27 Jun 17 GST – Is all well?
The much awaited goods and services tax (GST) will be implemented from the 1st of July, ushering in the most prominent tax reform since independent India. Amidst all the chaos of transition, the government has managed to stick to its deadline. There is enough written about the benefits of GST, so I won’t delve into that. However, it is going to be interesting to see how the transition pans out.
There are still many concerns and grey areas in the GST Act. A few days ago, I spent many hours chatting with someone who is an expert on the implementation of GST. While he was more than supportive of a single national tax, he had plenty of concerns. Here are some of them…
Nearly every business has been included into the GST regime – the threshold of excise, which was 1.5 crores, has been brought down to 20 lakhs under GST. Every service provider should be registered under GST in all the states where its branches are located. Three forms need to be uploaded each month and one annual return – which effectively translates to filing 37 forms per branch.
Huge efforts will be required to maintain accounting records, invoicing systems, assessments, and separate input credit for each location, to name few.
Multiple tax structure
There are various slabs in the GST – 5%, 12%, 18% and 28%. Some items at the highest slab have an additional cess, and gold has a special rate of 3%. A large number of products (notably petrol and diesel) are out of GST altogether. There is also a provision for Central GST, State GST, and Integrated GST, all adding to the confusion for businesses. Having multiple rates and taxes negates part of the benefits of having a GST. It will lead to unnecessary disputes on classification as there are variations in rates across similar products. For instance – GST on silk is 5%, while it is 12% on velvet. For printing inks it is 18%, and 28% on coating inks. This will tempt companies to label their products to their convenience.
Increase in compliance costs for SMEs
Under GST, all firms – micro, small and big – would have to use computers and the Internet to file invoices, returns, reports, tax credits and payments, among other things.
However, most small businesses do not employ accounting and tax professionals, and prefer to pay taxes and file their returns on their own to save costs. For GST though – a completely new tax system – they will require professional help. While this will help the community of tax professionals, small businesses will have to bear the additional cost.
For instance, under VAT, filings were done quarterly and only returns were required to be filed. However, under GST all the invoices need to be uploaded, and the returns need to be uploaded monthly (three forms, effectively 36 returns plus one annual return, which is 37 returns in all).
Other points cited, which are still ambiguous:
- There has been lack of clarity and delays in announcing transition rules: on existing credit which companies might have and how it can be set-off under GST.
- If the supplier doesn’t pay the GST on time, then the credit is reversed. Therefore the onus is on the buyer to make sure that the GST is paid.
- There is a provision for composite GST. In case products are bundled, then the tax rate will be based on the product with the highest tax.
While there will always be some hiccups initially during transition and implementing anything new, the sheer scale of the current exercise means one should expect disruption. One hopes the government machinery is responsive and helps smoothen the transition, rather than harassing those who are late in compliance.
In the final analysis, GST is expected to have widespread benefits for the economy in the long run. However, in the short run there will be substantial chaos. The only clear gainers in the near term will be accountants and tax service providers.