GST: MACRO ECONOMIC EFFECTS

With GST the government intends to achieve the two major goals: Reduce tax evasion & Simplify compliance for tax payers.

In the prevailing tax systems, there are several cases where the government has not been able to detect evasion and loss of tax revenues. As a result, it has become a challenge for the department concerned to track the input claims against the liability of the seller. There have also been numerous cases of duplication of claims on input tax, fraudulent claims, input tax claims that do not correspond with tax liability declared by the seller, or seller who has not furnished his tax liability.

In order to overcome this, GST has introduced technology.  It seeks to establish a uniform interface for the taxpayer and a common and shared IT infrastructure between the center and states. It will thereby integrate multiple tax department websites, bringing all the tax administrations (center, state, and union territories) to the same level of IT maturity, with uniform formats and interfaces for taxpayers and other external stakeholders. Unlike the present-day taxes, GST is going to be on a digital platform from its inception.

Institutional mechanism
For the implementation of the technology associated with the GST, the Goods and Services Tax Network (GSTN) has been established. It is a non-profit, public private partnership company. Its primary purpose is to provide IT infrastructure and services to central and state governments, taxpayers and other stakeholders, thereby facilitating the implementation of the Goods and Services Tax (GST).

GSTN will perform the overall functions of GST IT system which are mentioned below:-

• Assisting in Registration Process.
• Transmitting the returns to the Central and State Government.
• Calculation of IGST.
• Confirming or matching the payment details with banking network.
• Giving MIS reports or Data to the Central and State Government and it includes all information of taxpayer.
• Giving analysis of taxpayers' profile.
• Running the matching engine for matching, reversal and reclaim of input tax credit.
• Generate business intelligence and analytics.

The salient features are:

• The GSTN server, with an open Application Program Interface (API), will provide convenience and an all user interface by connecting seamlessly with third party applications used by taxpayers through their mobiles, tablets and desktops.
• Such a move will help taxpayers in automating invoice matching from their software itself without the need to log on to the portal, thereby ensuring simplicity of compliance and savings of time. Technology will also bring in efficiency in tax administration for returns filing, registration, data exchange and effectual auditing, monitoring, investigation and performance analysis with minimal or zero human intervention.
• For businesses too, technology will be key to survive and thrive in the post-GST era. Given that invoice matching is a crucial component of GST and is linked to stringent timelines, it would need a solution that is both agile and accurate.
• Companies would also have to deploy software that has the desired robustness to talk to the GSTN system, and also helps them in achieving reliable, accurate, and immediate compliance. Besides, they would have to move from manual to automated systems to ensure speedy and timely invoice matching. As a starting point, companies would have to understand the impact of GST and technology on their business. They would have to acknowledge the important of compliance and decide on the right software solution to adhering to the compliance requirements.

About GST Suvidha Provider (GSP)
GST Suvidha Provider (GSP) and Application Service providers (ASP) will be the significant players in the success of the tax regime.

GSP is an acronym of GST Suvidha Provider. Through GSP, it allows user or taxpayers to execute the provisions of GST through the online platform. A GSP is considered as an enabler for the taxpayer to comply with the provisions of the GST law through the web platform. Through GSP, Tax Payers or Individuals can file their returns.

GSP's are controlled by the government and it operates as per the MoU. An agreement is signed between GSTN (a government body) and GSP. Through GSP and ASP, users or taxpayers file their returns online. In GSP and ASP, users or taxpayers have to fill their necessary details and automatically returns will be calculated. It also focuses on taking out the details of the tax payer and convert them into the GST Returns. These GST Returns are then filed on behalf of the taxpayer with GSTN via GSP.

About Application Service Providers (ASP)

ASP is an acronym of Application Service Provider. Taxpayer or users can file their GST taxes with the support of ASP partners or existing software. ASPs can develop an end- to-end solution for corporates, consultants, and taxpayers. Through ASPs, the taxpayer and consultants can manage the sale or purchase of goods and services and GST filing.

A large number of companies have an options to file return via Application Service Provider (ASP). In ASP, organizations or businesses must have to share the detailed data of sales and purchase of Goods and Services to the ASP. After then ASP providers will prepare the GST Returns and file the returns through GSP (GST Suvidha Provider).

ASP will play the vital role in filing returns as well as it saves the time of users. It collects all data or information from the taxpayers or users and then converts them into tax returns. ASP will take care of five roles which are mentioned below:-

• Data Protection & Privacy:- ASP will handle most of the sensitive data of an organization. This data includes who do you sell and where? What do you sell? How much do you sell and at what price? It's not all. An ASP has also required information about purchases. Overall an ASP will gather data or information from the taxpayers for filing the returns.
• Data Verification:- The details you submitted to ASP will be used for filing GST Returns. Make sure that details you have provided is true and authenticated as belonging to you without a doubt. Any mislead details or data can lead to incorrect returns which will lead to liabilities for the tax filing entity. The responsibility of filing correct returns lies with the company and its corporate officers.
• Data Archiving & Retrieval:- ASP will provide long term Data Archiving and Retrieval. At ASP, you will store data of 8 years beyond the date of filing of the annual returns for the year will be stored.
• Audit Features: - ASP will maintain all information details in the system starting from the from the point of upload till the creation of the returns. Cross check the audit features are available as a part of the ASP Platform.
• Application and Process Control:- Filing return is the responsibility of the corporate officers. So it's essential to establish and ASP will provide you full control of the process. Filing accurate returns is essential in the context of India because raising of all disputes in case of inconsistency is the responsibility of the filer. Not filing the dispute in particular time can lead to the material impact on the net tax liability.

