GST: A second ‘tryst with destiny’

While the GST ushers in a new rate policy regime, there is need to reform the indirect tax administration at the Centre and in the states

With the passing of the main goods and services tax (GST) legislation by Parliament, the country is on the cusp of a truly transformational tax reform which began with the circulation of the first discussion paper on GST in 2009. Over the last eight years, there have been many discussions within the framework of sub-groups and committees in which representatives of the Centre and the states have jointly participated and interacted. The passing of the GST is therefore a triumph both for “cooperative federalism and deliberative democracy”. However, as the implementation date stares at us, there are some important issues which need clear resolution, which can be divided into the following: a) the technology issue b) the procedural issue c) the rate issue and d) the institutional issue. The technology issue The successful roll-out of GST depends critically on the successful working of the common GST portal created by the Goods and Services Tax Network (GSTN). The Central GST law provides for the creation of a common GST electronic portal for facilitating registration, payment of tax, furnishing of return, computation and settlement of integrated GST, electronic way bill and for carrying out any other function as may be prescribed. The biggest challenge here is that out of the 75 lakh registrants, 65 lakh are likely to be small and medium registrants who will upload their returns and pay duty using the offline utility created by the GSTN. The small and medium registrants need to take the help of Tax Return Preparers to help them in this task. A massive outreach campaign is required to reach these registrants. It is expected that two billion transactions will take place every month. The procedural issue One of the main objectives of the GST which is incorporated in the “Statement of objects and reasons” in the GST legislation is to reduce the high compliance cost for taxpayers created by tariff and non-tariff barriers such as octroi, entry tax, check post etc. Unfortunately, the existing GST legislation does provide for inspection of goods in movement and stipulates the carrying of documents. This provision has created a doubt among the assessees that the gains achieved through the abolition of entry tax should not be diluted by the continuance of the check post. It is suggested that the GSTN could issue a meta permit much like the all-India permits issued to trucks which can be shown and free movement of goods ensured. In a recent article, The Economist has observed that 16 per cent of the carriage time by a truck is spent at the check post.

Compliance verification for panIndia services like banking, telecom and insurance should be centralised. Valuation of self-supplies should be accepted without verification. The rate issue Ideally, the rates structure should be simple and also be uniform between goods and services. Value addition in hair clips should be treated on a par with haircuts. The GST council has decided on a five-tier structure of goods, namely five per cent, 12 per cent, 18 per cent, 28 per cent and 28 per cent + cess (for four specified commodities). It has been decided that cess amount would be used to compensate the state. In the case of services, the current thinking is to have most of the services in the standard rate of 18 per cent with the merit of 12 per cent for some essential services. While a multi-tier rate structure is inevitable given the consumption pattern of various goods, some rate changes are warranted. The GST council has broadly decided that goods should be fitted into rate slots nearest to their existing rates and duties (central excise + state VAT). Notwithstanding this, there is a case for bringing in a large number of goods which are in the 28 per cent category to 18 per cent as these are not luxury goods. However, in view of the revenue implications, this can be done by raising revenues. The government can think of raising the rate of duties on gold jewellery, which according to the Economic Survey of last year is mainly consumed by the top 20 per cent of the income bracket. A GST on unmanufactured tobacco could also be considered to be charged at the hands of the purchaser. Revenue from these two measures could help the government to move items from the 28 per cent to the 18 per cent rate slab.

The other advantage of this would be that arbitrage opportunities between goods and services would be obviated. Otherwise in some cases, manufacturers may prefer leasing arrangements to outright sale. The institutional issue There is an institutional void at the level of the states as there is no body to which trade and industry can go for resolving matters of a non-policy nature. Therefore, it is suggested that GST secretariats may be created in each state which can bring together senior Central and state officials in an institutional framework. This body can be registered under the Societies Act, just like the Empowered Committee of State Finance Ministers, and provided with dedicated secretariat and funding. This could be created on the basis of a resolution passed by the GST council which could be followed up by the cabinet secretary writing to the chief secretaries of the states.

While the GST ushers in a new rate policy regime, there is also need to reform indirect tax administration, both at the Centre and the states. Recently, the Central Board of Excise and Customs has formulated a restructuring plan which strengthens the directorate of systems, the Directorate of Tax Intelligence and the Directorate of Training besides creating a new Directorate of Analytics which will help to crunch tax data for policy making. The states also need to restructure their commercial tax departments. A clear distinction needs to be made between the three prongs of compliance verification, namely return scrutiny, audit and anti-evasion. Similarly, the states can also think of creating a risk assessment directorate which could help in selecting delinquent units for compliance verification using data from financial records. Similarly, administrative units must be organised on a functional basis around key business processes rather than around individual assessees.

In conclusion, GST by providing more resources and the JAM trinity (Jan Dhan, Aadhaar, mobile) by ensuring more efficient delivery can help in delivering the basic services to its people. Then perhaps, what Martin Wolf called — the second “tryst with destiny” — may be a moment to cherish and celebrate.