GOODS AND SERVICE TAX ( gst) REGIME

GST rollout faces many HURDLES ON THE WAY

TINA EDWIN


THE APRIL 2010 DEADLINE for goods and services tax (GST) implementation may need to be postponed, not because the political will to carry through the tax reforms is lacking but for want of adequate preparation in terms of legislative changes and gearing up the administrative machinery.
At the legislative level, two sets of changes are required. First of all a constitutional amendment is required to give the Centre and states the concurrent powers to levy tax on goods and services. This amendment will need to be passed by a special majority in Parliament and then ratified by at least half the states before it can become law. Then the Centre and every state will need enact a GST Act that will replace the Central Excise Act, 1944 and the law on service tax at the central level, and the Value Added Tax (VAT) Act and other local taxes at the state level.
To get the constitutional amendment through before the end of the current fiscal year, the Centre would need to introduce a bill in Parliament in the upcoming budget session and get it passed in the winter session, such that it can be sent to states for ratification. On the new GST Act, the empowered committee of state finance ministers and the Centre would need to agree on the goods and services that would be outside the tax net, tax rate as well as the threshold rate for application of the tax before a bill is introduced . They also need to decide the stage of transaction at which the tax would be collected and incorporate that in the law. At present, the excise is collected at the stage when goods leave the factory, the sales tax when the invoice is raised and service tax on receipt of money.
But that may be the least of the hurdles on the path of GST implementation , even though work on the bills is yet to begin.
To ensure that GST can be rolled out in a meaningful manner such that a common market is created for goods and services and credits are transferred for taxes paid at the state level, it is necessary that all states come on board. At the moment , several states have reservations about moving to the GST regime as they are apprehensive of the losses they may suffer under the new tax regime and the level of compensation they will get from the Centre. Unless a formula for compensation of losses is worked out quickly , the consensus to move to GST is inconsequential . The implementation of VAT at the state level and then the gradual phase-out of central sales tax (CST) was delayed on this account in the past. That apart, delayed transfer of compensation from the Centre, particularly in the instance of CST losses, have made states apprehensive about being adequately compensated for their losses. So much so that some like Sushil Kumar Modi, deputy chief minister and finance minister of Bihar, want the compensation to be part of the Thirteenth Finance Commission awards. While the Finance Commission has been given the mandate to consider the impact of implementing GST on states revenues while finalising the awards, it may not be possible to transfer compensation for GST losses through its awards.
The challenge lies at the implementation stage. The format of the challans for tax payment need to be redesigned and the government may need to allot new unique number under the GST system for better administration of the tax.
The under-developed IT system can pose a problem here, but perhaps not enough to derail the roll out of the new tax system. The Tax Information Exchange System (Tinxsys), a centralised exchange of all inter-state dealers spread across the various states and Union territories of India, set up around the time state VAT was introduced, has yet to be fully implemented by all states and updated with data on transactions regularly . Scaling up this system to capture inter-state transactions would take time.
But the biggest challenge to the transition to GST is the under-preparedness of the administrative machinery . The state tax officials, who are used to collecting tax on goods, need to be trained to collect service tax. That would take time. But that problem can be got around if the Centre continues to collect the service tax for the first 2-3 years of the GST regime and transfers the collection to the state.
Even if the GST rollout does not keep its April 2010 date, the Centre would do well to lay out a firm road map for its implementation, setting milestones for removing every hurdle in the path of the new tax regime.