GST – War has just begun

Background of GST:

“Goods and Services Tax (GST)” was proposed and given a go-ahead in the year 1999 during a meeting between the Prime Minister Atal Bihari Vajpayee and his economic advisory panel which included three former RBI governors IG Patel, Bimal Jalan and C Rangarajan. Vajpayee set up a committee headed by the Finance Minister of West Bengal, Asim Dasgupta to design a GST model.

It finally was implemented by Modi Government on July 1st, 2017 to be a comprehensive, destination-based indirect tax that has replaced various indirect taxes that were implemented by the State and Centre such as VAT, Central excise duty, Service Tax, Additional customs duty (CVD), Special Additional duty (SAD), Central Sales Tax, Entertainment tax, Luxury Tax, Entry tax, Octroi, and others. The government of India also formed a GST Council to govern the rules the Goods and Services Tax.

Why it took so much time:

India is a vast country with diversified demographic profile. There are 29 states and 7 union territories in India. We have different languages, different customs, different climate, and different business environment across the country.

Moreover, India is a big political theatre. Do you think it is easy to bring a change which compulsorily puts all across the country on a single platform? Do you think all states will agree on something unanimously? Do you think our existing government machinery is capable of handling such a big change overnight?

So implementing GST was a herculean task which definitely required a strong political will. It was a big political risk too, as going back to the old system would be disastrous. But let us appreciate the fact that Modi Government (who had majority seats in lokhsabha and considerable seats in Rajyasabha) took responsibility of it and could get through it reasonably. Although the GST law will take some time to get stabilised. But over all, it is implemented very well considering the Indian scenario. Nevertheless, teething problems are bound to be there.

GST Council:

The Goods and Services Tax (GST) is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.

According to the article, GST Council will be a joint forum for the Centre and the States. It consists of the following members:

• The Union Finance Minister, Arun Jaitley will be the Chairperson
• As a member, the Union Minister of State will be in charge of Revenue of Finance
• The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

They lay down GST laws, principles that govern the following:

• Place of Supply
• Threshold limits
• GST rates on goods and services
• Special rates for raising additional resources during a natural calamity or disaster
• Special GST rates for certain States

GST Council Meetings:

Till today i.e. 14/03/2019, 33 GST council meetings have been conducted. Let us appreciate the fact that all the decisions taken so far have been unanimously passed by the council members. And the pace of decision making is also tremendous.

Revenue Sharing:

The Goods and Services Tax (Compensation to States) Act allows the central government to levy a GST Compensation Cess on the supply of certain goods and services.  The receipts from the cess are deposited to a GST Compensation Fund. The amount deposited in the Fund is used to compensate states for any loss in revenue following the implementation of GST.

Under the Act, any unutilised amount in the Compensation Fund at the end of the transition period (five years from the date on which the state brings its State GST Act into force) is distributed in the following manner: (i) 50% of the amount is shared between the states in proportion to their total revenue, and (ii) remaining 50% is a part of the centre’s divisible pool of taxes.

Beginning of war:

Till now, everything was going ok. But all cannot be on the same page all the time. During the 31^st GST Council meeting on 22^nd December, 2018, States must have felt that due to the pattern allowed to offset the GST input credit, they are having cash flow problems. So decision was taken to insert section 49A & 49B to bring new provision on GST set-off.

If you analyse this in details, this affects the working capital of your business as your cash outflow will increase from month to month due to the new rules of set-off.

However, from the State Government’s point of view, it is immediate revenue coming in, in the form of cash.

This is just the beginning. After completion of five years, there will be endless wars. And who will suffer? Obviously, we the people.