The Finance Minister has admitted that there may be a delay in meeting the April 1, 2010 deadline for implementation of the goods and services tax (GST). He is expected to take a call on it on November 10.
Speaking at the Hindustan Times Leadership Summit today, Mukherjee indicated that there are too many unresolved issues. "In large areas, we have been able to arrive at the convergence of views. At the same time, it will take some legislative measures, including a Constitutional ammendment. That has its own space. I am trying to stick to the time schedule but I will not be surprised if there be a slippage of a few months." He added that the government would not rush in with GST only for the sake of meeting the deadline.
PriceWaterhouseCoopers (PwC) has put out a white paper on the features of the proposed GST model for India. In an interview with CNBC-TV18, S Madhavan, Executive Director, PwC, expects a three-six month delay in implementation of GST. The real challenge, he says, lies in persuading all states. According to him, constitutional changes are required to permit the government to legally tax supplies beyond the manufacturing stage. "Constitutional changes will not cause any major delay. It may be taken up in the winter session. If there is consensus available with regard to all elements of GST, the amendments should go through by November. "The September 2010 roll-out is possible only if the draft GST code is presented in November-December."
He feels industry would need six months thereafter to adapt. Madhavan expects the normal rate not to exceed 16%.
Q: The Finance Minister is finally saying that April 1, 2010 is unlikely to be met. This is something that we have been debating and discussing for a while now and you were of the opinion that that deadline would not be met. How realistic a timeframe can we now expect because he is saying, a few months delay. How soon can we actually be ready to implement the GST?
A: Clearly, the expectation is that it is not going to be postponed by one whole year, lets say to April 1, 2011. Thats the first point. My personal expectation is that it is anywhere between 3-6 months because if you are talking about a worst case scenario of six months you are talking about September 30. I believe between now and September 30, which is almost a year, one can get a lot of things done in terms of both the constitutional changes and also several other elements of the change over from the present tax system to the GST. So in my view, a best case scenario of a postponement if there is a postponement of three months. But on a worst case scenario, about six months.
Q: What are the hurdles at this point because we are still discussing and debating the rate and the other structures, the state finance ministers are going to meet in November now to finally finalise the draft? But to your mind, outside of the constitutional ammendments that are required, what continue to be the key challenges and the hurdles at this point?
A: The constitutional changes in themselves should not pose a hurdle in terms of the timelines because they are going to be taken up in the winter session. But the challenge here is in terms of persuading the states, all of them need to be on board on the dual GST model and also they need to be on board with regard to how the rates will apply to goods and how the rates will apply to services and particularly with regard to how interest rate supplies of goods and services might be taxed. To illustrate some few new challenges which are continuing to be a debate and discussion between the central government and the empowered committee? So once these issues are resolved, which should happen either on the November 10 when the meeting with the FM is scheduled to take place or immediately thereafter, I dont expect in terms of the process that is required to pass through the constitutional change and that should pose a hurdle at all.
Bear in mind that the constitutional changes are essentially required for two reasons. One is to ensure that the federal government is legally able to tax taxable supplies beyond the manufacturing stage. Today the centre is limited to taxing transactions only upto the manufacturing stage. So, one is to permit the centre to go beyond that stage, and also equally for the states to charge GST on services. So today only the federal government is able to charge that.
So the reason for the constitutional ammendments is essentially two fold. But as I said, if consensus is available with regard to the other elements of the GST by in about a months time, I do not believe it is difficult for the constitutional changes to be taken up in the winter session of Parliament and then to be concluded.
Q: Lets assume that the Finance Minister decides that the GST will be introduced midway in the next financial year. Would introducing it midway pose some challenges? In terms of the preparation of the industry both from the IT as well as the switch over, do you think six months is enough time or should perhaps we just say lets go ahead and delay it by a year?
A: The ideal situation is clearly when you switch over from the present VAT excise system to the dual GST at the beginning of the fiscal year. That is clearly the ideal situation. Therefore, we were all hoping that the system would be in place by April 1.
If that is not possible for the reason we have just described, then the question is do we wait for another full year to pass before implementing the GST or should we ensure that the GST is around - lets say its never perfect, and we need to perfect it as we go along - but lets assume that there is a GST which is more or less flawless to use Dr. Kelkars term of about 80-90% there. I would rather say that we took that GST on board and work with that GST to make it more refined and perfect as we go along.
That is the response to with regard to as to whether you are to ideally postpone it for one full year or you would want to shift it over to either the three or the six months.
Having said that, clearly there are challenges when you shift the whole structure in between the fiscal year in terms of IT preparedness, in terms of transitional issues with regard to how do you take credits forward and how do you account for inventories as on the changeover date. One can multiply such challenges. And therefore from a business disruption point of view, I would think the least disruption would be ideally when you switch over from the fiscal. But the last point is in terms of the readiness of business itself to enable the changeover to happen.
If you now suggest that we are now in the end of October and the timeline to switch over to the system is about six months, I would think that, its a fair time period of six months to enable industry to change over, provided the white paper is released in time by early November and provided also that the draft GST code atleast at the federal level is released no later than the middle of November or perhaps towards the third week of November. If those events were to happen then industry has the ability make the changeover and while they can keep fine-tuning those changeovers for the rules and regulations to happen, they can atleast begin the process. So I would think that from a readiness point of view if the events that we expect to happen in November do happen, then I think a six month period for changeover for business is good enough.
Q: One quick point, in terms of the rate itself we get the sense that a lot of states are pushing for a higher rate 16-16.5% or perhaps thereabouts. At this point in time are you in a position to comment about what can really the rate be despite the fact that it is a dual rate structure? What sort of ballpark figure are we looking at?
A: My conviction at this point in time is the normal rate. Bear in mind that we have already agreed a dual rated, dual GST so to speak as far as good are concerned. So there are two rates. The states have talked about a range of between 8% and 9% for the normal rate for state GST and I believe they have also looked at a 4-5% as the concessional rate.
So assuming that the centre follows suit with similar rates, the range therefore for the goods charged at the normal rate will be between 8% and 9% at the state and at the federal level. I expect the rate to be at the lower end of 8% and therefore the aggregate to be 16%. And for the concessional goods also I expect it to be at the lower end of 4% which means 4%+4%= 8%.
So my expectation is that the normal rate should not exceed 16%. I am aware that there is a debate going on with the states as to whether that is good enough to ensure or assure the states about revenue neutrality.
But bear in mind also that the center has some out with a fairly clear assurance with regard to compensation for states who are out of pocket as a result of the change over to the GST. So I would believe that that assurance is good enough and therefore the state should be amenable to look at a revenue neutral rate, if I can use the term, of a dual GST of 16% on goods.