JULY 1, 2017, marked a date of significant changes to life of business and finance in India. India's much awaited "One Nation, One tax" Goods and Service Tax (GST) has become a reality. Unique Identity (Aadhar Card) is also being made compulsory for passports, PAN card, income tax returns, government-supported schemes (such as PDS) on the same day. India is moving to a reality of one nation, one tax and one market country with the GST replacing 17 different layers of complex taxation and 23 levies both at the state and the central level. The price of a product will be the same anywhere in the country from July 1. This will benefit not only the buyers but the sellers also as the whole country will be a single market. That should help reduce the immense power of India's myriad middlemen wield at state borders, free up internal trade, make it easier to do business and widen the country's tiny tax base. Prime Minister Narendra Modi gave a new meaning to the GST "Good and Simple Tax" on the inauguration stating: "One person needs to know only one tax ‘GST' in place of 500 types of prevailing indirect taxes in 29 states and 7 union territories". GST council includes ministers from states as well as the central government and it's responsible for recommending GST regulations. The council held eighteen meetings and all decisions were taken with consensus showing a cooperative federalism. Multiplicity of taxes at the state and central levels had resulted in a complex indirect tax structure in the country ridden with hidden costs for trade and industry. Firstly, there was no uniformity of tax rates and structure across states. Secondly, there was cascading of taxes due to "tax on tax". No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the state level sales tax or VAT, and vice versa. Further, no credit of state taxes paid in one state can be availed in other states. Hence, the prices of goods and services get artificially inflated to the extent of this "tax on tax". GST has addressed the issue. The GST will have a unique feature where on a single transaction both center (CGST) and state (SGST) will levy taxes simultaneously and where transaction will travel from one state to another, tax will be collected in form of IGST which will be ultimately distributed between the center and states. GST will be a destination-based tax. This implies that all SGST collected will ordinarily accrue to the state where the consumer of the goods or services sold resides. Mid-range suppliers (with turnover up to 7.5 million rupees) can opt for "composition scheme" with minimal formalities and limited tax payment. Small traders/suppliers (turnover up to 2 million rupees) may opt to be out of the GST but looking at interconnecting seamless Input/Output credit transfers, it will force even small intermediary to get registered under the GST. Only last end of supply chain member with small turnover may find it worthy to be out of the Goods and Service Tax Network (GSTN). Virtually it will close loopholes and have most of the trade under the GSTN. Robust GSTN is a game-changing tool. Any contractor who is part of a supply chain does not load his invoices on to the tax software will put everyone else on the chain in the doghouse. At present, Indian business activity goes back and forth between the black and white economies: GST will force to make the judgmental call. Either you are in the black or you are not. The grey economy, if you wish, will cease. If an artist tried to portray the post-GST economy, he would do a work in chiaroscuro. To achieve easy transition, chains of workshops and knowledge sharing sessions are being held during past six months by professional bodies like Chartered Accountants Institute (ICAI), ICWAI, chambers, trade forums and volunteer bodies. The government itself has held more than 4700 workshops coupled with 18 GST council meetings to address various stake holders concerns and solutions in continuity. Further challenges are expected, hence it's a interesting journey for the world to witness. Some of the major benefits of GST are as under: Easy compliance: All tax-payer services such as registrations, returns, payments, etc., would be available to the taxpayers online, making compliance easy and transparent. IT savvy platform will reduce personal interaction with tax officials. Uniformity of tax rates and structures: GST will ensure that indirect tax rates and structures are common across the country making the country tax neutral based on geography. Removal of cascading: A system of seamless tax-credits throughout the value-chain, would ensure that there is minimal cascading of taxes. Plunge in production cost: With GST the cost of production will take a slight dip as now the firms will be free to move and call goods around the country without being charged extra than just the price of those goods and the cost incurred naturally in moving goods. Economies of scale: With GST, the road to consolidated working is wide open as now the companies would want to operate from areas which offer the highest productivity which would create a cluster of companies operating from one place resulting in gains for them as they could enjoy economies of scale. Locating productivity: Companies until now have been deciding on their locations based on tax subsidies and incentives but with GST, finally, they can think beyond tax and factor the real majors for an apt location like productivity, efficiency, and commercial viability. Cheaper imports: Companies would be able to import goods at a cheaper price after GST as it will streamline the process consolidating the additional custom duties into it. So, imports will be taxed similar to interstate tax as the IGST and can also be claimed for input tax credit. India has created a unique GST system to cater 1.3 billion population, with differing GST slabs (0 percent to 28 percent — seven slabs with certain exemptions) to match 3.5 billion invoices on monthly basis, this proves to be a herculean task. Errors in online information submission by any of supply chain member could jeopardize the other supply chain member's compliance. Challenges will also be posed from the multiple tax slabs and existence of exemptions which creates room for huge amount of litigation and escape route to tax evaders. Eventually tax slabs are tend to reduce and overcome the teething issues of implementation with active participation from GST Council and stake holders. The world is watching the mega tax reform as it could create opportunities, lead the nation toward what is being termed as "Economic Freedom," "Good and Simple Tax," "Technology driven transparent reform". It would be interesting to note what route it takes on implementation. It can also be a great experience and resource pool for the GCC while moving forward to implement VAT for the first time from January 2018. Vijay Soni, chartered accountant, CPA and CMA, is a tax and finance expert. He is also President- IMA WP Chapter, Saudi Arabia. Email: [email protected]
