June 12, 2017

With not even three weeks left for implementation of GST, India’s biggest tax reform, there still seems to be a lot of uncertainty over the manner in which it will be implemented.

While the government has said multiple times that the reform will noticeably reduce the compliance cost for taxpayers and harmonise the tax structure across states, integrating all taxes levied on goods and services into one regime is easier said than done.

Ridham Desai, MD, Morgan Stanley, said in an interview with CNBC-TV18, that in the short term, goods & services tax (GST) could trigger some correction in the market. He said that Morgan Stanley recently conducted a survey of micro and small manufacturing and services companies, wherein almost half of the firms surveyed said that they are not prepared for GST launch on 1 July. In fact, 90 percent of them expressed the need for training. Hence, there is a possibility that when GST get launched, we face some amount of disruption on growth.

Here are some of the challenges to a smooth implementation of GST:

Race against time

The GST rules have been finalised and notified only last month and some states are yet to notify their laws. With hardly few weeks left before the rollout of GST, there is still confusion about the manner of implementation. Apart from the legislative bodies involved, many companies are yet to put new systems and softwares in place, while some organisations are still in the process of floating tenders for hiring financial consultants.

Infrastructure

GST is a technologically-driven system where every transaction – from invoicing to the payment of tax – has to be done digitally. Although the government has invested heavily in building a technological ecosystem, the taxpayers – companies and individuals – will still need to purchase proper Enterprise resource planning (ERP) and other business process management softwares or hire third-party software providers.

The companies will also need to capture input tax credits on their own before reconciling the same with suppliers’ returns as the tax credits will get blocked in case of any mismatch. So these businesses will have to hire additional manpower as well.

Technological move

GST being a fully IT-enabled platform, its success hinges on the fact that how well taxpayers adapt to it. Many small traders/entities still file tax returns manually and for such taxpayers, the shift from offline to online alone will be a big hindrance apart from the increased number of returns they’ll have to file under GST.

Input credit woes

Although the limit on input tax credit without excise payment receipts on items with tax rates at 18% and above has been increased to 60% against excise payments from 40%, for items in lower tax slabs the limit remains the same. This loss of input credit will force wholesalers and dealers to destock inventories leading to temporary shortages.

[The Financial Express]