Decode GST now or regret it later

If one believes Goods and Services Tax (GST) is a panacea that will cure all indirect tax-related problems, he or she must dig deeper into the fine print of the Central government’s draft on the model GST law.

GST's constitutional amendment may have been getting political attention but the latter is just an enabling legislation. The model GST law, cooked in the government's bureaucratic kitchen, will set the foundation of rules and procedures of India’s most glorified tax reform.

The GST’s draft model law has brought out broad contours of the Goods and Services Tax in the public domain. Making sense of tax laws may be difficult but the GST Bill is essential to be read in order to understand how India's greatest tax reform may open the door to more problems than it resolves, if implemented in its current form.

Before one enters the cobweb of the GST model law, one must recall the three changes that GST is expected to bring about.

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First, there are dozens of taxes that prevent India from becoming a common market. Under GST, a single tax will be imposed at a single rate all over the country on production, sales and services, turning India into a common market.

Second, diverse taxes fuel inflation. Under GST, all indirect Central and state taxes, except customs duty, will be merged. These include excise, services tax, VAT, and octroi.

The merger will reduce the effective rate of taxation. Under this, producers (manufacturers) and service providers will get the amount of tax on the final product or service, which will reduce inflation, eventually.

Third, the GST will bring in an efficient tax administration, which will immensely increase ease of doing business in India.

Now enters the model GST law.

Three problematic aspects of "ease of doing business":

A. Registration and return (R&R)

Let us start with GST registration, which is primary aspect of taxation and serves as the first and foremost hassle for businessmen. If this law is implemented, any person having aggregate business turnover of Rs 10 lakh across all locations in India will need to register themselves in the states from where they make a supply.

In fact, under the three level tax structure proposed under GST (Central, state, interstate), people selling their products or supplying them, across the country will have to get three different registrations in every state.

In addition, GST registration would require more than half a dozen other activities irrespective of turnover. These include persons making inter-state supply, casual taxable persons and non-resident taxable persons, agents, input service distributors and e-commerce operators etc.

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If a company runs different businesses, it will have to get separate tax registrations for all of them.

For each month, a person is required to file the returns, separately for outward supplies made, inward supplies received, and a monthly return. In addition to these returns, separate returns are required to be filed by input service distributors and by a person deducting tax at source. An annual return is also required to be filed.

The taxpayers having turnover exceeding the prescribed limit will also be required to get their accounts audited by a chartered accountant or a cost accountant, and submit a copy of the audited annual accounts with the annual return.

In addition, they would also be required to submit a reconciliation statement, reconciling the value of supplies declared in the return furnished for the year with the audited annual financial statement.

Now only the government can enlighten us how the GST Bill will ensure easy business, with such an enhanced compliance requirements. In India, the compliance cost of tax laws is already pretty high, which can grow several times after GST.

B. Common market

There is another provision that needs to be considered as it is going to be a great burden on companies and establishments running in different states.

Under GST Act, if a company sends goods to its own branch or unit it will have to pay tax on it. The unit receiving the goods or services will later claim a refund. This provision is, in a way, requiem for the late lamented hopes of a common market under GST.

C. Tax credit

Input tax credit is the lifeline of GST under which the tax paid on raw material or supply is reimbursed. This system alone undoes the evil of cascading taxation (read tax driven inflation) on product or service, but the provision regarding this is surprisingly complicated.

The GST Act says if the supplier has not paid taxes, then the manufacturer using that raw material or service cannot claim tax credit. The restriction on claim of credit of specific supplies is against the basic premise of GST. This provision may serve as a major obstacle on the way of GST implementation.

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A close look at the Bill further creates an ambiguity over provisions-related definitions of "supply" and "value of taxable supply", which may open up Pandora’s Box of complications on indirect tax system, already reeling under plethora of litigation.

Irrespective of government's claims on GST, the model bill is full of inconsistencies regarding custom, excise services and VAT laws.

Potential tax nightmare

We had expected the GST would usher in a modern, simple and far-sighted tax system but the model law offers us a further regressive tax system.

States must not make their own GST laws on this model; otherwise India’s most cherished reform may well turn into a nightmare.

More than the politics, GST's economics, implementation and administration are important.

The government, eager to show revolutionary change, may pin great political hopes on it, but the way GST is taking shape, it will only open more inconsistencies and chaos in the tax system.

Let us hope our leaders would not court crisis handling such a sensitive reform.