with banking network; running the matching engine for matching, reversal and reclaim of input tax credit and so on. To say it will have to handle a humungous amount of data is to put it mildly. Remember, apart from businesses with a turnover of less than Rs 20 lakh that are exempt, all other suppliers of goods and services are required to register with the GST Network (GSTN). The big question is whether small and medium businesses, a majority of who are not even acquainted with IT, will be able to transit to an entirely IT-driven system.

 And whether GSTN will be able to handle the resultant volumes. Preliminary estimates suggest GSTN would be required to handle a minimum three billion invoices a month. Unfortunately, neither the ability of businesses, especially of small and medium businesses, to shift to a technology-driven regime nor the ability of GSTN to handle this huge load has been tested. For now we have a bit of a breather. The first test will come in September when the first lot of returns for July 2017 transactions are filed. These are but some of the bigger challenges. There are many others ahead. The proof of the pudding, after all, is always in the eating. Reports suggest some states are already reneging on their promise not to levy new taxes/raise taxes. Entry taxes by municipalities, entertainment taxes by local bodies and stamp duties, for instance, are outside the purview of GST. The bottomline is we are in for the long haul. For now, we have only crossed the first few hurdles — as they say, picture abhi baaki hai! 

The writer is a senior consultant at the National Council of Applied Economic Research.