After being in the works for over a decade, the long pending Goods and Services Tax (GST) finally became a reality in the weekend gone by. For now, the debate is not so much about the tax rates on various goods and services, rather it is more about how smoothly the transition to the new system is going to be.
There are concerns of disruption in the supply chain and possible litigations arising from the interpretation of which tax bracket a particular product or company falls under.
Small and medium size businesses are likely to feel the pinch in the initial phase as the working capital cycle gets disrupted. A report by ratings agency India Ratings, based on a study of 11,000 firms, estimates input credit lock-up could be around Rs1 lakh crore. Of this about Rs 50,000 crore could be blocked for about two months. While large firms may be able to take the liquidity crunch in their stride, the smaller firms will have to grapple with high credit costs.
Then there have also been concerns about the preparedness of the GST Network (GSTN) to handle the massive load across the country. GSTN Chairman Navin Kumar created a bit of a stir when he said in an interview a couple of days back that there was no time to test the software.
All said, a massive exercise of this scale cannot be without its set of teething problems. That has been the experience even in advanced countries.
From a consumer’s perspective, GST is a mixed bag. Some items of daily use, such as toothpaste, soap among others, got cheaper. But the gains will most likely be offset by other items which became costlier.
From the government’s perspective, GST will help widen the tax base as companies wanting to claim input credit will have to be registered with the GSTN. This means that many businesses—small and big—which have been evading taxes all these years will no longer be able to do that with impunity. Also, it will be hard for businessmen to suppress their earnings through fraudulent billings. And since the GSTN will have the records of the revenues from the business, the tax returns will have to reflect those.
A major headache for finance ministers over the years has been India’s low tax to GDP ratio. That is now set to change over the next few years.
Critics have pointed out that multiple tax rates under GST defeat the very credo of the much awaited tax reform—one nation one tax. By definition, GST should mean a single rate levied by a single agency, like is the case in most developed countries.
In India, the government has opted for four slabs for both goods and services — 5%, 12%, 18% and 28%.
The government has said that the ultimate goal should be to move to a single or dual rate goods and services tax regime. That could take a while, given the stiff opposition from state governments, who are keen to protect their revenues to the extent possible. Petroleum and alcohol, two major revenue earners, are still out of the purview of GST.
It is too much to expect GST to make an overnight difference to the fortunes of the economy. And like with any major reform, there will be many losers too. Nevertheless, GST is an important step towards reducing the flow of black money in the system, and the benefits of that will reflect in the years to come.
(The author is Editor, Moneycontrol)
Disclaimer: The views expressed here are solely those of the author and do not in any way represent the views of exchange4media.com