The technology network crucial for the implementation of the proposed goods and services tax (GST), Indias most ambitious tax reform, is likely to miss an August deadline to start operations.
A delay in registering the company to run the network seen as providing the technology backbone of the tax system aimed at creating a common market in the country, and an inability to finalize a common format to be followed by all states in registering dealers, filing of tax returns and processing payments have pushed back its implementation at least to the end of 2012, two government officials said, requesting anonymity.
The government had proposed that the network would initially handle all aspects related to value-added tax (VAT) to test its preparedness to operate the wider GST regime.
The states and the central government have only finalized the format for e-registration and returns recently. But the e-refund and the payment-processing formats have still not been finalized, said one of the officials. Also, there is no decision if all states will move entirely to GSTN (the network). Connecting the states entire network with the Centre is also not over.
Former finance minister Pranab Mukherjee, in his 16 March budget speech in Parliament, had said the network would be operational by August.
The cabinet in April had approved a proposal to create a company with a equity capital of Rs. 10 crore that will operate the network. The federal government was to hold 24.5% stake in the Section 25 company and an equal amount was to be held collectively by the states. The remaining stake was to be held by National Securities Depository Ltd (NSDL) (21%) and three financial institutions (10%) each.
A Section 25 company pays no dividend to members, but ploughs back profits and any other income to further its objectives.
Although the government is in talks with a few private banks and non-banking financial companies to pick up stakes in the firm, no decision has been taken yet. The GST network is now expected to start operations only from the year-end, said the official cited earlier.
The government is also reassessing the final stake NSDL will hold to avoid any controversy over a potential conflict of interest as NSDL could also be a service provider to the network.
Not much progress has been made in the past two months, said another government official, because of a lull in the finance ministry.
Mukherjee resigned as the finance minister and is now the 13th President of India. P. Chidambaram has been appointed in his place.
Now that the new finance minister has come over, things should start moving, said the second official.
Though it (the company) has got all necessary approvals, some details such as the articles of association need to be finalized. Also, there is no clarity on who will hold the dominant stake among private partners, he said. The chairman and CEO (chief executive officer) of the company have to be appointed.
The payment-processing gateway for the network has also not been finalized, he added.
State governments have expressed reservations over private firms holding a 51% stake, after which the Union government agreed to impose conditions in the articles of association so that certain decisions can be taken only with a three-fourths majority, ensuring that the government will hold control over the network.
The plan is to initially use the network for VAT. The system will take at least six-eight months to stabilize after it begins operations, said Pratik Jain, a partner at KPMG, a consultancy. As it is, the whole speed of GST has slowed down because of issues like central sales tax compensation.
In a meeting of a panel of state finance ministers held in July, some states criticized the Centre for the delay in rolling out the network.
The company has not been registered till now. A strong IT (information technology) network is very important for successful implementation of GST, but there has been no progress, Gujarats junior finance minister Saurabh Patel had said. And states are being blamed for the delay in GST.