As the stipulated date for the rollout of Goods and Services Tax (GST) on July 01st 2017 approaches, it is still unclear what the practical challenges could be. Let us admit that this is going to be one of the biggest national tax exercises undertaken in recent memory. Subsuming a plethora of central and state taxes into a single GST is not going to be easy. The technical, logistical and IT challenges are going to much more complex. Business associations like ASSOCHAM are already asking the government to postpone the launch of GST as it is likely to be too disruptive to business. But then, all change is going to be disruptive and more so in case of a project of the size and magnitude of GST.
It needs to be appreciated that irrespective of whether the implementation actually commences in July or later, the challenges are unlikely to go way. Moreover, a lot of practical challenges will only become evident once the actual implementation is undertaken.
Key challenges to the implementation of GST in India
The big challenge in GST could be integrating the small and medium enterprises. Remember, GST makes the entire process from invoicing to tax payment entirely online. The invoice creation under GST-1 will be online and the approval by the client under GST-2 will also be online. Once it is approved, it becomes GST-3 for tax records. Most small and medium enterprises may not have the technical savvy to adapt to this massive change. GST assumes a much higher level of technology readiness that we have in the industry today.
One of the key features of GST is the seamless input tax credit (ITC) that will be available under the GST system. But the seamless credit has a lot of assumptions. For example, many products like petrol, diesel and alcohol have been kept out of the purview of GST. Integrating tax credits across products will be a nightmare as equivalent audit trails may not be available for all transactions.
The GST was originally designed to simplify the entire tax structure and therefore a single rate of tax was suggested. That is the experience in other countries that have implemented GST across the world. The unwritten principle in GST is that you reduce the slabs, which is why most countries have kept just one slab of GST. But in the Indian context, there is 0% slab, 5% slab, 12% slab, 18% slab and 28% slab. In addition, a new slab of 3% has been introduced specifically for gold. These multiple slabs are going to be a challenge in actual implementation.
If you thought that GST is going to make the job of corporates simpler that may not necessarily be the case. For example, under the GST an assessee will have to file 37 returns per year (3 returns per month and one annual return). This is in contrast to the 13 returns that an assessee is filing today. This is, of course, only for one state. If you are operating across multiple states, then your number of return filings will go up proportionately. So, if you operate with business locations in 10 Indian states, they you will have to file a total of 370 (37x10) tax returns each year. That will surely be an additional cost in terms of logistics and compliance.
There is also a logistical challenge to the implementation of GST. Till date, not all the 31 states have passed the State GST Acts. Some key states like West Bengal and Punjab are yet to pass the GST Bill and if the bills are not passed before July 01st, it could create a massive mismatch for trans-India trade. More so, considering that both these states are important pivots in all-India trade. However, it is hoped that these states will be in a position to pass this bill through an ordinance before the implementation date.
There is likely to be a complication regarding the payment of service tax. Currently, service tax comes under the purview of the centre. In the GST regime, it will come under the single GST umbrella. Therefore all intra-state services will be subject to State GST while inter-state provision of service will be subject to central GST. For an intangible delivery of services, this likely to lead to unnecessary complications. Also, in case of services supplied inter-state, the question of state jurisdiction will become critical and is going to be hard to define.
The anti-profiteering clause in the GST Bill could again lead to another practical challenge. Under this clause, the business is required to pass on any tax cuts to the customer in entirety. While this will not be an issue in case of services invoicing, it could be an issue in case of products where the maximum retail price (MRP) includes many items apart from GST. Delineating the impact of GST from these set of factors may be practically difficult and may open the doors to endless litigation.
Last, but not the least, the biggest challenge for GST is going to be IT-related. Companies need to revamp their tax and IT infrastructure in entirety to be GST-ready. Secondly, banks will have to handle the entire payment interface online and the IBA has already sought more time from the GST Council. Lastly, the CBEC now needs to integrate old taxes with new taxes and achieve the entire thing seamlessly. That is easier said than done!
A lot of challenges may lie ahead once the GST is implemented on July 01st. But, the GST Council will have to take it along the way. That is the only way to address such a complex rollout.