GST is a structural reform which will change the entire taxation landscape. However, any reform has its own set of opportunities as well as benefits; on the other hand reforms also bring with them new set of concerns. In this article, we shall look at some of the important concerns that the new GST regime has raised.
Some of the concerns have been discussed below:
a) Formation of Anti-profiteering Authority
Primary objection to anti-profiteering is additional compliance burden, increase in litigation and potential harassment at the hands of the taxman. Australia and Malaysia are closest international examples where such authority was created post GST rollout. However, in Malaysia, it led to widespread litigation and was found to be administratively difficult to implement. Overseas experience indicates that anti-profiteering provisions are only effective if there is a significant lead-in time to allow the relevant authority to educate consumers and businesses as to their respective rights and obligations. It is this education process that has the greatest impact on consumer confidence and business behaviour.
Anatomy of Anti-profiteering Authority
Section 171 of the CGST Act creates the obligation on businesses to pass on to the recipients any reduction in the rate of tax or the benefit of input tax credit by way of commensurate reduction in prices. It provides enablement to the central government to set up the Authority or authorise an existing Authority to monitor and enforce compliance with the requirements of the provision.
Under this provision, a five-member anti-profiteering authority will be set up to decide on levying penalty if businesses do not pass on the benefit of price reduction to consumers under the goods and services tax regime. The authority, to be headed by a retired secretary-level officer, can take suo motu action, besides acting on complaints of profiteering. The authority will have a sunset date of two years and will decide on penalty to be levied. It would ask the businesses to refund the price reduction on a proportionate basis to consumers.
As per the structure, the complaints of profiteering would first come to the Standing Committee comprising tax officials from states and the Centre. It would forward the complaint to the Directorate of Safeguards (DGS) for investigation, which is likely to take about 2-3 months to complete the inquiry. On completion of investigation, the report would be submitted to the anti-profiteering authority which would decide on the penalty.
b) Digital literacy and Internet Penetration
Under GST, around 37 returns have to be filled in a year on GST portal. This kind of arrangement requires access to internet and being digitally literate. However, India performance on these two aspects is very low; deficiencies are severe in rural India. Today, the digital divide in India is real - illiteracy rate is 25-30 per cent and digital illiteracy is even higher. According to some estimates, computer literacy in India is just 6.5%. In terms of internet penetration, the estimated internet penetration has reached only 27% in 2016.
c) Increase in compliance cost for Multi-location Goods and Services Provider
Multi-location service providers such as banks, telecom operators, airlines and insurance companies are staring at huge compliance burden with the Goods and Services Tax (GST). These service providers would need to take State-wise registrations in place of current centralised registration, file monthly returns instead of six-monthly increasing the compliance manifold. For ex- Currently, a service provider operating in 20 States can operate with one centralised registration and is required to file two returns in a year. Against this, under GST, they need to get registered in 20 States and file close to 740 returns in a year. A similar manifold increase in the compliances is expected for a supplier of goods as well.
d) Conflict between Centre and State tax authorities
Under GST regime, State authorities will scrutinise 90 per cent of all assesses with turnover of Rs.15 million or less. The remaining 10 per cent will be assessed by the Centre. For turnover above Rs.15 million, Centre and states will assess 50 per cent each. Such a division of assessment power will increase conflict between Centre and states taxing authority. One related issue is that, earlier taxation and assessment of services was in the realm of Central government but now, any firm either dealing in goods or services would also come under state authorities as per above mentioned formula. This would be troublesome in short run as states authorities may not have capability to handle service providing businesses.
e) No Parliamentary approval needed for CGST rates
The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament. Under the Constitution, the power to levy taxes is vested in Parliament and state legislatures. Though the proposal to set the rates through delegated legislation meets this requirement, the question is whether it is appropriate to do so without prior parliamentary scrutiny and approval.
The Constitution does not allow a tax to be levied or collected except by authority of law. Currently, most laws which levy taxes such as income tax, and service tax specify tax rates in the principal law, and any changes in these rates requires the approval of Parliament.
f) Exclusion of petroleum from GST
The Central government will continue to impose excise duty on five petroleum products (petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel), while the State governments will continue to impose VAT on these petroleum products.
Currently, credit of excise duty paid on specified petroleum products is available. However, exclusion of petroleum products from GST will add to the cost of manufacture as excise duty on such products would not be creditable under the GST regime. Petroleum products such as high speed diesel, are common fuels used in various manufacturing processes, as also for transportation of inputs and final products.
Therefore, industries that consume petroleum products as their main inputs (such as the fertilizer industry which use natural gas as an important input) will get significantly impacted by this exclusion.
g) Increased working capital
Working capital is a common measure of a company's liquidity, efficiency, and overall health. It is the cash available for day-to-day operations of an organization. Impact on working capital may be significant for the manufacturing sector. Under the current regime, stock transfers are not subject to tax. However, under the GST regime, stock transfers are deemed to be supplies and are subject to GST. Though GST paid at this stage would be available as credit, realization of this GST would only occur when the final supply is concluded. This would likely result in cash flow blockages and therefore companies would have to rethink their supply chain management strategies to minimize this impact on their cash flows. This would be worrisome for MSME sector as this sector is typically capital constrained.
