Why delayed GST is as disruptive for economy as demonetisation
The Goods and Services Tax Council meeting held on February 18 was expected to finalise the draft of the various legislations under the proposed GST regime, but only one matter relating to compensation to states was resolved.
One input which came out of the meeting was in the form of another legislation for the Union Territories, which will be on the lines of state GST (SGST). The crucial anti-profiteering clause which is going to impact consumers as well as the industry was also not discussed at the meeting.
The honourable finance ministry had said that unlike the income tax, GST is a transaction tax and therefore can be implemented in the middle of the year as well. A transaction tax gives the flexibility of introducing it anytime during the fiscal, but at the same time it poses a challenge, because the related compliance gets triggered from the very first transaction.
For the purpose of income tax, computation is done and tax liability is determined at the year-end but in case of indirect taxes, the liability to pay tax along with related compliance becomes applicable from the very first transaction and therefore it is imperative for a businessman to expect a certain degree of clarity over the proposed tax regime.
The government came out with the first draft of the GST laws and related rules in June and the second draft came in November. There were significant changes in the second draft and no rules were incorporated in the second draft. A small change in the wording of law or a specific manner prescribed in the rules can lead to varying interpretations and the industry needs time to prepare itself.
Rules are subordinate legislations which prescribe various operational aspects. The industry needs time to align business processes and IT systems to meet the changed legislative requirement. Sufficient time is required to understand the impact on specific class of transactions, concluding the way it will be handled in the proposed regime, train staff and upgrade the information system.
Even a small change in law can have a huge impact depending on the nature of business activity which an assessee belongs to, and it may require renegotiations with the customer/vendor, which is a time taking task.
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| The government came out with the first draft of the GST laws and related rules in June and the second draft came in November. |
A stable, transparent and predictable tax regime was promised by PM Narendra Modi. But this is certainly not ease of doing business when the industry doesn’t know what exactly will be the shape of the law and how it is going to be implemented. This becomes more important when the entire indirect tax regime is going to see a sea change.
The GST law per se is not bad but its effectiveness is dependent on the way it is implemented. A deadlock in the council while taking up crucial issues and delay in finalising the law and rules will be another economic disruption after demonetisation (though temporary as highlighted in the Economic Survey).
If the central government is credited for bringing this legislation, then it has to be criticised for its failure to meet the commitments and deadlines set earlier. The people of this country who pay taxes and business houses who collect taxes from people and pay it to the government are the major stakeholders in this tax reform, and the government should not take them for a ride.