GST’s fallout: Chaos & new licence raj likely?

The crowd cheered repeatedly. Addressing a gathering of chartered accountants after the Goods and Services Tax was passed by the government, Prime Minister Narendra Modi struck a chord that had a ready resonance with the audience. The chartered accountants had much to cheer since their practice would gain the most from the new law. They weren’t the only ones. It was widely if cautiously greeted by business leaders, who said “India will awake as a common market for the first time. To do the obvious is often the most difficult”, and that “life will become simpler with GST... but the transition will have to be managed well”.

Some business leaders called it a “win-win” situation, echoing the government spokesman who claimed it as a “technological marvel, as well as a fiscal marvel”, but the revenue secretary in the finance ministry foresaw problems in implementation and said that rules would be issued “soon” to deter unscrupulous businesses from exploiting the tax reform to cheat customers.

Though big business was largely satisfied with GST, smaller businesses, specially traders, were not. Many of them were afraid that the tax reform could turn out to be a nightmare for the economy. Traders from across the country went on strike in protest over fears that they would be badly hit. The varying tax rates, the excessive documentation and fears over the design and implementation caused worry on how it would affect their livelihoods.

One problem, many critics felt, is that GST was pushed through in too much of a hurry, and should have been started as a trial run for two months before being officially rolled out. Former finance minister P. Chidambaram maintains: “Every tax official who will administer GST should have been directed to spend two weeks in the office of a small or medium business and actually ‘filing’ mock returns and ‘paying’ the calculated tax.”

A further consideration that would have to be taken into account is that of around 100 million small businesses, traders and shopkeepers, nearly 60 per cent are computer illiterate and are not computer enabled. But GST can be complied with only through a computer system that connects with the GST network on which all businesses, traders, shopkeepers have to now be registered.

Senior government officials already say businesses are being unscrupulous and that rules would be issued “soon” to deter unscrupulous businesses from exploiting the tax reform to gouge customers. The government’s love of paperwork is evident in the 37 returns that have to be filed every year and which will require a huge IT backend.

It will require firms to file at least three online tax returns a month into the GST Network, a massive IT backend that will process up to five billion invoices a month. The compliance burden and GST’s complex structure — it has four main rates from five to 28 per cent — have sparked fears of initial chaos.

Of particular concern is the number of GST slabs involved. There are at least six tax slabs involved — 0 per cent, 5 per cent, 12 per cent 18 per cent and 28 per cent plus and above. This can be compared with countries like Singapore and Malaysia, which have one or two tax rates at a much lower rate. This tax complexity will lead to a tendency to evade tax. Businesses will want their products assessed at the lowest possible tax rate, and there are bound to be thousands of lawsuits in an already over-burdened system.

Already, before the rollout of GST, there was a backlog of 24 million cases clogging the Indian judicial system. Of these, 100,000 were in indirect tax appeals, locking some $23 billion in government revenue. Businesses also worry that they will have to struggle to reconcile invoices, forcing them to commit time and effort to resolving disputes and reworking budgets.

At present the government earns 16 per cent of its tax revenue from excise and another 15 cent from service tax. The government hopes to collect more revenue from GST, doubling its budget revenue in a couple of years. But this assumes that the whole system will work, that traders and the small scale sector, which has so far been adept at evading taxes, will not find loopholes in the GST system. At the same time, working capital costs of traders will rise and the insane paperwork will contribute to high levels of stress and perhaps also the collapse of some businesses. So instead of leading to a greater degree of liberalisation, it could lead to a return to a new form of the licence-permit raj.

And while GST is propped up by its advocates as pushing GDP growth by as much as two per cent, the initial disruption could push GDP growth considerably down. The maximum GST rate of 28 cent, while suitable for some luxury items, was too widely applied for as much as 30 per cent of goods, but surprisingly leaving out gold, which is likely to be taxed at just five per cent. Also, petroleum has been kept out of GST as the 45 per cent tax on it forms a key part of government revenue.

There are also concerns about whether the software for the new system is ready. The software was updated after changes were made to GST rules, but there was no time to carry out beta tests on this version. This means glitches are possible, and software experts feel it was a big risk to take with a reform on this scale. Some feel the rollout cannot go smoothly unless the software has been properly tested.

With all these possible glitches, it is unlikely that the GST rollout can go smoothly.