The Goods and Services Tax (GST), if implemented, will have to cut through a lot of complexity in a federal political structure like India. At the onset, the GST is supposed to include indirect taxes (sales tax, excise and customs) so, in principle, it should simplify business. It also must unify service tax and Value Added Tax (VAT), which means the business can claim input credit for services rendered towards a final product as well. VAT is nothing but the tax arrived at after subtracting the output tax with the input tax.
There is a proposal for an Integrated GST (Central + State), which is supposed to handle the situation, because the businessman will end up paying IGST only once, instead of paying all other taxes across the board.
What's not clear is how this will be rolled out, and whether input credit can be claimed across States. This should be worked out by the GST council and will be part of the GST Bill that follows the constitutional amendment. However, the constitutional amendment is in limbo, thanks to the tussle between the lower and upper houses of the Parliament.
India collected Rs 5,46,000 crore in the form of indirect taxes in financial year 2015. Can all this be plugged into the GST by taking into account all the State taxes too? The BJP government is trying to answer those questions by taking the Opposition into confidence. But the Opposition wants certain items excluded from GST. While the political parties try to figure it out, here is why it is a complexity that India struggles with and must sort out quick:
- Multiple parties have to agree on the GST. The government has its work cut out: Say, a factory buys tomatoes from farmers and then crushes it into a processed item. When it drums the item, it sends it down stream to a brand where it will be packed or reprocessed into sauces or soups. From there on it goes to a wholesaler and retailers. The current relationship in VAT is publicly explained along will all the indirect taxes that have to be paid, which ultimately results in each person in the chain taking input tax credit on VAT and paying service tax. But since GST is a single point tax, the collection of the tax between five or six different parties in the chain needs explanation in the Bill. However, this is just one source of the problem. If the product moves from one State to another, the impact on the following needs to be clarified as well:
- The minimum retail price (MRP) regime.
- Will the pricing of products change from State to State?
- What will the relationship between State and Centre be in tax collections?
- The first couple of years States will be compensated on GST-related losses through the Centre. The collection mechanism between different parties needs to be explained. Today, there is a State GST and Central GST, which together will amount to 18 to 22 percent.
- Will this tax structure affect the federal relationship of State and Centre?
- Most transactions in India are by cash.
- Learning from the Unified Payment Interface – technology should play a role in implementing GST: The RBI and the National Payments Council of India have worked together to create a payments interface – in the form of the Unified Payments Interface – to have a cashless and cardless economy to cut banking commissions. Likewise, a platform of technology to enable GST payments should also emerge. Since the objective of GST is to bring transparency and convenience in tax collection, there should be a technology switch to ensure a dynamic tax recovery mechanism from all registered companies with a TIN number.
- Technology platforms – enabling GST – should be created to allow SMBs to pay taxes and benefit: The SMB industry, which accounts for 37 percent of the Indian GDP, is often harassed by the system and is easily led into graft by the bureaucracies of each State. The opportunity to create technology platform to pay GST for SMEs must be a priority.
- Wipe out all forms of State entry taxes to make logistics transparent: GST can wipe out State entry taxes. While crossing each State, trucks are harassed at check-posts over payment in order to enter each State. Since each company has paid taxes upfront on a digital platform for movement of goods, there should be no harassment on State borders. This corruption should be dealt with, otherwise there is no point in implementing GST. Even with technology this State-wise harassment cannot be stopped. Hence, where is the guarantee that GST can solve this?
- Fighting a system that does not want to pay tax: India’s accounting practice has a way of window-dressing accounts for tax saving. Most companies/individuals evade tax, and accountants encourage it. It is also because people do not trust any government with using tax money for public good.
Finally, the GST Bill is being tabled in the Rajya Sabha again. But the delay in implementing the Bill is only going to make India take the next step towards to a reformed society. If the banking system is reforming the payments system, with Aadhaar-based authentication and the use of smartphones, surely the government bodies in India can get more progressive by using a progressive tax system.