GST: The countdown begins

Several earlier articles in this column have discussed the GST, from the state of preparedness of the administration to the design elements of the GST. This article discusses the key developments of the past week on the GST, the likely next steps, some issues unaddressed till date and the time line for a possible, and very high probable, introduction of the GST in April 2011.

A key meeting of the Empowered Committee of the State Finance Ministers (EC) took place on 21st July 2010. This was followed by a meeting of the EC with the Union Finance Minister, Pranab Mukherjee (FM). The FM made a major speech thereat, reaffirming the intent to introduce the GST by 1st April, 2011 and also making several significant announcements (nay, concessions) on various aspects of the GST, such as rates, exemptions, thresholds etc. These together constitute a very major step forward and has been seen as such, with the States being galvanised into action. They have now to be seen as being equally keen on this major reform initiative and to see it to fruition by April 2011. Let us look at the announcements in some detail.

 

On the GST rates, the FM has given up on the initial insistence on a single rated GST for goods. He has indicated that since the States are not agreeable to a single rate on goods, he is amenable to a dual rated GST for the initial two years, with a convergence to a single rate in the third year of the GST. In other words, the promise of a single rated GST on goods will only be realised, if at all, after the third year of introduction of the GST, whereas, until now, it was seen as being within reach and therefore something to attempt at the inception of the GST. The indicated rates are a standard rate of 10 per cent and a concessional rate of 6 per cent in year 1. In year 2, the standard rate will reduce to 9 per cent and the concessional rate will remain at 6 per cent. In year 3, the standard rate will go down to 8 per cent whereas the concessional rate will go upto 8 per cent, thereby resulting in the desired convergence.On services, he has indicated a single rate of 8 per cent.

He has thus reached out to the States and has made these significant concessions with a request that the States finalise a similar rate structure. If that were to come about, the aggregate standard rate on goods, comprising the Central GST and the State GST, will be 20 per cent in year 1, 18 per cent in year 2 and 16 per cent in year 3. The aggregate GST on services would be 16 per cent from year 1.

It can straightaway be seen that the standard rate is a very high one and is nowhere near the GST rate that was initially envisaged at say 12 per cent, as per the recommendation of the Task Force of the Thirteenth Finance Commission, or say 16 per cent that was otherwise talked about. This 16 per cent will only be reached 3 years down the road. Thus, the multiple challenges that arise as result of varying GST rates across goods and services i.e. of distinguishing between goods and services, of the appropriate classification of goods between the lower rated category and the standard rated one, the taxation of bundled supplies comprising of both goods and services, such as works contracts, the potential double taxation of software, telecom services and so on will all be there for sometime to come. This is not at all desirable but appears inevitable, if we are to have a GST, albeit not a perfect one, by April 2011. Given the other benefits of the GST, this is perhaps a compromise worth making, much as it is likely to challenge both industry and the administration in the initial years.

On the matter of exemptions, the FM has announced that the Centre will review the number of goods current exempt from excise duty and limit the exemption under GST to the 99 products that are currently exempt from the State VAT. Now, from a standpoint of broadbasing of the tax, having a list of 99 products exempt from the GST is not ideal and this is indeed a very long list. It appears therefore that this has also been a significant compromise to get the GST on board.

As regards thresholds, the Centre has suggested that the level be at Rs 10 lakh per annum for both goods and services under both components of the GST with a compounding option for small dealers upto either Rs 50 lakh or Rs 1 crore.

Perhaps the most important announcement has been with regard to information technology. It has been recognized that the successful implementation and administration of the GST would be majorly dependent on a strong and robust IT system. The announcement of the formation of an Empowered Group, to be headed by Mr. Nandan Nilekani, with representation from the Centre and the States, which would take decisions on the IT infrastructure at both Central and State levels is a very welcome one. It would hopefully also ensure a significant reduction in compliance costs, by enabling electronic filing of returns and payment of taxes besides also enabling seamless GST registration, both on a transitional and on an ongoing basis. If this is combined with the expectation of a single GST return to be filed with the Centre and the States, as also a single GST invoice, the benefits of uniformity and standardisation will certainly be realised.

Following on from here therefore, the next steps to be taken will be as follows: 

 

 

agreement by the States that the above suggested GST rates are acceptable to them as well. This is expected to be discussed in detail in the next meeting of the EC on 4th August. Given the high proposed rates, there are no really no reasons why the States ought not to agree. Indeed, it is a moot point as to whether open ended and full compensation for any revenue losses should have been offered by the Centre to the states, in view of these high rates. However, the request from states on compensation has also been met. This reassurance should surely enable all States to drop their reservations and come on board, regardless of their political persuasion and the State specific challenges that individual States may have. 
 

constitutional amendments that are required in order to operationalize the suggested GST. It is understood that the Union Government has circulated the draft of the suggested amendments at the time of the meeting with the EC. It is understood that a GST Council, with the FM, the MOS for Finance and all State finance ministers as members, has been proposed with sole powers to regulate all matters on the GST.

It is critical for the EC to finalise its responses to this draft in its next meeting on 4th August, so that the amendments will then be piloted through the monsoon session of Parliament which concludes in end August. It is expected that the amendments will be so piloted in the last week of the monsoon session of Parliament so that these are thereafter similarly passed through the State assemblies by no later than December 2010. Hopefully, these will all be done in time as a process, once agreement is reached in the EC.

As to the issues still remaining unaddressed, these are many and are as follows:

release of the draft GST law/rules at both the Centre and the states; 
 

determination of the rules for the place and time of supply of goods and services; 
 

treatment of bundled supplies, software, telecom services and so on, where the challenge of double taxation is an ongoing one; 
 

mechanisms to operationalise the destination based consumption tax that the GST is supposed to be, especially with regard to inter State supplies (IGST model of taxation), imports of goods etc.,; 
 

transitional issues such as treatment of outstanding input credits, present litigation, refund claims, GST registration for existing excise/VAT registered businesses etc.,;

It is hoped that all of these will be addressed as soon as possible, immediately after the next meeting of the EC. Clearly, there is much to be done between now and April 2011 but one possible timeline that could be looked at is as follows:

passing of Constitutional amendments by end August; 
 

release of draft GST law/rules by Centre/States by September/October; 
 

passage of Constitutional amendments in State assemblies by September/October; 
 

finalising GST law/rules by November/December, after a comment period; 
 

passage of GST law by the Parliament/state assemblies by December 2010/March Quarter 2011; 
 

setting up of IT infrastructure by March Quarter 2011.

If this were to be followed, there is no reason why the dual GST, warts and all, cannot come into force by April 2011. We are all stakeholders in making sure this happens.

The Author is Leader Indirect Tax Practice PricewaterhouseCoopers pwctls.nd@in.pwc.com

Supported by Rahul Renavikar and Niren Shethia