Plug-in challenge of formal and informal sectors.

A Singapore think tank has raised concerns about the implementation of Goods and Services Tax (GST) from 1 July 2017, saying these cannot be ignored as it will affect producer and consumer states differently.

Given that manufacturing activities in India are distributed amongst a few states, primarily Tamil Nadu, Maharashtra, Gujarat and Andhra Pradesh, the revenues of the state governments in each case are likely to shrink as the GST will be charged at the point of consumption in the consumer states, writes Dr Deeparghya Mukherjee, a Visiting Research Fellow at the Institute of South Asian Studies (ISAS).

To protect states against the loss of revenue, the central government has assured reimbursements in the first five years and states which are reluctant to implement the GST have been given the option to decide to join later.

It is assumed from the experience of the Value Added Tax (VAT) that the states which are currently reluctant about the GST would decide to join in later.

Currently, 23 of the 29 states in India have ratified the GST bill but only eight states have passed a SGST bill, namely: Maharashtra, Bihar, Telangana, Rajasthan, Madhya Pradesh, Uttarakhand, Chhattisgarh and Andhra Pradesh.

As per the GST Council directive, all states were to have passed the State GST bills by the end of May 2017.

GST Network

There are additional concerns with respect to the implementation of the GST system which is totally dependent on the information technology (IT) infrastructure.

The central and state governments have registered the Goods and Services Tax Network (GSTN) as a not for profit and non-government company responsible for providing shared IT infrastructure to both the central and state governments as well as tax payers.

This will require all businesses to use the IT infrastructure irrespective of their size.

India’s production system consists of a large number of small- and medium-sized enterprises (SMEs) which are a part of India’s large informal sector.

The ability, as well as intent of such companies to adapt to the proposed changes through digitisation may be questionable.

The short-term impact on these ventures, which employ around a hundred million people, could be significant.

The concern is higher when one realises that the system has been envisaged recognising that production activities are organised as a chain of value-added activities, of which both the formal as well as informal sectors are a part, and fluctuations at the source of value chains (comprised of unorganised and informal firms) could have a damaging effect on the final production.

In the case of inter-state transactions, the Integrated GST (IGST) will be levied and collected by the central government and the exporter and importer will pay taxes adjusting for taxes paid on inputs.

This, in turn, requires all parties involved in the transaction to have adequate IT infrastructure to claim the benefits of the system.

The GST will simplify economic transactions across the economy, converting India into a single market, easing flows of goods and services through the country.

However, its strong dependence on a robust digital infrastructure which needs to be used by all tax-paying agents, including businesses in the SME segment (whose current IT usage is negligible), could delay or hinder the envisaged economic progress in the short run.

Additionally, as long as all states do not have a SGST to accompany the CGST, the uncertainties resulting from such a structure could harm India’s business interests.

Nevertheless, with successful implementation over the longer run, the reform should benefit the economy.

ISAS, which recently published the paper is an autonomous research institute at the National University of Singapore. fii-news.com