The first couple of meetings of the GST Council gives hope that the new tax regime may be in place by 1 April 2017.

The Goods and Services Tax (GST), slated to be implemented from 1 April 2017, is looking like on its course for a timely enforcement with the GST Council showing signs of maturity and agreeing on a couple of thorny issues. The meeting of GST Council, comprising of the Union finance minister, MoS finance in charge of revenue department and finance ministers of all the states, was expected to be stormy given the diversity of opinions and interests of states. However, it turns out the first couple of meetings — on 22nd and 23rd September — were more cordial than expected.

There was consensus on at least three issues — subsuming of cesses under GST, fixing threshold for businesses to come under GST and demarcation of administrative control. The Council has agreed to subsume all (indirect tax) cesses under the GST. That means come 1 April 2017 (this deadline still remains in doubt despite the promising early signs), cesses like Swachh Bharat Cess, Krishi Kalyan and numerous other sector-specific cesses on excise duties may cease to exit. However, a substantial amount of cesses that are levied on petroleum products — Cesses on petroleum products alone account for Rs 88,000 crore of around Rs 2 lakh crore that the government collects from different cesses — may remain untouched as petroleum products have been kept outside the purview of GST.

Nonetheless, subsuming of other cesses under GST not only ensures that the industry is spared of the additional burden but also lesser number cess means more equitable distribution of revenue between states and the Centre. It must be mentioned here that the amount collected through cesses goes exclusively to the Centre’s coffer and is not shared with the states.

The second important issue on which the Council has reached a consensus is on avoiding dual control over assesses. As per the agreement reached in the Council, the states would have the sole jurisdiction of assesses with Rs 1.5 crore or less turnover in a year while the Centre would have control over those whose annual turnover is over Rs 1.5 crore. Another important decision taken in the Council meet is the Centre retaining the administrative control over service taxes. Though this could be a temporary arrangement, this is important given the fact that it would save services companies from registering separately with all the states and Union Territories. Besides, it also takes care of the fact that state government tax officials are not familiar with taxing services and that could lead to a lot of disputes in future.

Clear demarcation of administrative powers of states and the centre would not only save businesses with dealing with two sets of tax officials, but also ensure smooth transition from the current regime to the GST regime. The third and probably the most contentious of the three was fixing the revenue threshold for businesses to be under the GST. The government’s initial proposal was to fix a threshold limit of Rs 10 lakh for the businesses to come under the GST. However, many states later had suggested Rs 25 lakh as the threshold saying it would save many small traders from the pain of GST compliance. But few states like Uttar Pradesh were opposed to increasing the threshold as they feared losing out on revenue.

The Council, after deliberation with all the members, finally settled for Rs 20 lakh — call it the middle ground that the council finally settled for. So far so good!

The final act

However, the toughest challenge ahead for the Council is to build a consensus among members or the rates and slabs. Going by early indications, it looks like there would be not be just three rates — 12 per cent on merit goods, 17-19 per cent standard rates and 40 per cent demerit rates as recommended by the GST Committee—but more rates. The government has given an indication that the GST to begin with could be 4-6 tiered structures with rates ranging from 8-50 per cent. While the government is calling it just a stop-gap arrangement to ensure that inflation does not shoot up with the advent of GST. It has indicated that the aim would be to move to a uniform standard rate but with a time lag.

Whatever the rate structure the Council decides, it would be a painstaking process, and may see a lot of negotiations and bargaining. The process itself could be messy given that the council needs to also decide the categorization of the goods and the rate of tax to be levied on them. They also have to decide the number of exempted goods — there are over 300 exempted goods under the existing regime.

Fixing the law

Fixing the Model GST law would itself take some time given the number of the ambiguities and flaws experts have pointed out. Without addressing these gaps the government cannot expect a seamless transition to the new system. There are many issues that need to be addressed. For example, the Model law says that the input credit to a taxpayer would be available only on a matching concept basis, which means that unless each player in the chain — from raw material supplier to the consumer — pays its taxes, others in the chain cannot get the input credit for the tax paid.

This has been done apparently to ensure compliance at each level and stop leakage and avoidance, but it necessarily means that entities in the chain would get their tax credits after a time lag and therefore, could face working capital issues.

Another issue is that of taxability of supplies even without consideration. This means that supply of goods and services, say, between two branch offices of a bank, would also be taxed under the GST. This should create a lot of concern for businesses.

Industries and businesses are hoping that these issues are resolved before finalizing the GST laws. Now all eyes would be on Council meetings slated on October 17, 18 and 19, when the Council would befinalising the rates and slabs. Although many challenges remain before implementation of GST, the most heartening fact is that the state governments and the Centre have put forward the right steps and given the right signals for a cordial resolution of issues at hand. What is even more heartening is the fact that the government is going by the roadmap it had laid down after the passage of the GST Bill in Rajya Sabha. If the government continues to move at this speed, we might as well be able to see GST being in place by April 1, 2017.