Two done, many more to go

A rush job to meet GST's April 1 deadline can be risky

In its first meeting last week, the GST Council resolved two key issues on enforcing the goods and services tax. The first of these is the threshold over which the GST will be applied has been set at Rs 20 lakh, with the exception of northeastern and hill states, where the exemption is Rs 10 lakh. This is a significant achievement as going into the meeting, different states had varying demands. Eventually, the decision was taken through consensus. Industry had been asking for a Rs 25-lakh cut-off, but the GST Council did strike a happy compromise. Even the Confederation of All India Traders has been quick to welcome this.

The second decision relates to administrative control, which was another thorny issue, as most states were largely united against the Centre in demanding exclusive control over assessees with turnover up to Rs 1.5 crore. The final solution was nuanced. The Centre agreed to grant states exclusive administrative control of assessees with annual turnover of up to Rs 1.5 crore in goods, while retaining exclusive control in services, providing important relief for sectors like telecom and allowing regional tax inspectorates time to get up to speed on the GST. The council also decided to simplify the tax administration for assessees.

These are welcome developments as the swift agreement on these contentious issues has raised hopes in many circles that the April 1, 2017, implementation date for GST will be met. But that enthusiasm may need to be tempered as the road towards successful implementation of the new tax regime still remains a challenging one. For example, take the issue of dual administration. The council decided that for assessees with revenue above Rs 1.5 crore a mechanism would be worked out wherein they would be regulated either by the central or the state government, based on risk evaluation. That may prove to be tricky as the Centre and the states will be at odds on this, keeping industry and traders on tenterhooks till the mechanism is announced.

Then there is the issue of deciding the revenue compensation that the Centre has promised to states. While it has been agreed upon to use 2015-16 as the base year for compensation, whether the compensation will be based on an average of the last three years of revenue, as the Centre has suggested or on the best of three years out the last five, as some states have demanded, remains to be seen.

The most vexed issue, of course, will be the GST rate on which some tough bargaining is expected when the council meets again on October 17-19. Many states want an average tax rate of 22-23 per cent compared with the Centre's suggestion of 18-19 per cent. As Credit Suisse has pointed out, issues such as multiplicity of rates could prove to be sticking points. A large number of rates can distort supply chains and complicate administration as well as compliance, introducing undesirable discretion in the system. At the same time, just one standard rate may be inappropriate because the poor may be affected. Mapping the hundreds of product and service categories to the few GST slabs will require mature handling. These are complicated issues and a rush job to meet the April deadline will be fraught with risks.