Conclusion
Use of technology will also enable efficient tax administration for registration, returns filing, data exchange, and effective investigation, monitoring, auditing and performance analysis with little or no human intervention. It will also provide several user-friendly features such as offline capabilities, alerting capabilities, mobile/tablet interface, and additional mechanisms to avoid duplicity of data.

As this tax system is being implemented for the first time in India, businesses will encounter several challenges during the initial stages of implementation. However, once systems are streamlined, the two important objectives envisaged - curbing tax evasion, and increasing tax revenue and ease of compliance for taxpayers will be achieved.

The success of this transformation will help our nation create history in the world of GST compliance.

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Anatomy of GST rates
At classification level around one-fifth of the items are in GST exempted category, around one-fifth under 28% rate category and one-sixth under 12% category.

Most of the item shall come under 18% tax rate. Most of the food items have been exempted or fetch lowest rate of 5% which is important given high poor percentage in society.

Within services category luxury services and services considered to be anti-social like gambling are under 28% category.
Under the goods category, petroleum products, alcohol, electricity, real estate and several food subcomponents have been kept outside GST ambit.
Under services, health and education, amongst some others, have been excluded.
Four products luxury cars, aerated drinks, tobacco and related 'paan' products would also fetch additional Cess.

The council has recently revised rates on 66 items such as pickles, sauces, fruit preserves, insulin, cashew nuts, insulin, school bags, colouring books, notebooks, printers, cutlery, agarbattis and cinema tickets, following representations from industry.

 Restaurants, manufacturers and traders having a turnover of up to Rs 75 lakh can avail of the composition scheme with lower rates of 5%, 2% and 1%, respectively, with lower compliance, against Rs 50 lakh previously. A GST rate of 5% will be applicable on outsourcing of manufacturing or job work in textiles and the gems and jewellery sector. Bleaching and cleaning of human hair, a big industry in Midnapore, will not face any tax.

Implications on various sectors of GST ratesEstimates suggest that there is likely to be no upward impact on inflation. Rather, if tax cuts are passed on and the input tax credit mechanism runs with part efficiency, GST could help lower the inflation rate by 10-50bps. In terms of growth impact, the near-term could be messy, with adjustment costs for the private sector grappling with inter-sector implications. Service providers, in particular, are likely to face an increased (and more complex) tax burden. Over the medium-term, the impact on overall growth is unambiguously positive.

The progressive tax structure would make sure that states do not face any revenue shortfall due to GST. It is likely that more comprehensive service tax coverage increases their revenues. Then, if any shortfall does remain, the Centre will take care of it.

Moreover, with a view to keep inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate. The cess is expected to provide additional resources to the central government to compensate states for losses incurred. This will be based on the compensation formula.

Impact on Important sectors

• Construction and Infrastructure
  The composite supply of works contract in this sector will fall under the 18% GST rate with full input tax credit (ITC). The GST rate may seem higher than the current tax rates as the effective tax incidence for an average construction contract in the pre-GST era is typically in the range of 11-18%, which is lower in comparison to the announced GST rate of 18%. The difference is more pronounced for the construction services which fall under the service tax exemption category.
  Despite higher rates, the sector is likely to benefit under GST regime from the availability of input tax credit. As under the current tax regime the benefit of input tax paid is not fully available, the benefits arising out of input tax credit on the raw-materials available under the GST regime would result in an overall neutral tax incidence for construction services.
  Cement prices are expected to go up marginally, as the GST Council has announced a tax rate of 28 per cent on the product. The cement industry says the rate is above what was expected, and the increase will most likely be passed on to consumers.
• Hospitality sector
  Goods and Services Tax (GST) rate levy on the hospitality sector is within the range of 2 to 28 %. hoteliers have termed it as a "killer step" for the tourism and hospitality industry, which is already reeling under rising costs of basic commodities, labour and the recent liquor ban on highways. It will certainly have an adverse effect on the industry, particularly for the mid and high category hotels which will fall under the 18 and 28 % GST rate.
• Engineering, Capital Goods & Power Equipment
  Introduction of GST is expected to improve the prospects of engineering, capital goods and power equipment (ECPE) sector by simplifying the tax structure. The complexity in this sector is that companies are involved simultaneously in manufacturing of goods and rendering of services. A comprehensive tax like GST would combine the state and central taxes in a single structure and the tax credit would be available at each stage of production and final sale so that double taxation could be avoided. This would bring in more cost competitiveness to the domestic players.
• Automobile sector
  Currently taxes paid by car manufacturers are 27.6% to max 45.1% and the GST rates on automobile sector would be 28%. So rates seem to be revenue neutral though gains would occur from easy compliance and less cascading effect.

    Criticism of rates according to some experts

• It compromises on simplicity. The multiplicity of tax rates for services will add complexity to the compliance in the GST regime.
• Around 19% of services have been under the highest slab of 28% which caters to daily needs of middle class. Thus the middle class will now have to bear the brunt of higher prices.

Conclusion
A well-designed GST in India is expected to simplify and rationalize the current indirect tax regime, eliminate tax cascading and put the Indian economy on high-growth trajectory. The proposed GST levy may potentially impact both manufacturing and services sector for the entire value chain of operations, namely procurement, manufacturing, distribution, warehousing, sales, and pricing.

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. 

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. 

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.

  Conclusion
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'.