On Wednesday 3rd August 2016, the RajyaSabha set the stage for the rollout of a uniform Goods and Service Tax with The Constitution (122nd Amendment) Bill.Pursuant of the journey of long awaited tax reforms, the ratification of Constitutional Amendment Bill for GST has not only laid a roadmap for tax reforms in the country but instigated a need for business reform.
GST makes a fundamental shift from an origin-based tax to a destination-based one; its biggest contribution is the elimination of border check-posts that haunt all state boundaries. India will now be a single-market with no trucks lined up at border posts for hours with cargo and manifests waiting to undergo laborious checks.
The fully computerised tax information network is an integral part of the GST that emphasis on tracking transactions by capturing invoice at every point in the value chain. It will thus play a big role in increasing tax compliance for businesses.
Increased GDP growth will be a result of reduction in transportation costs, as companies will no longer have to plan their warehouses based on tax rates in different states thereby bringing rationalization in logistics costs. However, the State governments are yet to conclude to eliminate the border posts, which if not exercised may reduce the potential of usefulness of computerized tax information network of GST (GSTN).
The GST regime will bring in the following developments –
1) The system will be more efficient and compliance will be met. Tax Avoidance is going to be difficult because itwill be detected at some stage or the other through GSTN.
2) There will be no cascading effect on tax on tax.
3) There are few goods on which the tax might be higher or lower.
4) Neutrality in taxation irrespective of area/location of business and business processes.
This destination based consumption tax mechanism offers an advantageous and effective Credit Mechanism of SGST, CGST and IGST will cover all B2B and B2C transactions.
The fact that for a well functioning GSTN, firms will have to register with each state/UT and pay taxes at that level is still ambiguous. Also, another ambiguity is the fact regarding affixing responsibility on the firms to ensure that everyone before them in the value-chain has paid taxes before they get input tax credits is inexplicable and will pose as a nightmare of compliances for firms and companies. The discretionary valuation of goods and services can cause serious problems.
Another challenge rests with the implementation of Invoice-based valuation and the ways to deal with discounts offered on final sales, which though experimented by the rest of the world, has not yet been accepted outside.
Not only the rules on e-commerce, similarly, are very complex, but also valuing intra-firm supplies lies in ambiguity.The fact that real estate has been kept out of the purview of GST is a turnoff, in addition to the fact that this will also lead to large amounts of un-rebated tax credits.
Another issue that remains unaddressed is the proposed lower rates of GST that require slashing of critical exemptions and exclusion if the benefits of lower taxation, including higher compliance, are to accrue to the economy. Clarity is awaited on refund of unutilized credit.
With proposal of GST to be implemented with effect from 1st April 2017; is an ambitious tax project wherein the governments have several months to fix its serious flaws.
With India joining the GST club with other 165 countries of the world, GST will change the fundamental ways of carrying on business. With the implementation of GST by the government, businesses will have to undergo re-engineering in various internal and external processes such as procurement, logistics, accounting systems with increased compliances, financial management, marketing, IT systems etc. and above all, tax consideration in decision making. Nevertheless, one can be hopeful that GST as a tax will be the last element in decision-making process of an entrepreneur.