On IT Backbone for GST

CBEC is hoping that the IT systems for GST will be up and running by January 2017. This is dangerously close to the proposed April 2017 rollout, and does not offer much time to remove glitches that will inevitably be there in the first version.

GSTN has given the contract for IT backbone to Infosys. Let me put this in context. This year,

Making GST Better

My previous post explains why GST is not the 'One Nation One Tax' it is made out to be, and why we should cheer only as much as is due. In this post, I consider how GST can be made better. Some ideas:

1. Dual Control

A critical problem in GST is the significant jump in compliance burden for traders and service providers. Currently, traders are assessed only by VAT authorities at the State level while service providers report to Central Govt. In GST, each of them will have to report to both Central and State GST authorities. 

This can be easily resolved by having a liberal turnover threshold (say, Rs. 10 crores annually) upto which State authorities will assess for both State and Central GST. Since same set of codes and same IT infrastructure is to be used, this change can be incorporated with no notable burden. If required, GST Council can devise norms for compensating States for discharging the burden of Central Govt. 

Similarly, multi-state enterprises should be permitted to report exclusively to Central GST authorities. 

2. Release Draft Rules, Tax Rates and Exemptions 

There is no reason why the proposed details are not in public domain if GST is supposed to be rolled out from April 2017. Release them now so that entrepreneurs can look at the nitty-gritties. 

3. Section 16(11)(c) 

Section 16(11)(c) of the Model GST Bill requires that the supplier should have paid tax before you can take credit. This clause may disrupt business cycles and freeze up transactions as customers have no good way of finding out if the supplier has paid the tax. Thus, they may withhold payment unless supplier can furnish some evidence of tax payment. This will delay settlements till beyond the return cycle. I have discussed the problem in greater detail in an earlier post. 

The idea behind the clause is to safeguard revenue against false credit claims. However, this safeguard can be easily provided by having a system under GSTN where the supplier can voluntary furnish information for taxable supplies to parties. Once the supplier uploads particulars of an invoice on GSTN, there would be a rebuttable presumption that the supply is genuine and the supplier intends to pay tax on the same. In case of default by supplier in payment of tax, the presumption would stand rebutted where there is reason to suspect collusion or where related parties are involved. 

ERP packages can design a system wherein desired invoices can be uploaded on GSTN on a daily basis automatically where they can be seen by the customer whose registration number would be contained therein. The customer can log-in and verify that the supplier has intimated transaction to the GST authorities. Assured of the supplier's bona fides, he can make the payment within the normal credit cycle.  

4. Match Timings for Payments and Credits

For services provided over a period of time, the Model GST Bill provides that tax is payable when the supply of service commences while customer will get credit when the the supply ends. 

Many service contracts are structured to run over a period of 1 or more years. Thus, for an AMC for an asset, full tax will be charged at the beginning of the contract while customer will get credit after 1 year. There is no reason why credit should be delayed till the end of service period once tax has been paid. The customer should be able to claim credit as soon as the supply becomes taxable. Otherwise, the tax credit chain is not seamless and credit gets bundled up. 

This provision should be re-drafted so that the tax liability should be broken up over the period of service with reference to quantum of work done or payment, with credit available on the same basis. 

5. Allow Transfer of Credit between Centre and State 

The Model GST Bill specifically provides that credit for Central GST cannot be utilised for paying State GST and vice versa. Meanwhile, credit for both can be used to pay Integrated GST on interstate transactions. A customer relying on small suppliers exempt from Central GST may accumulate credit under State GST. In such cases, these enterprises will find interstate transactions more beneficial than intrastate ones, distorting the idea of 'One Nation One Tax'. 

The Central Govt will in any case be adjusting and transferring revenue from one State to another and from Centre to States for interstate transactions. The scope of these transfers can be expanded to provide utilisation of credit between the two chains of Central GST and State GST. 

6. Reach Out to Small Enterprises 

Now that the feat of pushing the 122nd Amendment to the Constitution through Rajya Sabha has been accomplished, the Govt needs to phase out the hype and invite small enterprises to look into the details. A political statement from the top on suggested lines would help: "At ground level, our traders, manufacturers and service providers transact in a million different ways. We are committed to Ease of Doing Business. We have laid out the vision for an integrated tax that will unify the nation. But the task of writing the detailed rules cannot be left exclusively to officers sitting in New Delhi. Every small trader, every enterprise should join in the process and be a partner in this change." Amen!

