Taxing Times

Despite the worries that the government and the GST Council members had left too many decisions and details for the last minute, the Goods & Services Tax (GST) system became operational at the stroke of midnight of June 30. Finance Minister Arun Jaitley, Revenue Secretary Hasmukh Adhia and others in the team left no stone unturned to make sure that the biggest tax reform was implemented smoothly.

A number of critics point out that the GST that Modi government has rolled out is a far cry from the original recommendations. They also point out that there are far too many rates and far too many issues with the current GST system. And despite the prime minister dubbing GST as the Good and Simple Tax, it is pretty complicated, though not as complicated as the previous system. It has too many tax rates, cesses, and several goods outside of the GST system - including petrol and diesel, real estate and vehicle registrations, alcoholic beverages, and some local entertainment taxes.

There is plenty of truth in all those assertions, but I suspect the government knows it well. Some of the complications were not of its own doing - the fact that the Centre needed to take all the states along, and allay their specific problems and fears, forced it into compromises that it otherwise not have made. The number of rates had to do with several states fearing that GST rollout could create social tensions because it would make a lot of so-called luxury goods cheaper while making some essential goods more expensive. That a single, uniform rate of 12 per cent would be more favourable to the rich consumers, and not the poor ones. Similarly, the cesses have been put in place largely because the Centre guaranteed any revenue shortfall to states for five years, and needed to make sure it had enough money to do so.

The first test of GST rollout will come when the time for filing details of invoices and filing of the GSTR comes, and also if there is a big rush for GST registration when the invoice filing date nears. The fact is while all big and medium companies had registered and created the proper systems for GST filing, an enormous number of small enterprises, mom-and-pop businesses, traders, etc., had not taken the plunge hoping that GST would continue getting deferred.

They will also have to embrace digitisation - a step a number of traditional businesses have avoided so far, because they are not comfortable with it.

In the short-term, GST could cause plenty of pain to small traders, especially those who are not comfortable with digitisation. As a system, it does favour bigger, more organised players who have digitised the entire chain of vendors and customers and are in a position to claim full input credit compared to those who haven't such robust systems in place.

Despite the short-term pain, the long-term gains of GST will be enormous and show up in better tax compliance, better revenues and a more equal playing field.