Is GST in India on the right track?

Amidst din and bustle of economic downswing, the governmental commitment to introduce GST from April 1, 2010, seems to rest on the backburner. One practical reason for this apathy is the intervening polls at the Centre as also in a number of States and the uncertainty whether the ruling parties will return to power to remain accountable for non-implementation of GST.

In the current economic depression which is likely to continue, GST would have been a welcome step for three reasons. First, it would lessen the burden of taxes on consumers considerably by eliminating cascading effects of all taxes on the price, thus rendering products and services cheaper. Second, an electronic data interchange (EDI) system in GST, as envisaged, will considerably reduce the cost of compliance for the Trade, usher in an era of fiscal discipline and consequently encourage larger investment in India. And thirdly, GST is likely to inflate the tax kitties of the Union and the States owing to enhanced efficiency resulting from electronic accounting of intra-state and inter-state credits, through the mechanism of a clearing house.

The above three reasons would provide enough justification for the States Empowered Committee (SEC) and also for Union Finance Ministry (UFM) to accord priority to GST implementation. However, the progress made so far in this regard makes one reasonably sceptical. The case in point is the prevailing vacillation to settle certain key issues such as whether there should be a single or dual GST; in the event of dual GST, as has been recommended by SEC, whether administrative control over tax collection should be vertically split between the States and the Centre or both would have concurrent and overlapping jurisdiction; whether the collection of GST on services should be assigned to States leaving out a few major multi-destination services, such as telecom, for the Centre; whether Centre’s administrative control should be confined to large tax payer units only; whether the responsibility of collection of countervailing duty (equal to GST) on imported goods should be assigned to States; and whether credit of duty in inter-state sales should be allowed to buyers instantly or only after the duty remittance has been acknowledged by the designated bank in destination State. More significantly, however, enough attention has not been given to the developing of an electronic clearing house model for credit management, which holds the all-important key to successful implementation of GST in a federal country like India.

SEC appears to rely on banks’ efficacy to serve as the Clearing House, overlooking the experience of Central Board of Excise and Customs (CBEC) while implementing Electronic Accounting System in Excise and Service Taxes (EASIEST) and of Central Board of Direct Taxes (CBDT) while implementing On-line Tax Accounting System (OLTAS). Even after years of commissioning, several banks are still in default in entering simple challan data, off-line, in the above-said electronic Systems. In the above backdrop, it is not conceivable that banks in India will be equal to the onerous task of commissioning and administering a complex electronic accounting system like the Clearing House for credit management. Thus the implementation of GST by the appointed date of April 1, 2010, is most likely to founder if SEC persists with bank-managed clearing house system.

The single most critical challenge of GST, whether single or dual, is how to administer and account for credit flow along the supply chain up to the retail stage, particularly in respect of inter-state sales. It is pertinent to mention that in the prevailing VAT administration, tax credit is not allowed to the buyer in Destination State inasmuch as all sales out of the State are considered as export which is tax neutral. In GST regime, inter-state sales will no longer be treated as export or import and, therefore, will become taxable at all stages allowing credit of tax to each buyer-assessee in an unbroken supply chain. Dual administrative control over this supply chain is not conceivable unless there is a near perfect electronic accounting system managed by a single clearing house.

Another major weakness of the SEC model is that it provides for collection of CGST by States, without addressing the issue how credit of CGST and SGST will be regulated/adjusted when systems of accounting are at variance. Besides, it does not provide for a Risk Management System to guard against tax evasion. The experience of GST compliant countries merits a mention in this regard. On a modest estimate, the UK loses annually over 10 billion sterling pounds of VAT through Missing Trader and carousel frauds while other EU countries collectively lose about 100 billion Euros annually on same account. In Canada, since the inception of GST in 1991 till March 2003, about 600 individuals and businesses have been convicted of GST fraud. In Brazil, GST experiment has failed for same reasons. The only effective anti-fraud safeguard, as has been envisaged by the EU Commission, is real time settlement of all VATable transactions. It is also imperative that unorganized sectors, notably of iron and steel, copper and other metals, are brought within the credit chain by allowing deemed credit, inasmuch as their sales by and large remain unaccounted owing to inadmissibility of credit on market scraps. There is no evidence as yet of any such effective, all encompassing system being contemplated, let alone being put on trial run. There is, therefore, every reason to doubt whether the SEC model of GST will survive eventually.

The question is how we can address the above issues in a time bound manner. As a matter of fact, there is no dearth of talents in the country. What we need is a team of highly motivated executives with sound domain knowledge cum field experience coupled with Systems background.

It is time for the EC and the UFM to address the above pertinent issues in proper perspective instead of hastily adopting a patchy model of GST.