GST Mythbusters

The 122nd Amendment to the Constitution does two major things:

A) It gives Centre the sole authority over interstate transactions, paving way for interstate credit not available under VAT regime.

B) It gives States the power to tax services.

These are great changes. Yet, GST is not the 'One Nation One Tax' it is made out to be. There is nothing in the 122nd Amendment to restrict the power of any State or Central Govt from playing with tax rates and rules. There is a GST Council, but it can only recommend. Its recommendations are not binding.

1. There is no restriction on the number of GST rates. States or Centre may have several different rates. There is no provision to ensure that tax rates are same across states.

2. Credit under Central GST cannot be used to pay State GST. Credit under State GST cannot be used to pay Central GST. However, both can be used to pay Integrated GST.

3. Different states may have different items exempted from tax and provide different basic exemption limits.

4. It will increase documentation burden on small taxpayers. Under VAT, a taxpayer simply classifies transactions as being within the state or interstate. In GST, he will have to maintain state-wise particulars for all interstate purchase and sales. For larger taxpayers using ERP, this poses no burden. However, this requirement will be burdensome for small taxpayers.

5. Large service providers providing services across the country (such as banks and telecom companies) will have to get registered in each state and pay State GST there. This will create a lot of confusion over which state the service is taxable.

6. Traders currently have to deal only with VAT authorities. They are not bothered with Central Excise authorities. Under GST, traders (except those with turnover below Rs. 1.5 crores) will have to get assessed with both of these authorities. Since excise authorities (to be renamed Central GST authorities) have been dealing with manufacturers who are typically larger and also have more detailed bookkeeping, the transition will be painful for traders.

The problem of Dual Control had been admitted by Central Govt as an important potential challenge to GST rollout. It is vital that traders voice their concerns in a timely manner.

7. Traders with turnover below Rs. 1.5 crores will not be liable to Central GST and pay only State GST. This has important implications for customers of such traders if the customer is liable under Central GST. A customer buying locally from several small traders and maintaining high levels of inventory will accumulate credit under State GST,which cannot be utilized to pay Central GST.

However, this credit can be used to pay Integrated GST on interstate transaction. This will create am environment where a taxpayer with accumulated State GST will be incentivised to prefer interstate transactions. This may lead to taxpayers setting up dummy units outside the state which will buy the goods and sell them back in 2 interstate transactions.

8. Once States exempt some items and impose high rates on others, they will have to continue with checkposts at state borders to ensure that goods are not being wrongly classified to evade taxes. So trucks will continue to sit idle at state borders awaiting checking, though the wait should be shorter.

9. Everytime an item is exempted, the tax credit chain will get broken at that point and cascading taxation will begin afresh.

10. Detailed draft rules and procedures for implementation, proposed tax rates, exemptions, norms to ensure timeliness of distribution of States' share in Integrated GST, method of computation and timeliness in distribution of compensation- All these are yet to be made public. As such, the homework for April 2017 rollout is not visible in the public domain.

We have seen the consequences of poor rollout in Companies Act 2013. Small companies are stuck when it came to raising equity or when lending or guaranteeing loans of sister concerns. Three years after it was notified, the Govt continues to bring amendments to nullify poorly thought provisions.

The lessons are twofold: One, having the bill in public domain is not adequate, detailed draft rules and procedures hold the key. Two, small players must learn to engage the Govt in a timely manner i.e. before the law is implemented.

The impact of the Company law fiasco was limited only because it adversely affected only a restricted group and also affected only financial transactions. But GST impacts everybody and all sale-purchase & service transactions. Hasty rollout will jeopardize the economy and all its constituents.

I remain positive on GST. The proposed setup involves much innovation and eliminates many problems in earlier drafts. And yes, some things we will learn on the feet, they will get improved only when the system is introduced. But let us ask for details before we cheer the proposed regime. And cheer only as much as is due.