GST Tax and it’s effect on the Indian Economy

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There can be no gain without pain and that may be especially true when it comes to GST. As about 160 countries overhauled their indirect tax systems, they confronted numerous challenges. Latecomer India is unlikely to escape some havoc.

When Canada implemented its goods and services tax in 1991, retailers offered customers “Don’t Blame Me for the GST” stickers amid cash-register snafus and vending-machine meltdowns. In Australia, Japan, Malaysia and Singapore, where the GST was lower than pre-existing rates, the new regimes initially pushed up inflation, according to a May 26 report from Nomura Holdings Inc.

India, which is scheduled to combine more than a dozen levies into ‘ one nation, one tax’ on July 1, has more room for error than most. Not only does the country’s size and diversity make the challenge daunting — 1.3 billion people, 29 states, 22 official languages — it’s also implementing multiple rates. Some companies may be coming into the tax system for the first time and both federal and state governments, some ruled by different political parties, will jointly administer the new system.

“Certainly there will be an adjustment period, there is no doubt about that,” said Arvind Panagariya, vice-chairman of Niti Aayog, the government’s top policy planning body. It’s not clear “how painful or how long” this period would last.

The pitfalls are daunting:

Technology

The GST Network will process as many as 3.5 billion invoices each month. Taxpayers may be required to file as many as 37 returns a year. Experts doubt the system will be able to seamlessly match billions of credits, facilitate tax collections, provide refunds and check evasions.

“Non-functioning of the GSTN portal, due to technical glitches is something which could give sleepless nights to the industry and thus can be a dark nightmare, ” said Harpreet Singh, partner, indirect tax at KPMG in India.

Shortages

Some companies, particularly in the consumer goods sector, are selling off their inventories to avoid having to deal with two different prices for the same product. Some may also be delaying production so they can claim a credit against their costs for the first time under the new regime. Conversely, once July 1 rolls around there could be transportation bottlenecks as stores rush to restock.

Inflation

The fact that most commonly used items will be taxed at a lower rate than previously argues that the GST should in theory be disinflationary, according to the Nomura note.

But Sonal Varma and Neha Saraf, authors of the note, said that while the consumer price inflation could drop by 33 basis points in the short term, core inflation could rise by 60 basis points because of increased taxes on services. They note it may be difficult for authorities to enforce anti-profiteering rules.

Law

GST laws have introduced multiple new concepts like “supply” and “location of supplier” which can throw up different interpretations. Lack of tax literature and judicial precedents may add to confusion as industry and lawyers begin to grapple with new concepts, said Singh of KPMG.

Small Business

Small businesses which haven’t been in the tax net before may continue work in cash and have less than perfect books. Nevertheless, they’ll be required to upload their tax details to the GSTN and compute their returns if they fall across the threshold for inclusion under GST which stands at 2 million rupees ($30,983) of annual sales.

“Overall there will be some nagging problems to begin with on the implication and compliance sides,” said Madan Sabnavis, chief economist at Credit Analysis & Research Ltd. in Mumbai. “But this will be temporary for the first six to nine months.”

Getting more of India’s economy into the tax system, may be the country’s biggest challenge.

If you are a business and are worried about the effect and changes GST would mean for your business, here is a tip, Download a GST compatible application that comes with pre-defined GST features in their accounting and invoicing like Vyapar. Soon out in Desktop version too !

Source: NDTV.com

 

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