India’s biggest tax reform Goods and Services Tax (GST) is set to complete its milestone of 100 days and it’s time to take stock of the experience on the ground. To me, the measure of this experience will have to be looked at through the prism of transition into GST, the business impact and the compliance efficiency.
At one stage, with 1 July as the implementation date, there were concerns about the industry’s preparedness, since this reform’s impact was far-reaching with changes in processes, business models, supply chain, IT infrastructure, pricing, working capital, etc. It turned out that the preparedness to handle this big change was fairly good within the organized sectors which, in turn, tried to train and create awareness within their ecosystem covering the smaller stakeholders.
So, while transition, invoicing and supply chain in the new regime was managed by many, there were pockets of confusion. Business behaviour like de-stocking of goods in the distribution chain prior to GST became a natural corollary across the industry. The de-stocking was a reaction to the questions around quantum of transition credit of legacy taxes/duties on inventories. The government did eventually provide a fair mechanism for transition credits for goods with documentary evidence on actuals or otherwise on a presumptive basis. Maybe a more proactive and early resolution of these transition credits could have potentially minimized the de-stocking.
The de-stocking led to decreased market activity in the initial weeks/months of GST which, in turn, impacted our GDP growth numbers for that quarter on the back of slower numbers during the demonetization period, creating a perception challenge on the ground. Through August and September, this inventory chain has more or less stabilized and will hopefully see a pickup during the festive months.
The GST law with its anti-profiteering provisions mandates efficiency of output headline rate reductions to be passed on besides passing on savings due to input tax credit efficiencies. This saw most sectors reducing prices in different ways, both on inventory and new stocks, to pass on benefits. This law is wide in its ambit and it has to be seen how this will play out in the coming months. Stakeholders have to be acutely aware of the need to maintain appropriate documentation in case of questions from authorities.
GST rates were determined in a manner such that they were close to or equal to effective taxes on such goods and services in the erstwhile regime across central and state levies. Though this exercise was thorough, the initial months have seen tweaks in many goods for corrective actions. This may have justification but such changes in the early months have impact on business plans and inventories and could have been avoided for at least the first 12 months.
The government, GST Council and the working committee has been responsive in the first few months to address problems as they arose, but there are still issues that need immediate attention. The grandfathering of incentives for Uttarakhand, Himachal Pradesh, Jammu and Kashmir and north-eastern states is one such scenario. Companies across sectors either manufacture or contract-manufacture in these regions, and are awaiting the final notifications on how such benefits will pan out in the GST regime in actual terms though they are aware of the overall approach. Many of the pricing decisions in the value chain for such companies are linked to this aspect and require immediate attention and clarity.
Another issue which needs immediate attention is the refund of input tax credit for exporters. In my view, this impacts both small and large exporters as the quantum and timing of refunds have a direct impact on working capital requirements irrespective of size, which renders our exports uncompetitive in a challenging export environment. The government is seized of this issue, with both the GST committee on exports and ministry of commerce working on solutions to expedite the process of refunds which I am sure will be unveiled post the 6 October GST Council meeting, if not earlier.
One of the important aspects of GST was its inbuilt self-policing compliance mechanism, with India attempting transaction-level credit matching prior to tax payments in a GST regime that is complex with 8 plus million taxpayers. However, GST compliance has been the biggest pain point in initial months across the taxpayer spectrum.
This is not a surprise considering the magnitude of what we were attempting versus the erstwhile rudimentary periodic summary tax filings. Such digitization of a massive volume of transactions requires several months of performance testing for software logics, loads, IT infrastructure, etc. by GST Network, companies, service providers namely GST Suvidha Provider (GSP) and Application Service Provider (ASP) and the ecosystem. But in our eagerness to implement and stick to timelines, the entire ecosystem underestimated the challenges of stabilization of such a technology platform and the quality of data that digitized platform will require for smooth and structured functioning.
This has resulted in compliance calendars being re-tweaked rightly by the government albeit as a reaction to severe practical issues on the ground. The summary GSTR3B filing was a good intervention for basic compliance and tax collections and will have to continue for some time. The transaction level filing for GSTR1 is mostly underway for July though majority through the GSTN offline utility and has been laborious to say the least. For GSTR2 filings, the jury is still out and we will know by October-end. This is one area all stakeholders could have visualized and handled better and constructed a calibrated timeline for filing allowing systems to stabilize and avoided all this pain and chaos.
Finally, there has been a lot of debate on collections for the first two months of Rs90,000-plus crore. In isolation, these tax collections are good but the real picture net of credits (including transition), refunds etc. will emerge only around January/February 2018. The whole process of questions being raised on transition credits beyond a certain value has in many cases led to both centre and state authorities asking questions, something that can best be avoided by making it clear as to who will be the jurisdictional authority, or we would have lost the plot.
Harishanker Subramaniam is national leader, indirect tax, EY.