14 Jun 2017 15:57 IST

Rushing to get last mile delivery right

Much remains to be done before the Goods & Services Tax is rolled out on July 1

The Government is moving at what can only be described as lightning speed given the bureaucracy’s usual torpid pace. On the weekend, Finance Minister Arun Jaitley assembled the GST Council to review 133 tax rate appeals and slashed duties on 66 goods from cashews and agarbattis to computer printers and kids’ drawing books. “Overall, it was a very positive result,” says Pratik Jain, PwC partner and Indirect Tax leader. But there’s still way more that must be done in a mind-bogglingly short time before the government rolls out India’s biggest-ever tax upheaval on July 1.

It’s easy to understand why the Government’s keen to launch the GST as fast as possible. The countdown clock to the next election is now well and truly ticking, and with less than two years to go, the BJP must ensure dust from the GST disarray will have settled long before May 2019 when the people’s voice will be heard again. For equally obvious reasons, the Congress and other opposition parties have wanted to stall the GST’s start.

Loose ends aplenty

Setting aside politics, though, and just looking at the logistics, many observers, especially chartered accountants, believe there are too many loose ends to be tied up for the GST to go live July 1. Many smaller vendors and distributors say they need more time. In Malaysia, for instance, when GST was introduced in 2015, there was an 18-month lead time and even then the birth pangs were considerable. Our seven-tier GST is far more complex than Malaysia’s two-tier one and Malaysia’s economy is smaller and less disparate. “We can’t wait for everything to be perfect. But I don’t think the smaller corporates will be ready for it,” says Crisil chief economist Dharmakirti Joshi.

In fact, it’s India’s seven-slab system that may cause the real headaches. (For reference, the slabs are zero, 0.25 per cent, three per cent, five per cent, 12 per cent, 18 per cent and 28 per cent.) Also, the multi-tier GST is giving many industries a strong incentive to fudge prices. Take the hotel industry which has been hit with 28 per cent GST for rooms costing over ₹5,000. There’s talk of introducing room rates of ₹4,999 and then charging for other add-ons such as breakfast that’s currently included in room rates.

Over 160 countries have GST regimes; that includes countries from Canada and Australia to Gambia and the Sierra Leone. The lesson from everywhere is it’s impossible to overhaul the tax code on such a large scale without major disruption. Countries found the switch caused inflation of up to 2 per cent, even in well-ordered economies such as Singapore, Japan and Australia. The BJP insists it’s minimised GST’s potential inflationary impact by keeping 50 per cent of products in the Consumer Price Index basket in the zero tax bracket. But the Government’s view is far from universally accepted. Some experts suggest GST could have a far greater negative impact on the economy short-term than demonetisation.

More papers to file

Also, it may seem like a contradiction, but the GST – which is being introduced to make life easier for business – will actually increase paperwork. Sure-fire GST winners are chartered accountants who see it as a goldmine. For starters, GST involves some 37 filings or compliances every year for small businesses. That’s compared to half-a-dozen currently for service tax. Even professionals will have to file monthly. “Bigger organisations will need one or two people just for this,” says chartered accountant Satyendra Jain. Smaller firms will also need to revamp their systems to ensure monthly compliance.

Then there are the GST act’s anti-profiteering clauses. Some companies fret the provisions are too onerous and give too much discretion to tax officers – and could lead to the very harassment GST aims to minimise. Jaitley has promised there’ll be no “witch-hunt” and accountants predict the Government will waive penalties in the first one or two years till everyone gets used to the GST system. Still, in countries such as Malaysia where GST legislation included an anti-profiteering clause, it was ineffective in any case.

Also there’s IT infrastructure to be tested for GST-compliance and firms that still have to adopt the digital technology to be ready for the tax. Many industries are still crying foul over their assigned tax rates and making last-ditch pitches for lower levies.

Many demands to hear

The entertainment industry, for instance, has been waging a high-decibel battle for reduced rates. At the weekend, the GST Council lowered duties on movie tickets below ₹100 to 18 per cent from 28 per cent. But tickets above ₹100 will still attract 28 per cent GST and Bollywood says this is just going to mean more people will watch movies on their phones, tablets or TVs rather than going to theatres. Similarly, the service sector wants taxes pared further.

Now, people using telecom services or taking insurance pay 15 per cent but that’s now going to be 18 per cent. Says Joshi: “The pressure on inflation will come from services.”

Simultaneously, States are turning up the heat, both to keep local industry happy and to ensure their own revenues don’t suffer. At Sunday’s meeting, the GST on cashew nuts was cut from 12 per cent to 5 per cent, largely on the insistence of States such as Kerala.

There’s also the question of what will happen to inventories held before the GST’s launch. Each industry, worried about losses under the new tax regime, is making contingency plans. E-commerce sites such as Flipkart are holding flash sales to liquidate goods while the auto industry has promised to compensate dealers if they’re left holding stock when GST is launched. The pharma industry, meanwhile, is warning people to stock up on essential drugs because of potential shortages and FMCG companies such as Britannia are also talking about supply disruptions, even though they are satisfied overall with the new duties.

Then, there’s the matter of the all-party meeting in Jammu and Kashmir to be followed by an assembly session to figure how to approve the Integrated Goods and Services Tax Act, 2017, without violating the State’s autonomy under Article 370.

Bottom line: We know what the GST’s supposed to accomplish – turn India into a single market with one national consumption tax – and hopefully boost GDP by as much as two percentage points if some economists are right. Says Joshi: “There will be efficiency gains in the next three-to-five years.”

But while the government’s financial advisor Arvind Subramanian last year described the GST as an economic game-changer, he also noted it was a tax that’s “fiendishly, mind-boggling complex to administer.” The government better hope the benefits emerge before it faces the electorate again or things could get messy — for everyone.

(The article first appeared in The Hindu BusinessLine.)

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