18 August 2016

GST – Designing a compliance friendly regime

by Iype Mathew


India is now poised to introduce its biggest indirect taxes reform by launching the Goods and Services Tax regime. GST when introduced will usher in a nationwide common market which is expected to be less intrusive, compliance friendly, and self-policing in nature. The passage of the Constitutional Amendment Bill was a very big hurdle crossed. We hear claims that this achievement represents - a grand national consensus, an example of cooperative federalism, a rare and historic political consensus, etc. Good that at last the larger interest of the nation prevailed over the self-serving interests of different political groups. There lies an equally tough road ahead to be crossed in completing the remaining tasks. This job is also to be done well and thoughtfully. A few important issues in this regard are being focused in this article for general consideration.


Rate of GST

Indirect taxes are essentially regressive in nature because the burden of this tax generally passes on fully to the ultimate consumer without making any distinction as to whether the consumer is rich or poor, big or small, or h4 or weak. In other words, indirect taxes impose a greater burden on the poor than on the rich. By its very nature there is an inverse relationship between the tax rate of an indirect tax and the ability of the tax payer to pay the tax. Thus a regressive tax takes a larger percentage of income from low-income earners than from high-income earners.

In the case of supply of goods and services, it is impractical to adopt progressive rates for its levy and collection. We generally see that governments apply indirect taxes uniformly to all consumers on what they buy. Therefore indirect taxes have to necessarily be low in order to mitigate the hardship it causes on the poorer people in general. And in India where almost 1/3rd of its people are extremely poor, there is hardly any justification for governments, Central or State, to aim at a high rate for GST in the future. It will be a great opportunity now, for these governments to set an upper cap of 18% for GST, at least in principle, in the general interest of the vast majority of its people.

The aim of the governments should also be to eventually reduce the standard GST rate, slowly and steadily from 18% to 16% and ultimately to 14%. Today the main concern is to ensure that there is no fall in the revenue collection on account of switching over to GST model, and 18% is estimated to be a safe revenue neutral rate (RNR) for that purpose. But for the historic reason that governments in India found it convenient to source its revenue mainly through indirect taxes, it does not mean that this dependence on a regressive tax, should be perpetuated. Direct taxes are where all the attention should be. It is openly admitted by experts that India can and should widen its direct taxes net and put greater efforts in regulating and effectively controlling this source of revenue.


Dual Tax Administration

Any tax can be levied and collected only by authority vested by law. In India the power to make laws is indicated in the Constitution wherein the matters on which the Parliament and the legislature of any State can make laws, have been clearly specified in the form of Union list, State list and Concurrent list. The progress so far made as regards GST is limited to the creation of this source of power to make the law. The actual law for the levy and collection of GST will eventually be separately passed by the Union and the States, and these laws will comprise of the Acts, the Rules, the Tariffs, the Exemptions and the procedures (forms, returns, registers etc.). When GST is introduced a multiplicity of indirect taxes will be replaced by a single levy, which will comprise of two portions, one for the Union and the other for the State, and the character of this levy would have changed from that of an origin based levy to that of a destination (consumption) based levy. These changes will not only reduce compliance cost but will also make it easier and simpler for the assesse, and most importantly promote business, trade and commerce. Being a single levy, the two parts of GST (CGST and SGST) will be imposed concurrently on every transaction of supply of goods and services and on the same value. Because of such a concurrent levy, it is now proposed to design common processes and documents for registration, payment of tax and filing of return. All these features will no doubt considerably simplify tax compliance requirements.

But assessees and experts additionally wish that tax payers are also brought under the control of a single tax administration. It may be mentioned that a large number of traders who now only pay VAT and therefore interact with only one State VAT authority, will now be required to additionally interact with Central indirect tax authority when GST is introduced which they would not prefer.

India is a federal democracy wherein the States enjoy as much autonomy in matters coming within their purview, as does the Union in respect of its matters. Any dilution or interference in the autonomy of the functioning of States within the Union of India, is certainly not desirable, and will create h4 reactions and protests. Finance and Home are two subjects which are extremely important and at the core of politics and governance. The Union and the States, can only adopt a policy of mutual respect and cooperation, while planning for legislation in these matters, and be prepared to strengthen and compliment each other in these subject areas. Therefore when both the Centre and the States are jointly empowered to raise indirect tax revenue, they will naturally have separate laws and separate infrastructure for its control and regulation. There is no escape from such a dual administration arrangement. Simpler laws and procedure, common forms and formats, low rate of GST and automation of transactions, are what will ease and save the situation. Focus should therefore be on these aspects, and a culture of a clean and convenient taxation system is bound to set-in.


Date of Implementation

Switchover to GST involves large scale preparations including the setting-up of the IT infrastructure. There should be no desperation because of any dead-line. If the change is forced-down, with half-hearted preparations, the consequences can be chaotic, and therefore certainly avoidable. On its journey of transforming into a developed economy, GST is extremely important for India in order to create a robust indirect tax system and to instill a genuine culture of complete tax compliance. Hence assessment of lead time to prepare the tax payers and the tax authorities for the change-over, has to be carefully done. 1st April, 2017 is being mentioned as the change-over date. But if a couple of more months are indeed required to complete the preparations reasonably well, there should be no hesitation in letting it be so. Afterall it took us 16 years to come this far, and a little more extra time should not matter at all.



The decision to be taken by the governments at the Centre and in the States, for implementing GST, will have far reaching cost and price implications for producers and consumers. The gains of a GST regime are in efficiency, competitiveness and increased revenues, but these gains are possible only when, by design, GST is a compliance friendly regime.

 [The author is a Director, Lakshmikumaran & Sridharan, New Delhi]

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