What are stock transfers? - Stock transfer refers to moving of goods from one part of the distribution chain to another of same legal entity. Since stock transfer happens between units of the same legal entity, there shall not be any sale.
How stock transfer treatment would differ for intra-state and inter-state transfers - In GST regime, payment of tax on stock transfer depends on whether the supplying and receiving units are in the same state or not. In case both the units are in the same state and have same GSTIN, then no GST is payable. On the other hand, if the units are situated in different states, then each unit to register separately in the respective states and therefore GST payable on such supplies.
h) Impact on Municipal Finance
Income from taxes constitute about two-third of the revenue accounts of the municipalities and over one half of the total income from all the sources. A variety of taxes are levied by the urban local government in different states. The most common taxes are property tax/house tax, profession tax, vehicle tax, Octroi, tolls.
GST will subsume Octroi and Entry tax which are main sources for local bodies. While GST is expected to be divided between the Centre and states based on a mutually acceptable formula, urban local bodies will have to deal with a huge fiscal gap once these taxes are scrapped to make way for the new taxation system. There is no provision given by 14th finance commission as how ULB/PRI would be compensated in the wake of GST. This depletion of revenue would have serious implication on city rejuvenation programs.
i) GST Council decisions Non-Binding
The GST Council will decide very important aspects of the tax, including the base, rates, allocation of tax base among the States, administrative architecture and compliance procedures. However, Centre and the States retain the power to design taxes as they consider appropriate within the defined framework. The GST Council's decision will not be binding on them and will only be recommendatory. What happens when States deviate from the collective decisions?
It is in this context that the role of the dispute resolution mechanism becomes crucial. It is not clear at this stage how the mechanism will function and whether the decisions of the dispute resolution authority will be binding.
j) Registration Issue
The first area of concern lies in the registration of users for the website. According to the most recent numbers, 60 percent of the taxpayers from State Tax databases have registered themselves on to the platform.
Yet, only 6.5 percent of taxpayers from the Central Tax databases had registered seven days before the 31st March registration deadline.
Inadequate outreach on the part of the central government can be pointed out to be the main culprit for the lack of registered users.
A lack of timely migration can cause serious issues for the viability of the GST as the IT infrastructure is the only possible way to track and properly implement the nascent tax system.
k) Auditing Issue
Along with the registration challenge, the GSTN has also been dealing with an auditing issue. Ascertaining and verifying the accuracy of the data within the GSTN would seem to be a Herculean task, given its 70 million expected users.
In order to do so, the Comptroller and Auditor General of India (which has been tasked with the audit), would need access to all GSTN data. Yet, the GSTN has refused data access to the CAG for auditing purposes, citing its private entity status (51 percent of the organisation is owned by private Indian financial institutions) and stating that it is only acting as the holder of the information.
Without a proper audit of the data within the platform, there is no way to ascertain the functionality of the GSTN.
Trust in the GSTN has already been brought up as an issue, with the lack of transparency into the majority privately owned organisation being cited as a crucial concern.
Goods and Services Network (GSTN)
The process of tracking inter State transactions will be extremely complex and will require an infallible IT system. The clearinghouse mechanism envisaged in the dual model GST will handle humungous data. Designing and developing an IT infrastructure of such a size and complexity will be a herculean task. For this purpose, a Special Purpose Vehicle (SPV) called the Goods and Service Tax Network (GSTN) has been set up by the Government to create enabling environment for smooth introduction of GST.
The Goods and Services Tax is a much needed tax reform, and if implemented correctly, can do wonders for India's economy. Along with eliminating double taxation and lowering product price, the GST can also assimilate the informal sector into the greater Indian economy and provide a much needed boost for India's lagging export market.
Yet there are implementation issues that could be problematic for India's small businesses and, perhaps more importantly, undermine public trust in the GST. The issues surrounding the GSTN can be managed if more time is given for continued enrolment of taxpayers and thorough testing of the IT infrastructure. Additionally, giving time for the CAG to conduct a thorough audit would allow for any functionality issues with the GSTN to be brought to light, preventing costly public trust issues.
Similarly, the problems with the anti-profiteering clause can be ironed out with more time and the implementation of widespread education and price monitoring policies in the lead-up to the GST. The formation of a committee to handle all complaints, creation of an audit unit specifically geared towards anti-profiteering testing, and putting in place regulations outlining what specifically constitutes anti-profiteering can help build corporate and public trust in the GST.
Government has launched National Digital Literacy Mission for addressing the challenge of Digital Literacy. It is also important to relook at the targets given that GST is a reality. It is only when these concerns are addressed GST shall achieve the Goal of 'One Nation, One Tax and One Market'.