GST: Industry Caught Woefully Unprepared By The Pace Of Political Executive

Suddenly the roles are reversed. Instead of the government, it is the industry or rather large chunks of it, which seem unprepared for the switch over to the Goods and Services Tax regime from 1 April 2017.

The sense of distress came to the fore at the jam packed session on GST organised in New Delhi on Friday, by industry chamber CII with tax consultants Deloitte. Speaker after speaker rose to ask “pretty elementary questions”, as one of the government speakers put it. Those queries were whether there is even now a possibility of pushing back the date for making GST operational; the rates at which their goods or services will be taxed; about the IT systems they would need to handle the tax processing activities for their business.

The session was organised the morning after finance minister Arun Jaitley announced that the GST Council, the highest committee set up for the administration of the tax, has decided on a four-rate tax structure (plus cess with a sunset clause) for the first year of the tax experiment. These rates will be 5, 12, 18 and 28 per cent. Despite the shortcomings, the Indian political executive has built the scaffolding of the largest ever tax reform exercise, undertaken anywhere in the world. There was a reason for the element of surprise among the attendees to the industry-government session that this vast scale exercise, will be on.

In the days leading up to the decision, there was a good deal of commentary that a consensus on rates would not be possible due to the differences among the states and with the centre, on the quantum of compensation; also about whether it will be centre or the state governments which shall retain the administrative control over taxation of services; as well as the exemption limit for business below which they will not have to maintain the admittedly lengthy GST records. Yet, coming out of the meeting on Thursday, Jaitley announced a consensus decision on rates had been hammered out.

So industry and most commentators were caught unprepared. It is quite similar to the developments in August this year. After holding out for more than year, the Congress party almost suddenly came around to support the 122nd Constitutional Amendment Bill in Rajya Sabha and in Lok Sabha for the country to adopt a GST framework under the Constitution. The necessary number of states, 15, got the bill approved through their legislature in less than a month thereafter.

The surprise should not have been there, though. Since the beginning of this year the Prime Minister and the Finance Minister has said GST will be rolled out by April next year. They have also made the same commitment to the international bodies like the World Bank and credit rating agencies, S&P and Moody’s. It is consequently, a given. Despite this scale of commitment, domestic industry had believed otherwise. It is because the GST reforms have been in the making for close to ten years as the report of the Chief Economic Advisor, Arvind Subramanian has pointed out. Longer, if one goes by the assessment of Govinda Rao, former Director of the National Institute of Public Finance and Policy. Even though the pace had picked up it was not always forward looking.

Plenty of large companies find they have not yet put in place the information technology architecture needed to run GST system and the time available to do so is just five months. The SAP architecture is not in place for most companies. Small and medium enterprises are even worse off, as the CII-Delloitte session showed. Yet as Sanjiv Srivastava, Commissioner, Central Excise, in the Central Board of Excise and Customs in finance ministry said at the session “To get GST to work properly, industry has to be part of the tax collection mechanism”. According to him there every link in the supply chain has to work properly.

Simply put, if Maruti has to pay its tax correctly, every one of its vendors must be also on the GST map. If their production records do not match with Maruti, there is going to be problem. “The supply chain has to work seamlessly, without any distortion”, Srivastava said.

Anybody in metro cities who has spent hours wading through sheafs of papers private hospitals hand over at the billing counters to patients at the time of discharge, will understand the problem intuitively. Those papers are a demonstration that the IT system in those hospitals operate on a stand alone basis, kept away from the prying eyes of tax officials. So there is a separate record sheet for each class of expenditure.

It has to change. Down the line every small and medium industry in India have to get their IT systems in their accounts business to coordinate with the government’s tax machinery – the GSTN system. The government tax sleuths need not conduct raids or ask for files. Each time a ball bearing is produced or a robot arm delivered, the system will note it. Few of them are prepared to do so, yet stare at a deadline, now in months.

Robert Tsang, India GST Implementation Leader at Deloitte put it mildly, “The Devil is in the detail”. It is these details that is giving industry sleepless nights.

The four tax rates for GST are built with the following rationale:

Most agricultural commodities will have no tax. This does not mean they will be out of GST, there will be a paper or electronic trail for their production and sale where they will be shown as zero rated. Most items that fall in the consumer price index come in this category. So if a tomato sauce or a fruit drink manufacturer has to claim GST credit, he has to show the tomato or fruit tax records, even if it is a nil one along with those for PET bottles.

Items of mass production will be taxed at 5 per cent, but most goods in the country will be taxed at either 12 or 18 per cent rate. Services will be taxed at 18 per cent instead of the current 15 per cent. Costlier varieties of white goods will be taxed at 28 per cent. In addition the government will retain a cess whose rate has not yet been decided. The sunset period for the cess will be five years. All these rates can be changed by the GST Council which is headed by the union finance minister and includes the chief ministers or the finance ministers of all the 29 states and two union territories.