GST and its roll out blues: Modi's 'biggest achievement' has a few snarls

In a recent research note, Nomura has sounded a note of caution over the regime's complex structure

Hailed by Assocham as the Modi government's crowning achievement so far, the Goods and Services Tax (GST), which is slated for a July 1 rollout, has raised concerns from various quarters, including India Inc.

The concerns vary from the rate of tax to be levied on various industries to the very structure of the new regime. The clamour has only grown after the May 18-19 GST Council meeting in Srinagar, where the rates for 1,211 items and 500 services were decided. 

The GST as proposed has a multiple rate structure. Almost all goods and services have been classified into groups attracting GST rates of 5, 12, 18 and 28 per cent, respectively. In addition, four items (namely luxury cars, aerated drinks, tobacco and related 'paan' products) will attract separate cesses each.

Curb your expectations

According to a recent Nomura research note, benefits accrued from the GST in its current form will be "far less than initially envisioned".

As reported earlier, the research note attributes this to the regime's complex structure and multiple tax rates.  

"The GST as proposed is fairly complex with multiple tax rates (across different categories and even within the same category) in order to minimise the inflation impact and due to political considerations," said the research note. 

The note added that the efficiency gains which were expected to accrue from a simplified tax structure would be reduced owing to the current structure of the regime. However, in the note, Nomura held out hope that in the coming years, the government would be "able to work its way towards a more ideal GST".

Various tax slabs and rates causing worry

In the past week, Business Standard had reported that a bunch of business sectors had made representations to the government for a review of the GST rates. These include toys, multiplexes, ayurvedic products, paints, detergents, aerated drinks and hotels. 

Toys, multiplexes, paints, detergents and aerated drinks have been slapped with a 28 per cent GST. Also, ayurvedic products have been bunched under the 12 per cent slab, a move which has drawn criticism from Yoga guru Ramdev, who's Patanjali Ayurved has taken the FMCG market by storm. 

However, the government has been firm in its response. As reported, late last week, Vanaja Sarna, chairperson of the Central Board of Excise and Customs, ruled out a review of the GST rates, barring a few rare cases.

Big corporates are not the only ones worried. As reported earlier, traders in the country appear to be worried over the classification of different items under various tax slabs of GST. According to the Confederation of All India Traders (CAIT), this has created an environment of anxiety and concern among the trading community.

In view of the growing discontent about the proposed GST rates, CAIT has urged the government to revisit the rate schedule.

"The wider impact of the classification of items under different tax slabs needs to be gauged very cautiously since, under GST, not only the taxes paid on goods but even the taxes paid on services will be eligible for input tax credit," CAIT said, adding that since input tax credit would now be available on tax paid on inter-state purchase of goods and availing of services, the advantages of which would have to be ascertained before estimating the impact on the prices of commodities.

Is complexity India's Achilles Heel?

Concerns over the complexity of the new regime's structure come at a time when professional services firm Deloitte has said that Indian tax laws are perceived as the second most complex in the Asia Pacific region. In fact, in its survey, Deloitte said that the country's tax laws have become even less predictable over the past three years.

As reported earlier, according to Deloitte's Asia Pacific Tax Complexity Survey, India ranks only after China in having the most complex jurisdiction for taxation and most complicated requirements of tax in the region. 

  

By 'complexity', it meant the perceived level of difficulty in interpreting the tax laws and rules in the relevant jurisdictions.

With regard to India, the Deloitte survey said that GST would reduce complexity in tax environment by eliminating multiple taxes while improving trade and commerce. However, it added that in addition to GST, the introduction of GAAR (General anti-avoidance rule) from April 2017 and adoption of BEPS (Base Erosion and Profit Shifting) actions would lead to an increase in complexity over the next 2-3 years in the field of M&A tax and indirect tax in particular.

Roll out blues

Close on the heels of the Srinagar meeting, as the government passed one more milestone on the road to a July 1 rollout, Assocham sounded a note of caution and said that the government should consider relaxing penal provisions for a couple of quarters to help India Inc meet the challenge of complying with the new tax regime. (Read more) 

"Implementing GST from July 1 will definitely be a challenge for the industry... There could be people making genuine mistakes. I would say the department should be softer in the first quarter or two because it is going to be a learning process," Assocham President Sandeep Jajodia told PTI in an interview.

The GST law provides for as many as 21 kinds of penalties for various offences. Short payment will attract a penalty of 10 per cent of the tax due subject to a minimum of Rs 10,000. For various other errors, the penalty would be 10 per cent of the tax due.