The introduction of GST is a much awaited attempt by the Central government to unify the various states into a common market by replacing a complex regime of national, state and local taxes. Preliminary calculations by the GST Task Force of the Finance Commission, headed by Dr Vijay Kelkar, suggest that the combined revenue-neutral GST rate should be substantially below the present combined Central and state indirect tax rates of approximately 35-40%. Thus, GST should lower prices and the tax burden on final consumers (especially on products like automobiles), boost demand and, consequently, give a fillip to economic growth.  

For India Inc, GST is also likely to benefit businesses by reducing working capital requirements, with a better tax credit mechanism at both the Central and the state levels. It also opens up the possibility of consolidating warehouses on a region basis rather than in individual states. It is expected to lead to more efficient distribution structures, with the abolition of central sales tax (CST) and the establishment of a uniform tax regime across states.

Theoretically, GST is a simplistic yet ingenious scheme for levying indirect taxes. It increases the country’s tax revenues by broadening the tax base while lowering tax rates. However, the socio-economic dynamics in India seem to have compelled the government to have a multi-rate system, provide exemptions and so on.

The government is proposing to introduce a dual GST model, with the GST rate being split into Central GST and state GST. At a recent meeting of the Empowered Committee of State Finance Ministers, some states demanded a concessional state GST rate for essential commodities. The Centre has consented to this demand. Thus, the state GST structure would have three rates—a standard rate, a lower rate for essential commodities, and a special rate for precious metals. There will also be zero-rated and exempted products. Services are expected to be taxed by the states at the standard rate, irrespective of the nature of services.

The list of exempted products or products taxable at lower rates needs to be carefully scrutinised, since the success of GST lies in achieving a broad base of tax. Too many exemptions or a reduction of rates on many products would result in erosion of the same. Also, the government needs to ensure that a lower GST rate does not result in an inverted duty structure, which, in turn, would lead to accumulation of excess tax credits with assessees. Further, a robust, efficient and speedy refund mechanism is needed for products that are exempted or taxed at lower rates, as well as to benefit exporters and other assessees with excess tax credits in hand.

Along with this, the government needs to resolve some key issues to ensure smooth and successful implementation of GST. In particular, effective administration of the GST system is a must. This would require establishing an effective technical infrastructure and training tax officers thoroughly. Maintenance and preservation of good accounting records by businesses at the other end should also be stringent.

Considerable thought also needs to be given to the exemption threshold for small businesses. Otherwise, inclusion of smaller firms in the GST net would lead to increased administrative costs for both the assessee and the government.

GST appears to be a perfect finale to the process of indirect tax reforms that began in 1991. It presents a good opportunity for the government to modernise the indirect taxation structure in India, reduce compliance costs and promote simplicity and certainty. However, its successful implementation will depend largely on whether the necessary infrastructure is developed. People also need to be educated about the new regime—the government should release a white paper on GST for public comment as soon as possible.

The government needs to urgently address all these issues well within time. This will give the corporate world adequate time to efficiently align its operations with the GST regime and make a smooth transition.

Tax Partner Ernst & young, india

(The article is co-authored by Sarika Goel,a senior tax professional)