The Indian Government collected tax amounting to ₹ 17.10 lakh crore in the fiscal year 2016-17. The tax collection grew by around 18% as compared to last year. Indirect taxes consisting of excise, state-level VAT, service tax, etc. accounted for 50% of the total revenue from taxes. It aggregated to ₹ 8.63 lakh crore.
With the introduction of a new tax regime, viz. GST, the tax collection equations are set to change. Claimed to be the most massive tax reform since Indian independence, it is expected to amplify the economic growth rate by about 0.5 % points. It will broaden the revenue base and reduce the cost of compliance for firms.
By replacing a variety of taxes with a single unified tax, GST reform will simplify the Indian indirect tax regime. But, a plethora of obstacles pose a threat to the successful implementation of GST.
1. Impact on Services Sector:
After GST, Services Industry (including IT, ITeS, Telecom, etc.) would be taxed at 18%. It is higher than the current rate of 15% which includes the cesses as well. This would mean that there would be a 20% increase in tax rates as compared to current rates. It would add an extra burden on end consumers as the services would now be charged higher than before. In an industry like telecommunication, the impact would be greater as its end consumer base is huge and spread across the country.
Both Central as well as the State Government authorities have to manage the administration for tax payers. According to the proposed GST law, all service providers have to obtain registration in each and every state where services are being provided. This would increase complicacies as a centralized registration scheme is currently followed. Since, some industries are more complex than others, separate registration in each state of operation, will cause problems in complying with the law. The process of creating a separate accounting system, billing system, assessments, returns and separate input credit for all locations will a taxing task.
3. Multiple Tax Rates:
The GST framework will make the tax regime uniform across the country. The GST Council recently came up with a four-tier tax structure – 5%, 12%, 18% and 28% – for different commodities. Essential commodities like food grains will not be subjected to tax. States will still control taxes for products like tobacco, liquor and fuel. Though the ease of doing business will be improved, yet some aspects still continue to be elusive. A multiple tax structure may help in controlling the impact of GST on prices of essential items but classifying goods and services under different slabs would be a rigorous exercise. Presently, goods and services are taxed at different rates in different states. This is due to various geographic, economic and cultural reasons.
Example: Coconut oil which is taxed in Kerala at 5%, is taxed at 12.5% in Uttar Pradesh. Hence, taxing goods and services at specified rates will involve a complicated process as simple movement of tax rate to closest slab rate won’t suffice. Also, a multiple rate structure could lead to disputes based on classification of goods and services.
4. Destination based Taxation:
The tax levy mechanism is a major deviation from the current system. The present system levies taxes on the basis of origin and the tax revenue is collected by the origin state, where the good is manufactured or service is generated. GST is going to be consumption-based tax, i.e., the place of consumption (State) will collect the tax revenue. It will be a blessing for States who consume more than they produce (Ex-Meghalaya, Arunachal Pradesh) but a curse for the states who produce more than they consume (Ex- Maharashtra, Tamil Nadu).
Since now, Centre taxes the services, the state where they are finally supplied or consumed does not matter for levying service tax. After GST, states can also tax services, along with the centre. The states would levy SGST, while the centre would levy IGST in case of inter-state supply of services. A share of the revenue from IGST would be accrued to the state which will receive the service.
If a service is consumed across multiple states (Ex- Telecom), the tax revenue would be accrued to the state where the recipient or his office is registered. Hence, states having more registered offices would enjoy greater tax revenue.
Even if these challenges are overcome, there has to be a dynamic IT infrastructure, connecting all the state governments, industries, banks and other stakeholders on a real-time basis. The incorporation of Goods and Services Tax Network (GSTN) by the Indian Government will ensure that appropriate technical support is provided to all the stakeholders for smooth transition to the new GST regime.
Though, being GST-ready is challenge for corporate India, it is also an opportunity for migrating to a world-class indirect tax compliance system. This fully automated system of taxation would enable proper assessment of business impacts and determination of tax liabilities. It will also be flexible enough accommodate changes in the tax base, rates, rules and procedures.
A survey conducted by the National Council of Applied Economic Research revealed that the new taxation reform would boost the nation’s GDP by 1%-2%. As per a report by Crisil, GST implementation would be instrumental in reducing the fiscal deficit. The humongous impact of GST is going to affect all sections of the society- from small businesses to huge conglomerates. The implementation of GST is going to put India on the central stage of world economy. This endeavor of the Indian Government to have a balanced & sustainable indirect tax law will decrease the litigation & uncertainty woes of the tax payers. It will also boost investors’ confidence to invest in Indian businesses. GST will surely be an impetus to the Indian growth engine.
The challenges for GST implementation are minions compared to the mammoth benefits it will reap for the Indian industries in the long run.