No further time to be lost on GST

The tabling of the Constitution Amendment Bill in the Lok Sabha on Friday is indeed a welcome step and signals the government’s seriousness in implementing the much awaited Goods and Services Tax (GST) in April 2016.

Like the Finance Minister said, this is one of the most important tax reforms since Independence. It enables the Centre and States to concurrently tax goods and services across the supply chain with a seamless credit mechanism.

The perusal of the Constitution Amendment Bill suggests that the Centre has more than met the States’ demands towards fostering the spirit of cooperative federalism.

The Bill, adhering to the demands of States, keeps alcohol for human consumption outside, while petroleum goods will attract GST from a date to be notified later.

Compensation to States for any loss of revenues due to implementation of GST for a period of five years is another feature of the Bill.

While these facts that were known, what came as a surprise was the Centre agreeing to an additional 1 per cent origin based tax on supply of goods in the course of inter-State trade or commerce of goods, to be collected by the Centre for a period of two years and assigned to States.

This major concession of an origin-based tax in a GST scenario which is fundamentally destination-based could have been best avoided. The additional tax is primarily to assuage the producing States and will result in their collecting these taxes over and above the GST revenues.

This will unnecessarily complicate the tax system and create a cascading element as it appears that this tax would be outside the GST credit chain.

With the Centre agreeing to compensate States for any loss due to GST there was no need to have created this origin-based exception.

Hopefully, good sense will prevail among the States to remove this additional origin-based tax of 1 per cent as Parliament debates the Bill.

While compromises will result in a less than an ideal GST structure, it at least paves the way for its potential implementation in April 2016.

The Bill brings some clarity on all the taxes and duties that will be subsumed within GST both at Centre and State, including entry tax and the levy of integrated GST on goods and services on inter- state transactions.

The concept of declared goods has also been dispensed with going forward under the GST structure.

Another important aspect of the Bill is the structure and functioning of the GST council.

It’s imperative to understand this body as it has the powers to recommend base and threshold limits, taxes to be subsumed, exemptions, model law, principles of levy, place of supply rules, floor rates with bands, special provisions for specified States and so on.

Fundamentally, the GST design and structure — when it unfolds — and its evolution will depend on the collective wisdom of this council. The fact that this council will be guided by the principles of creating a harmonised GST structure for a national common market provides some degree of comfort.

The GST council will comprise the Centre, represented by the Finance Minister as chairperson, and State ministers in charge of finance, revenue or taxation as case may be.

The council will need to have 50 per cent of its members to be present for a quorum, with the Centre having a weightage of 33 per cent and all States combined having a weightage of 67 per cent of the total votes cast.

No decision of the council can be taken without a 75 per cent majority of weighted votes of the members present. This majority will hopefully ensure a balance and allow the Centre to play a crucial role in ensuring an efficient GST in consultation with the States.

While the tabling of the Bill has triggered the process of GST implementation, a lot will be need to achieved in the next 15 months for this to be a reality in April 2016.

At the outset, there is the question of the passage of the Bill in both houses of Parliament, especially the Rajya Sabha where there could be still be several challenges, followed by the passage of the Bill in 50 per cent of the States.

While the Finance Minister has alluded to the fact that the Bill need not be referred to the parliamentary standing committee, one will have to wait and watch.

The readiness of the IT platform is a critical component of the GST roll-out, and is incumbent on the readiness of GST law and rules. All these need to happen in tandem for the roll-out on the appointed date.

Further, it’s very important that industry is given a reasonable amount of time to understand the GST structure and design for them to prepare themselves both from a perspective of business and IT infrastructure, all of which require intense planning and time.

GST is not merely a tax reform but a transformation of how we do business in India. It will require careful and proactive planning by all stakeholders to leverage its benefits.

The writer is a partner and national leader, Indirect Tax, EY India. The views are personal

COMMENT NOW