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!