What needs to be done to get GST right

Politics of taxation is tricky business, conventional wisdom demands that governments should not increase taxes. It’s also true that taxation needs to be viewed from a range of perspectives including history, economics, politics, sociology, law. Tax policy is intrinsically political – who pays tax and how much forms the core of politics of taxation and simplicity of a taxation structure has a ripple effect on tax payers, businesses and the economy at large.

India’s relationship with taxation has been a perilous one, complicated, lopsided, grossly unfair and shockingly lenient — all at once. Well, anyway, GST ideally should put an end to all that. The idea of one nation, one tax is indeed alluring in a country where every individual pays about 15 taxes or more.

Also read: Decode GST now or regret it later

Passing of the Goods and Services Tax Bill in Parliament is one major hurdle that has been overcome, but the real challenge now is to work out the modalities of a tax which is being touted as independent India’s most definitive tax reform.

Industry bodies, e-commerce companies, businesses are looking worried with the model Bill that has been put up for comments and feedback. In fact, FICCI has raised a red flag on dual administrative control with both Centre and state, unwieldy powers to tax authorities, restrictions on input credits, among other things.

Differentiation between who can claim input credit and who cannot could be a cause of disputes, and even where taxes are allowed to be creditable, they will not be refunded but adjusted with output tax. In a modern taxation law, excess credits are mostly refunded within a stipulated time period of mostly two weeks, explains Satya Poddar of EY India and any delay earns interest at the market rate.

The model law permits refunds for exports and not for the entire domestic production. Moreover refunds will not be automated, it will require manual approval of as many as 36 bureaucracies at the Centre and in the states. The time-frame for claiming a credit or a refund is 90 days, whereas elsewhere in the world, it usually does not exceed two weeks.

Also read: GST Bill an example of half-baked and vague reform

While GSTN (Goods and Services Tax Network) will reduce human interaction, but with the states insisting that accounts and compliances of taxpayers be decentralised, it would further add to complexity. Businesses with nationwide operations would be required to register in each state of operation. Telecom companies could have to apply for 36 registrations, one for each state. Businesses will have to deal with 36 registration numbers, as compared to one today.

India’s new economy is driven by pan-India entities, their transactions are complex and cannot be subject to state tax. On the flip-side, states worry that they will have no control or influence on the taxpayers and that they will have to rely on third party.

This is the balance that seems to be missing in the model Bill.

As the Centre and states go back to the negotiating table to work out the nuances of the model legislation (from the list of exemption to tax rates), it’s imperative that besides voter considerations, and power dynamics, the needs of a new, emerging economy are understood in totality.