Tag Archives: Goods and Services Tax

GST Should Boost India’s Long-Term Growth Prospects: Fitch

Newsroom24x7 Network

Hong Kong/Sydney/Singapore: India’s new Goods and Services Tax (GST) will unify the indirect tax system and remove domestic barriers to trade, which should support productivity gains and GDP growth over the long term, says Fitch Ratings.

The GST that came into effect on 1 July is relatively complex, including multiple tax rates for different goods – ranging from 0% to 28%, or higher where ‘sin taxes’ are applied – and requires frequent filing in all states in which a company operates. Nevertheless, it is far simpler than the previous system, under which each state set its own sales taxes – in addition to the central government – and imposed border taxes on goods entering the state.

The unified national system should offer significant opportunities for productivity. For example, it will become much quicker and less costly to move goods across the country now that trucks will not be held up at checkpoints at state borders. Smoother logistics should reduce retailers’ need for working capital and allow them to operate centralised warehouses, rather than in every state. Supply chains could extend, encouraging specialisation, now that there is less incentive to source goods within state borders. Tax filing may also become less time-consuming as a result of the new electronic system.

The GST is unlikely to increase revenue in the short term. However, it is likely to boost revenue indirectly over the long term, as it supports GDP growth and encourages tax compliance. A benefit of value-added taxes like India’s GST is that retailers are required to show compliance right along the supply chain to claim refunds. Large companies will now have an incentive to pressure smaller suppliers into compliance. The new electronic filing system is also likely to lead to more tax reporting. Moreover, the tax base will be broadened, as only SMEs with sales of INR2 million (USD31,000) will now be exempt from paying GST, down from INR15 million.

Small informal retailers – which account for over 90% of retail sales – should also find it harder to understate their sales or to avoid filing tax returns altogether in a system where transactions are tracked throughout the supply chain. This could accelerate the shift toward organised retail.

Shifting activity into the formal sector, where activity is regulated and taxed, is a key government goal and was the main motivation stated for demonetisation in late-2016. The informal sector is very large, accounting for over 20% of GDP and 80% of employment, and is largely untaxed. This is one of the reasons why government revenue is low, at just 21.4% of GDP in 2016, compared with a median of 29.9% for ‘BBB’ range sovereigns.

There are significant short-term risks involved in the GST implementation, emphasised by the late changes to the bill and the disruptive roll-out of demonetisation. High compliance costs for businesses and administrative difficulties have been problems in some emerging economies that have introduced value-added taxes, particularly those that had complex systems, under-resourced bureaucracies and short lead-in periods.

India’s new system will overhaul the way businesses operate, affecting their financial reporting, tax accounting, supply-chain management and technology requirements. Contracts will also need to be renegotiated. Smaller firms, many of which still keep their books manually, are likely to find the transition particularly difficult. India’s large bureaucracy is likely to be tested by the new system, with further potential implications for businesses. For example, delays in processing tax returns and paying out refunds might create cash flow problems. Multiple GST rates are also likely to lead to disputes over which goods fall into which category, which could add to strains on the judicial system.

Implementation of GST: Why involve a Private Limited Company in a Sovereign Function?

Lalit Shastri

gstn-gstThe directive by Union Finance Ministry to the Central Board of Excise and Customs (CBEC) and Central Board of Direct Taxes (CBDT) to share data with Goods and Services Tax Network (GSTN) – a Section 25 non-Government, not-for-profit Pvt Ltd Company – has run into rough weather as serious objections are being raised about the new arrangement on constitutional grounds and also because it involves the risk of critical data slipping into foreign hands.

It is being pointed out by those in knowledgeable circles that since GSTN will be having access to the entire tax data of the country – both of direct and indirect taxes – with the PAN providing the cross-link between the two databases, there is always going to be the danger of critical data getting into private and also foreign hands as FIIs own a sizeable equity in some of the banks involved.

From the point of view of the Constitution of India, it must be underscored that Article 283, which relates to Custody of Consolidated Funds, Contingency Funds and moneys credited to the public accounts, provides for the custody of the Consolidated Fund of India and the Contingency Fund of India, the payment of moneys into such Funds, the withdrawal of moneys therefrom, the custody of public moneys other than those credited to such Funds received by or on behalf of the Government of India, their payment into the public account of India and the withdrawal of moneys from such account and all other matters connected with or ancillary to matters aforesaid shall be regulated by law made by Parliament, and, until provision in that behalf is so made, shall be regulated by rules made by the President. Under this Article, there is an identical provision for tate Governments and the linked matters are to be regulated by the State Legislature and by the Governor.

Courtesy GSTN website
Courtesy GSTN website

Since the Constitution (One hundred and First Amendment) Act is silent vis-a-vis Article 283, serious objections are being raised in concerned official circles because the stage has been prepared to hand over the task of fund transfer to Consolidated Fund of India and the States to NGTN, a Pvt Ltd Company in gross violation of the letter and spirit of Article 283.

Tax administration, it is being pointed out by Indian Revenue Service (IRS) officers, is a sovereign function. It deals with sensitive, confidential and private information about tax payments by millions of tax payers. With GSTN implementing the GST, it will be difficult to rule out the possibility of the leakage of sensitive information as 51% of the equity of GSTN will be in private hands.

 

A note doing the rounds in official circles, which can be described as a critique of the system being put in place by the Union Finance Ministry for implementing the GST says: “GST also envisages inter-departmental sharing of return data and PAN data which will generate substantial additional revenue because of cross matching of data and 360 degree profiling of taxpayers. Under the GST regime, such an important function will be highly dependent on the system itself which warehouses all the data. Such system/data in the hands of a Pvt Ltd Company is uncalled for.”

The note also quotes the select committee of Parliament (Rajya Sabha) that has noted serious concern in this matter by putting on record that the “Non-Government shareholding in GSTN is dominated by private banks, and this is not desirable”. It further said, “The committee strongly recommends that the government may take immediate steps to ensure non-government financial institution shareholding be limited to public sector banks or public sector financial institutions.”

Since GSTN is a Section 25 non-Government Pvt Ltd Company, it also does not come within the purview of the Comptroller and Auditor General of India (CAG).

Also read:

GST: Finance Ministry commits blunder; now centre can levy and collect Excise duties only on petroleum and tobacco products

Implementation of GST by generalists and private players: Discontent brewing among IRS officers