For the goods and services tax (GST) to become the game changer everyone expects it to be, IT will be the key. Only through a robust, state-of-the-art, secured and trusted IT system is it possible to provide a seamless, user-friendly experience cutting across geographical and functional boundaries. A painless migration to the promised ‘nonadversarial’ tax regime will depend upon the surgical efficiency of GST’s most critical component, the GST Network (GSTN). If GST is the body, then ‘GSTN’ is the soul.

For a smooth roll-out of GSTN, states have hammered out a consensus on a common portal providing three core services: registration, returns and payments. However, with rapid technological changes, the need for speed, flexibility and transparency, burgeoning societal expectations coupled with complexities in value exchanges, the existing governance structure and paradigm are under severe stress. They now require global-scale platforms for value exchange, or ‘blockchain technology’, the disruptive technology that underpins the bitcoin economy.

Blockchain is a method of recording data, a digital ledger of transactions, agreements and contracts distributed across several hundreds or even thousands of computers around the world. Digital records are lumped together into‘ blocks’, then bound together cryptographically and chronologically into a ‘chain’ using complex algorithms. It can be used like a ledger, which can be shared and corroborated by anyone.

The present system of data management by tax departments typically involves large legacy centralised IT systems based on a ‘centralised ledger’ with some recovery sites. These are supplemented by an array of networking and messaging systems to communicate with the external stakeholders. Highly centralised systems present a high-cost single point of failure, apart from cost and complexity.

Tax regime will depend upon the surgical efficiency of GST’s most critical component, the GST Network.

Tax regime will depend upon the surgical efficiency of GST’s most critical component, the GST Network.

In contrast, distributed ledgers are inherently harder to attack. They are multiple shared copies of the same database. So, a cyber attack would have to attack all the copies simultaneously to be successful.
GST is a destination-based tax that provides a comprehensive and continuous chain of set-off benefits from the producer and service provider’s point up to the retailer’s level, taxing only the value addition at each level. This is akin to a peer-to-peer network (P2P).

Blockchain is a P2P technology that uses ‘distributed ledger’ and can record ‘proof of events’ like value added, set-off and tax paid across the entire supply chain. This proof is public, irrefutable, non-repudiable and impervious to tampering as it establishes a distributed consensus about every transaction. This frictionless flow of value has a built-in reward of set-off benefits in the supply chain. This means centralised uploading and invoice-matching by tax departments become redundant.

Blockchain allows untrusted parties to collectively create a trusted authoritative record, making it bad news for all ‘trust-keepers’ — governments, regulators, clearing houses of this world —as it strikes at their raison d’être.
The trust-keepers, facing an existential crisis, will not cede their space without a good fight. Although a strong erosion in their authority ensures that no tears will be shed on their fall.

Blockchain has taken the financial world by storm. R3, a consortium of around 45 of the world’s largest banks, is betting big on private blockchain. Also, ‘open ledger project’, led by the Linux Foundation, is trying to build a distributed ledger, ‘Fabric’, amenable to customisation for different industries.

Estonia is a trailblazer in blockchain technology. Others like Japan and Dubai are not too far behind. By being oblivious to blockchain, India may languish at the bottom of technology pyramid. True, in its present form, it suffers from several limitations like scalability, speed, confidentiality, secrecy and a ‘suspect reputation’ amplified by lack of a governance structure. Yet, it is shaking the foundations of today’s commercial facilitation.
Blockchain’s biggest strength is the secure distributed database aspect of technology. While the era of blockchain proliferation has just begun, the road to the programmable economy of the future is a long one. But isn’t that true for any new disruption?

The intended benefits far outweigh the associated risks. Blockchain technologies may fundamentally alter government functioning. The government has a historic opportunity to start small with a tactical, narrow deployment in GSTN that can be rapidly scaled up. It should also invest in accelerators and incubators, collaborate with academia, industrialists and venture capitalists to create a proper ecosystem for startups in blockchain technology and help India move up the food chain of software development. Having missed the Industrial Revolution once, India can’t afford to falter now.