The passage of the Constitution (122nd Amendment) Bill, 2014 for the introduction of the goods and services tax (GST) in Rajya Sabha marks a decisive crossing of the hump in the rollout of the ambitious indirect tax reform, which has been hanging fire since 2010.
After this, the Bill is slated to head back to Lok Sabha for the ratification of amendments moved in the Upper House, followed by the next crucial step — a ratification of the Bill by a minimum of 15 states in their respective assemblies. This will have to be followed by the President’s assent to the legislation to enable the rollout of GST by the intended deadline of April 1, 2017.
From an operational perspective, after the Presidential assent, a GST Council with representatives from the Centre and states will have to be formed within 60 days of the enactment of the Bill. The Council will be entrusted with recommending the tax rates, including the band of rates for goods and services.
While states are still in the process of thrashing out a consensus on the rates, broadly the rate is expected to come down for manufactured goods and go up for services, according to the decision of the Empowered Committee of State Finance Ministers which has been laying out the guiding principle for setting the rate.
The enactment of the Constitutional Amendment Bill will kick off a legislative marathon, with broadly three enabling laws required to be passed to give shape to the new tax regime — laws on the Central GST (CGST) and Integrated GST (IGST) that need to be cleared by Parliament and 29 separate State GST legislations (SGST) that will have to be cleared by the respective state assemblies.
States are likely to frame their GST laws in line with the CGST to enable implementation of the new tax regime. Alongside, the IT backbone for rolling out the tax regime, called GST Network (GSTN), will have to be commissioned which will facilitate online registration, tax payment and return filing.
After the passage of the Bill, Revenue Secretary Hasmukh Adhia tweeted that this is only the end of a beginning. He said the real hard work starts now and the government will make all attempts to implement GST as soon as possible. “We are ready with state-of-art IT design for GST implementation. Hardware and software will all be ready for testing by January 17,” Adhia said in his tweets.
The GSTN, being set up as a Section 25 (not for profit), non-government, private limited company in March 2013 to provide IT interface for GST, will essentially connect the database of states and Centre and taxpayers for seamless implementation of the indirect tax regime.
IT major Infosys was given the Rs 1,380-crore contract last year to build the network and maintain it for five years after it becomes operational.
Alongside, each taxpayer will be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This will bring the GST PAN-linked system in line with the prevailing PAN-based system for the income tax facilitating data exchange and taxpayer compliance.
In the words of former Finance Minister P Chidambaram, the “heart of this Bill is the rate of tax,” and this being an indirect tax, it should be kept “as low as possible.” A committee headed by Chief Economic Adviser Arvind Subramanian had recommended a revenue neutral rate of 15-15.5 per cent and a standard GST rate of 17-18 per cent, while Delhi-based think-tank NIPFP had earlier proposed rates above 26 per cent.
The GST Council will also decide on the draft GST law and Place of Supply rules and also the exemptions, threshold limits, dual administration between the states and the Centre as well as on the reports of the Joint Committee constituted by the Empowered Committee of the State Finance Ministers on payment process, registration, refund process and return under GST, which are in public domain for suggestions.
“Once such consensus is arrived at and blessed by the GST Council, various GST legislations such as the Central GST law, Integrated GST law and 29 State GST laws including allied rules and notifications will need to be passed by relevant legislative bodies. During this process, there will also be a need for substantial engagement with the industry bodies. Meeting the timeline of implementing GST by April 1, 2017 would require these processes to run in parallel and in a time-bound manner,” Rajeev Dimri, Leader, Indirect Tax, BMR & Associates said.
On the specifics of the tax rates, there seems to be divergence of opinion among states on what the optimal rate of tax should be. Plus, there are differences among the Centre and the states over who will administer businesses over a certain revenue threshold and on whether there will be a single or dual administration. In the debate on GST, while there has been a general consensus that transactions below Rs 1.5 crore will be administered by the states, there is some grey area over whether transactions above that will be audited only by the Centre or by both the Centre and states.
Most tax experts, however, raised doubts over the efficacy of implementation of the IT network, especially for smaller manufacturers, even though they expect the switchover to effectively increase the purchasing power of the common man, without a real increase in the income. This is because goods are scheduled to cost less, as the tax content in the product price is expected to go down from the current level of over 27 per cent to a 20 per cent under the GST regime
“The key to the implementation will be the decision on rates, exemptions and thresholds. Also, there will be a challenge for the industry as the IT enabled network might be a hurdle for small players. The government should give at least six months to the industry before final implementation of GST,” said Amit Bhagat, Partner, Indirect Tax, PricewaterhouseCoopers India.
The impact of an increase in service tax rates on the common man, according to analysts, could be vastly exaggerated. Sachin Menon, Partner and Head, Indirect tax, KPMG India said: “Increase in GST rate for services from 15 per cent to a 20 per cent may not impact the common man as 85 per cent of the Indian population does not consume any taxable service, other than mobile phones.”