As GST launch nears, here is a list of eight critical challenges for the govt
The next few months will be very critical for the nation as the entire system adjusts to the new tax regime
The long road to the implementation of the GST has finally ended with the tryst with July 1, 2017 being achieved. The path has been bumpy with several attempts being made in the last 5 years which has culminated with acquiescence by almost all states. The economic effects would be debatable as the views swing wildly between overt optimism and cautious pessimism. The GST involves a plethora of goods and services and tax rates and while the government has worked to ensure that it would be revenue neutral and inflation free in the medium term, the disruption in the short term could be significant. Further, it would still be hard to separate the tax effect from other factors when evaluating the impact on inflation or GDP.
The issues which would now be in focus are on the implementation side. While it is true that India is famous for the ‘jugaad’ mantra, which always seems to work at the end of the day, the actual implementation of any grand scheme has always been suspect which held for even the demonetisation scheme. Let us look at what would be the areas that will be of interest from hereon.
First, is the issue of the awareness of such a tax? While there has been a lot of effort put in by the government to educate the people about the shift-over of the tax system to GST, all economic agents need to be aware of the same. While the smaller ones with lower turnover levels have been exempted (turnover of less than Rs 20 lakhs per annum), those who should be registered need to do so or else it can create problems down the line as every tax credit to be claimed by any player requires the entire chain to also be in the loop as this is the basic idea of a GST. There has to be continuous matching of payments and taxes for all members of the value chain for every participant in order to claim such benefits. To begin with there will be anomalies which can impose a regulatory burden on tax payers.
Second, given the monthly and annual filings to be done from each and every state where an enterprise operates, it is necessary to have the ERP system in place for all of them. While this would be seamless for the larger firms which operate from multiple state locations, the smaller ones would be challenged as they need to get this in place. Alternatively this has to be done separately in all locations which will add to the cost of compliance.
Third, the GST experts would be in demand from the point of view of paying the same. This is what will be needed by almost all firms for understanding how to go about paying the taxes and complying with the same. GST laws have introduced multiple new concepts like supply and location of supplier which can be subject to varying interpretations and will require professional advice.
Fourth, the GST software (GSTN) from the revenue department’s side will stand the test of time because with myriads of firms filing their returns continuously on a monthly basis, there will be a tendency for systems to come under pressure. This has been noticed from almost any venture taken up which involves heavy usage and hence will be an area to be watched closely by the government department. For example with the government announcing that the last date for linking PAN with Aadhaar being 30 June, it is hard for one to login to the e-filing site.
Fifth, the apportioning of revenue to the states will be another area of interest. The GST has been drawn up in a manner such that there is an equal division between the two. As the revenue flows on a monthly basis is important for all states there needs to be seamless movement of funds from the centre to the states and vice-versa or else there would be deficits in cash flows which get linked with expenditures. The process of tracking all these transactions is complex and will require a very robust IT system. The clearing house mechanism envisaged in the dual model GST will have to handle a lot of data and process in real time to ensure smooth transition. Therefore, this flow would also deserve attention after July.
Sixth, the adjustment made by companies is important from the point of view of growth. It has been observed that in the period running till the implementation of GST companies have cut back on their production to deal with their stocks so as to be steer away from the dilemma of ambiguity on the tax implications for goods already in the warehouse to be sold after the GST is introduced. Some may defer production in order to claim a credit against their costs for the first time under the new regime. Their period of adjustment is important because it would have a bearing on the growth of the economy. It may be expected that normalcy would be with a lag of 1-2 quarters.
The price impact also appears to be uncertain today and it is largely expected that prices will move up to begin with as price movements have been sticky in the downward direction in the past. While there is a clause of anti-profiteering on this score, companies will have to devote considerable resources to ensure that they do not fall in this net. However, it must be pointed out that it will always be difficult to prove such a restrictive measure as linking GST to price is not very direct given that the rates vary for the final product as well as the inputs that are going in.
Finally, it is hoped that there would be a grievance redress mechanism in place that will be available to all firms which are involved not just in paying taxes but also seeking clarifications on the processes, refunds, tax credits etc.
Hence, the next few months will be very critical for the nation as the entire system adjusts to the new tax regime, which is known to bring in efficiency for certain and make it easier to do business. The logistics of execution would be critical at the operational level and it is hoped that by the end of the calendar year, all economic agents should have adjusted to this new dispensation.
(The writer is Chief Economist, CARE Ratings; views are personal)
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