Confusion’, ‘Havoc’ and ‘Disputes’, Warn Tax Experts if GST Target Date set as April 1, 2017

The first target date for implementing GST was April 1, 2010. In 2006, then finance minister, P Chidambaram announced in his union budget speech that

“It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and States. I propose that we set April 1, 2010 as the date for introducing GST.”

That “large consensus” Chidambaram referred to has eluded India for the past 10 years and many a GST target date has come and gone yet the tax reform awaits implementation. 

But this last week has revived expectations that GST may be implemented by April 1, 2017. The government accepted two demands made by opposition party Congress and the states, to drop the 1 percent additional, inter-state tax and to compensate states for any GST led revenue shortfall for five years. The Congress is still holding on to one demand – that the GST rate must be included in the Constitutional Amendment Bill, yet compromises are being explored as party leader Rajeev Shukla told BloombergQuint on July 28.

Even if a compromise is reached and the Constitutional Amendment Bill makes safe and successful passage through the Rajya Sabha this monsoon session of Parliament, many tax experts say a GST implementation target date of April 1, 2017 will be tough, if not impossible, to meet.

Constitutional Amendment Bill

April 2016 looks tough mostly because there’s so much that needs to be done for India and her businesses to be GST ready. Once the Constitutional Amendment Bill is approved by a two-third majority in the Rajya Sabha, the recent amendments approved by the Cabinet will require Lok Sabha ratification – that’s unlikely to take time given the BJP’s majority in the lower house. 

Then the GST Constitutional Amendment Bill, like any other constitutional amendment bill, will need to be ratified by atleast half of the state legislatures (simple majority) and the final step will be Presidential assent.

Harishanker Subramaniam, indirect tax leader at big four firm EY, estimates it could take two months between the time the Bill clears Rajya Sabha and receives Presidential assent.

GST Council

Once the Constitution is amended to include GST, the GST Council has to be formed within 30 days. The GST Council will comprise of the union finance minister and all state finance or revenue ministers. The GST Council will finalise thresholds, rates exemptions and other material elements of the GST design.

GST Model Law

Meanwhile, the GST Model Law, that was opened to public consultation in June 2016, will also need to be finalized. This will require consensus between the centre and states, after considering feedback from all stakeholders, and hence an in-principle approval from the GST Council.

Rohan Shah, managing partner at law firm Economic Law Practice, points out that “the Central GST law, including the Integrated GST (IGST) law, will have to be formulated basis the Model Law and enacted into law by Parliament.”

Since consultation on the Model Law is underway, the earliest the GST laws are likely to be passed are in the winter session of parliament, or if a special session is called before that. Subramaniam says, “In my view the GST laws will be money bills and are expected to have no issue for passage in parliament.”Shah agrees. 

States will also need to formulate and legislate their own GST laws, based on the Model Law.

GST IT Network

As the legislative work carries on, also rushing toward completion is the GST information technology network, also referred to as GSTN. Incorporated in 2013 as a non-profit entity, GSTN’s main objective is to provide common registration, return and payment services to tax payers across all states and union territories and has signed on Infosys for a Rs 1380 crore five year contract to develop and run the infrastructure.

S Madhavan, co-chair of the GST task force at FICCI says the GSTN “is in very advanced stages of readiness”.

Of course, it will need to incorporate any changes to the basic design of GST which could come about in the central and state GST laws. However, it is fair to state that the GSTN can be rolled out at short notice.

S Madhavan, Co-Chair, GST task force, FICCI

Shah also estimates the GSTN to be nearly ready but adds, “the system is yet to be subjected to dry runs, which will reveal whether it is GST – ready, given the significant load it will be expected to bear upon transition.”

Is Business GST-ready?

Given the parallel legislative and infrastructure changes needed to implement GST, is April 1, 2017 a realistic target date?

With current state of affairs,  I see the earliest date of implementation as October 1, 2017, which itself is ambitious given the challenges ahead.

Vineet Agrawal, Group Head (Taxation), JSW Group

Shah draws up a long ‘to-do’ list for businesses

  • Mapping incidences of the tax on all procurements and supplies
  • Ascertaining areas for optimisation so as to minimise GST cost and cash flow impact
  • Applying the new place of supply norms (which operate intra-country for the first time on services)
  • Effectuating changes to contractual documents with vendors and customers
  • Harvesting all credits on the transition
  • Incorporating the new requirements into IT systems and internal processes
  • Obtaining registrations (potentially in various States) and maintaining records in the new formats
  • Potentially interfacing with Central and State authorities on all GST-subject transactions

Agrawal says he’s most concerned about the transition for small industries, traders and service providers.

Challenge is to bring all of them on an IT platform which is sine qua non for effective implementation of GST. Then the other challenge is to integrate 37 tax administrations (Centre, 29 States and 7 Union Territories) in functioning and mindset for implementation of a pan India uniform law. One may argue that it will be an ongoing process, but any confusion in the initial days itself will create havoc given the size of economic activity.”

Vineet Agrawal, Group Head (Taxation), JSW Group

He adds, “I would be happy that at least one year should be given to both trade and Administration to train and gear itself for this historical migration.”

Subramaniam urges companies to start preparations now, if they haven’t already.

In case April 2017 is the implementation date, and if businesses choose to wait for final clarity on law/ business processes, they will get just 3-4 months to prepare as the final law is expected to get through the legislation process at the Centre and State only by November/ December 2016. This will result in pain and chaos during transition and implementation for industry. In my view there is sufficient visibility on the potential law and business processes for companies to begin preparation with some flexibility if not already started.

Harishanker Subramaniam, Indirect Tax Leader, EY

Large business groups like M&M are doing just that. S Durgashankar, president – corporate accounts and member of the group executive board at M&M seems unflustered by the suggestion of an April 2017 target date.

Overall the challenges would be around the implementation of a proper IT support system and also on various business decisions regarding sourcing, distribution & logistics. The time frame required for adoption by various businesses will depend on the size and complexity of the business. Since most corporates have already started on their GST readiness programme, by and large a period of 3 to 6  months should be sufficient to move to GST. For those companies that have not prepared themselves in advance, implementation could prove to be a tougher challenge.

S Durgashankar, President – Corporate Accounts and Member of the Group Executive Board, M&M

Four of the five tax experts featured in the story agree that businesses, small and big, need at least six months after the laws are passed to be GST – ready. Agrawal suggests a period of one year would be better, Subramaniam says the ideal time is 8-12 months.

Even where several aspects were known a year in advance in jurisdictions like Malaysia that introduced GST in 2015, companies have struggled to cope with transition in the initial year. GST in such countries was a single national GST and far less complex than our dual GST model which will further accentuate the pain during transition.

Harishanker Subramaniam, Indirect Tax Leader, EY

Madhavan says India could stick to the April 2017 date.

The fundamental choice is between adopting a GST now , however incomplete it may be, and fine tuning it as we go along, or wait for a better version, to be rolled out at some indeterminate date in the future. It is a roll of the dice surely, but all said and done, it is better that we work with what we have and go ahead and implement it at the earliest possible time.

S Madhavan, Co-Chair, GST task force, FICCI

But a fix-as-we-go approach may be counter-productive insists Shah.

A rushed adoption may mean that the transition is far from smooth, given that there may be some ambiguities in the law as well as practical issues/difficulties in implementation, which will need to be addressed. This will likely result in confusion for assessees and authorities alike and may potentially also lead to tax disputes.

Rohan Shah, Managing Partner, Economic Law Practice

Source: Bloomberg quint
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