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.