An unresolved puzzle

Free flow of the credit chain is the key to GST implementation

The GST Council meeting on Friday concluded by putting a smile on quite a few faces. Both industry and consumers have reasons to rejoice after the Council approved slashing the GST rate across more than 170 items from 28 to 18 per cent. 

The efforts made by the government towards ironing out difficulties faced by taxpayers (in terms of expanding the composition scheme, exemption for service providers making inter-state supplies of services, deferring the e-way bill provisions, and deferring tax collection at source provisions) are commendable. It clearly indicates the intention of the government to ensure that GST implementation in India is much smoother than in other countries.

While slashing GST rates is a welcome change, continuous changes in the structure are creating difficulties for businesses. This has had an impact on the pricing, stocking, budgeting, and for customers seeking justification for a change in prices.

The problem assumes greater significance for products bearing maximum retail price (MRP) in terms of the legal metrology laws. Typically, the MRP factors in the cost of production, distribution, marketing, and tax incidence, making changes in tax rates to deeply influence the end pricing of the product.

It is pertinent to note that the anti-profiteering provisions under the GST require taxpayers to pass on the benefit of the decreased tax rate. Thus, if the tax rate reduces, the taxpayers have to pass on the benefit to customers. Consequently, there is the possibility that a product manufactured within a difference of a few days may have a different MRP, leading to confusion for consumers.

It is imperative that the government implement various thought-through periodic suggestions to ensure it remains a path-breaking tax reform rather than an initiative gone wrong. Guidelines on how pricing and profits are to be calculated under the GST regime to track any unlawful gains and clarity on whether anti-profiteering provisions would apply at entity or at product level would also be helpful. 

To address the concerns of industry, the GST Council could consider reviving or reconstituting sectoral groups under its umbrella. This is not a new recommendation as the government did constitute such groups earlier. They had received an overwhelming response from industry and associations — although the results were a mixed bag. The sectoral groups could become an interface between the GST Council and taxpayers/associations to ensure that laws factor in the changing needs of industry.

To fix the technical glitches and to test the bandwidth of the GSTN, the GST Council could enhance the turnover limit of Rs 1.5 crore for filing monthly returns. A major reform in this direction would have been to set a turnover limit towards a higher side of around Rs 10 crore or based on the number of transactions undertaken in a month. Once assured of its ability to handle the load of heavy transactions, the government could extend filing monthly returns to all taxpayers and implement matching concept.

The GST Council has made announcements to ensure ease of doing business for small taxpayers and the issue of decentralisation continues to pose challenges for service sector taxpayers. Under the erstwhile regime, centralised registration helped the service provider to control the entire business operation from a single location. Single registration meant ease in compliance, maintenance of books, invoices and payments. The government should deliberate restoring the concept of centralised registration, as it would significantly ease service providers. Further, revenue would still accrue to the destination state where the recipient is located depending on the nature of service provided.

Free flow of the credit chain is the key towards GST implementation. After addressing the initial teething issues, the government may consider bringing petroleum, electricity and the real estate sector within its ambit to ensure free flow of credit through the supply chain. As India embraces the GST with enthusiasm, the government should constantly endeavour to remove impediments and ensure ease of doing business in the real sense.

The author is partner, Deloitte India.

With inputs from Anupama Agarwal, senior manager, Deloitte India