Tryst with GST: Will it transform or will it unleash chaos?

Last Updated: Fri, Jun 30, 2017 17:05 hrs
A pedestrian walks past a poster advertising about the new goods and services tax (GST) regime at the Service Tax Office in Bangalore on June 29.(AFP image)

A game changer for the Indian economy, the Goods and Service Tax (GST) is rolling out midnight July 1 in a function at the Central Hall of Parliament. This is the biggest tax reform since independence and will change the indirect tax landscape. All states and union territories except Jammu & Kashmir have passed the GST bills. The underlying principle of GST is ‘one nation one tax’; attempting to bring people into one common market.

The occasion will be marked by the sounding of a gong and addressing the lawmakers and dignitaries will be President Pranab Mukherjee, Prime Minister Narendra Modi and Finance Minister Arun Jaitley. The opposition leaders will boycott the event.

Speaking a day before the launch, Revenue Secretary Hasmukh Adhia assured that the process is transparent.

In preparation for the GST rollout, he conducted a video conference with central and state government officials on Wednesday. This was done to hear their concerns. The Finance Minister said GST is expected to "spur growth, competitiveness, indirect tax simplification and greater transparency".

There is still some skepticism and concerns among small traders and mom-and-pop stores; since they have never paid taxes. There are transition challenges and hurdles to a smooth implementation. For Livemint, Sachin Menon, national head Indirect Tax of KPMG India, writes about some of these challenges: "IT teams across industries are burning the midnight oil to make changes in their IT systems. Incorporating the recent changes in the reporting of returns is an additional challenge when it comes to being GST-ready."

"The generation of self-invoices and issuance of payment vouchers for purchase from unregistered dealers has added a layer of complexity to compliance under the GST regime. Industry is expecting the government to issue the requisite notifications soon, including the effective date of GST levy, eligible exemptions and concessions, and negative list of services. Without this, effective transition planning is impossible," he writes.

In an interview to the Business Standard, the Goods and Services Tax Network (GSTN) Chief Navin Kumar said the IT backbone of the GST will be ready by July 15: "It should be a stable system. Problems that surfaced during the first phase of the testing have been resolved. Some changes were made to the rules. Those changes we have absorbed now, so there is no time to do beta testing for that. Other than that, we have done all other tests. So, we are fairly confident of the system."

Part of the uncertainty is figuring out the impact of GST on goods and services and whether it will have any inflationary impact for consumers. On Thursday, the Finance Minister met with industry representatives urging them not to increase prices. Among those to meet with Arun Jaitley were executives of Hindustan Unilever, Procter & Gamble, Airtel, DLF, Amazon, Grofers, Wipro, Mondelez and Johnson & Johnson.

According to Business Standard, one official said, "The finance minister asked the industry representatives to pass on the benefit of the GST to the end user. The broad message was that GST should not be inflationary and that prices should either remain stable or come down."

As the unprecedented economic reform rolls out, it will be met in part by protests and strikes across the country as not everyone is on board. Demanding changes in the GST regime, the Bharatiya Udyog Vyapar Mandal which represents 17000 traders' associations and small and medium enterprises (SMEs) said it would go on a day long strike on Friday. Their secretary said, "We have several issues with the GST system and rates. The tax on some of the items will be fatal for SMEs."

Economists have weighed in ahead of the launch.

Soumya Kanti Ghosh, group chief economic advisor of the State Bank of India, said, "There will be formalisation of the economy, broadening of the tax base and this will lead to better tax collection."

Economist Mohan Guruswamy said, "Given the multi-tiered rate structure and the enormous paperwork involved, there should have been a six-month preparation time to allay fears of traders."

The Hindustan Times editorial, ahead of the launch, called the system flawed, but simple as compared to the earlier ones: "There is no denying that even in this flawed form, the next tax regime will be simpler than the old, and, consequently, will result in some economic gains, but it is difficult to ignore what could have been. In its purest form, GST, experts said, would add between 1 and 2 percentage points to India's growth rate. That’s between $20 billion and $40 billion added to the country's Gross Domestic Product."

"As expected of a disruptive reform – GST definitely qualifies as one – this change will cause some disruption. Truth is, no one can or will ever be fully prepared for something like GST. The change could have been set for September 1, and people would still be asking for more time," it went on to note.

Coming to the industry's side of the equation, some executives have spoken out ahead of the launch on what they plan to do going forward. Industry body FICII on Thursday struck a positive note on GST saying, "Goods and Services Tax (GST) will prevent cascading of taxes since input tax credit will be available across goods and services at each stage of the supply chain. The harmonisation of the laws, procedures and rates of taxes enforced by the Centre and the states will bring transparency/uniformity in our tax regime."

PepsiCo Chairman D Shivakumar in an interview to The Economic Times spoke of the challenges for the FMCG industry saying, "...educating everybody in the ecosystem, getting wholesalers to keep track of their bills and inventory is a huge change that needs to happen. How do you digitize the whole FMCG channel is something that is paramount importance to the entire industry after GST. The need is even higher after GST."

Speaking on the topic of price changes, he said, "We are not taking any immediate price changes. What is more important is to offer some degree of comfort and stability to the consumer first, through the existing prices as far as possible."

Bhaskar Bhat, MD, Titan spoke to ET Now on the effects to the jewellery industry. He said, "I do not think you should fear a price increase."

Thomas Cook MD & Chairman, Madhavan Menon does not see any major changes or effects on business. He said, "So we see no impact of GST on us because our rates remain almost the same. The impact on us is next to nothing."

Speaking at a mutual fund industry event, Anil Ambani said, "But there is just one way of describing its true promise. GST is not just another piece of reform or transform, however significant. GST is the liberation of our economic imagination. It is our economic freedom."

While the politics of the event itself plays out with the opposition and other parties boycotting the midnight ceremony, the government is betting big on the biggest tax reform in decades. The country waits with bated breath as some expect chaos and glitches as the system is put into effect. But if economists are to be believed, that's a price to pay for long-term growth and for benefits to the economy as a whole and consumers in particular.


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