Goods and Services Tax (GST) that has finally transformed India from being a political union to a political and economic union in the true sense was in itself a challenge considering how it has taken 17 long years us to get there, and how tortuous the journey has been. GST is undoubtedly India’s biggest piece of economic reforms that has also been the most complex reform to achieve as it called for the Constitution’s division of the tax base between the Centre and the States to be amended, calling for virtual political consensus across the federal divide and the political spectrum. It took a combined effort by India’s political parties to set aside narrow interests in pursuit of greater common good to bring about this reform. It has finally made us one economic entity with a single national market.
GST is expected to deliver innumerable benefits but given the challenges that lie ahead it would be naïve to imagine the ideal of a single national market: the One Nation – One Tax – One Market will be realised overnight. There are glitches aplenty that will have to be ironed out. It will be a while before the jungle of indirect tax laws with all its associated ills including corruption; that impeded competition and ease of doing business is replaced by the seamless operation envisaged under GST. GST is also not a magic wand that will change India overnight, rather the benefits in fact will be realised only after overcoming many challenges as under:
India’s GST is the first value-added tax to work entirely on an information technology and communications infrastructure and this is one of the biggest challenges. Under GST regime, all transactions and processes are required to be done only through electronic mode. The robustness of the IT backbone is must to process an estimated 3.5 billion invoices every month. More importantly there is no readiness and preparedness of small businesses, retailers and traders to align with the technology. The success of GST depends on how quickly businesses adapt to the digital taxation. Under GST, compliance procedures like registration, payments, refunds and returns can only be done through online portals. This is going to be a huge challenge in a country where there is a large number of small and medium enterprises, accounting for a significant share of the GDP.
Short-term adverse fallout on economic activity as a result of teething troubles arising from the sheer complexity of the new regime and its impact on prices is the second big challenge. If producers cut back on production for want of clarity on tax incidence or logistics problems, then we could see supply, and hence prices, being impacted.
Then there are challenges of innumerable procedural hassles, issues relating to transitional rules, refund procedure in case of inverted duty structure, e-way bill mechanism, and anti-profiteering clause and so on.
While corporate India is cheering the development, the implementation of the new tax regime is being seen as a big challenge. GST, which promises to facilitate ease of doing business in the long run, is however, a complex tax regime as far as its implementation is concerned.
The key challenges in terms of implementation of GST can be articulated as follows:
Determination of tax: To begin with, companies will have to put a system which will facilitate determination of tax as per the new regime. This will include consideration of source and destination along with special provision for states, products and schedules.
Compliance processes: Companies will have to make sure that there are periodic updates/uploads of sales and purchase data with reconciliation for tax payments and credits.
Reporting and analysis: Companies will also have to conduct analysis on pricing, supply chain networks and costs because of tax changes.
Then there are certain additional challenges that GST has thrown in particularly for certain industries as under:
Banks and Financial Services Companies: as compared to current indirect tax regime, in GST determination of correct place of supply, taxability of self supplies, state-wise registrations, taxability of interest margins and security trading gains are some of the complex challenges.
IT Companies: Non availability of tax exemption in SEZ unit, state-wise compliances, and multiple points of taxation are some of the major concerns.
E-commerce Companies: Tax Collected at Source (TCS) guidelines where payment made to supplier would be subject to TCS at the notified rate, point of taxation rules for goods etc. lays additional burden.
Another point to be considered is that while the India GST laws and rules are similar to GST regimes in other countries in many aspects; the Indian GST law places an additional burden on registered businesses to routinely submit financial transaction data to GSTN (GST Network) and follow a reconciliation mechanism for GST filings.
Working with these requisites and challenges will be a daunting task for Corporate India. For corporations, therefore, a robust IT infrastructure and tax technology, which takes cognizance of these conditions and offers a simplified solution, will definitely form the backbone of successful and effective GST implementation.
A major tax reform such as the goods and services tax (GST) is bound to have teething problems. This was fully anticipated and taxmen at the state and central levels are geared up to fix them. Earlier taxes like excise and central sales tax were levied on manufacturing at the factory gate or on inter-state movement of goods. Under GST, goods would be taxed at the destination. This would result in gains for the consuming state and loss for the manufacturing state. This was one of the reasons why large manufacturing states like Tamil Nadu had opposed the GST but large consuming states like Bihar, West Bengal and Odisha favoured the GST law. However, GST law provides for compensating the losses made by states (specifically the manufacturing states) for the initial few years. After GST, the government revenue will not remain the same. Through Revenue Neutral Rate the existing GST rates have been fixed to achieve revenue neutrality, which means that the government has tried to adjust in such a way that collections under GST would be at least equal to what the states used to collect pre-GST, and the Centre will make good any deficit.
None of the above challenges, however, can take away from the sheer economic logic and, indeed, necessity for GST. We are on our way to getting there.
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