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The Big Picture: GST: What are the hitches to be sorted out?

 

 


The Big Picture: GST: What are the hitches to be sorted out?


 

 

The much awaited announcement of the rates of taxes under the GST regime has got stuck. The GST Council meeting which was expected to come out with a decision on tax rates not only failed but was also adjourned abruptly. The Government’s hope to roll out GST by 1st April 2017 has certainly come under a shadow. The rates proposed by Government under a four slab structure is however not being agreed by all the states.

Reasons:

  1. GST started off with the idea of fitting into a variety of Government’s programmes like ease of doing business, getting the whole country into one single market, Make in India Scheme. At present, there is a situation where technically there are 4 rates, classification disputes arising and different rate of taxes for different items ranging from 26% to 6%. It was projected by various Government committees to have minimum number of rate slabs so that classification dispute does not arise. What is there at present is a compromised GST which does not address the main concern of bringing in efficiency. CPI sensitive items are being left out which is an exception. If a large number of items are taken out of GST, they will not get the benefit.

 

  1. Different states have different perspectives varying for destination states and producing states. Fixation of rates is a very complex matter. It has to take into account the factors like the revenues of the centre and the states, the tax burden on the consumers and also needs to have wider acceptability. It is not easy to strike a balance among these three issues. Whatever has been proposed by the Central Government to the Council, it is too complex and perhaps does not gel with the basic rationale of GST.

 

  1. This type of multiple rate structure is certainly not a good idea. Basically there are four rates: 6% for essential goods like food grains, 12% for merit goods, 18% for non-merit goods and 26% for luxury goods. The challenge is which product has to be put in which category.

 

  1. The structure of tax that has been devised now is such that everything has more or less the same rate as it has now. There was a need of game changer and what is being provided is just a name changer. The cess which was supposed to be absorbed has come back. Right now we have a uniform rate and changes will create a lot of confusion in services sector.

 

  1. In a federal structure like India where the states are being asked to give up their taxation powers which they had constitutionally all this while is a big challenge. Every state cannot agree to everything. Consensus has not been reached on tax rates but on compensation principle. Issue of inflation is not a primary concern of this Council because it would cut the income of both Centre and States. Nobody seems to be looking at the wider impact on economy. There is a need to minimize the gap between old tax and new tax in manufacturing but the problem is half of the taxes will be collected from services sector. This complexity has not been addressed as far as impact on services sector is concerned.

 

Possible Solutions:

GST Council should have representation of ministers from all states. There is a Revenue Secretary of Government of India who probably does the administrative work and background notes for consideration by the Council. A round of discussion at the officers’ level might be fruitful among Revenue Secretary at the Centre and Finance Secretaries of states and then making out a certain proposal which has a degree of acceptance at official level and then move forward to GST Council.

At present this problem should not be rushed into. These matters need more time for deliberation after the amendments were made. Time is required to train the staff and businesses to have software because everything is going to be invoice based. It is going to be highly inflationary unless there is a mechanism put in place to ensure that the benefits of elimination of cascading effects of taxes actually pass on to the consumers. The multi slab system might work but it might not give optimum results which were envisaged.