Govt must keep GST transition steady and predictable

It has been just over a week since the new goods and services tax (GST) regime was introduced. It has already shown its potential as a transformative policy. There has been some disruption, but whether this will swiftly decline or only increase depends upon the government’s problem-solving agility. One major test will come when the digital backbone, the GST Network, is called on to deal with a large number of simultaneous submissions — but that is still some time in the future. 

The GST’s advantages are already becoming apparent. For one, several reports suggest that logistics costs may indeed be on the decline. The crossing points between several states that had featured long queues of trucks have now been made irrelevant. As many as 22 states have removed these barriers already leading to significant savings in time and expenditure. This should cascade through the system, making goods cheaper and opening up new business opportunities. Of course, the continued success of this depends crucially on the administration of the tax and of the inter-state checkpoints. If, for example, all trucks crossing between Maharashtra and Gujarat are checked for alcohol, then the queues will rapidly re-develop and the major benefit of the GST so far will be lost. It is also up to the state governments to try to maintain uniform rates; the introduction of state levies might once again cause some benefits of common national indirect tax rates to be lost. State governments must crack down on rogue bureaucracies, including transport officers, who will seek to take advantage of the situation by “enforcing” long-dormant rules at such checkpoints. The question of “entry taxes” imposed by some urban local bodies should also be examined, as this has the potential to impede the free flow of goods. 

The government must stand ready to address any problems that arise. In particular, the informal sector is likely to be hit hard. So far, evidence of any difficulties is only anecdotal. But a movement away from small providers to larger, GST-ready suppliers is possible. This might aid in the formalisation of the economy. On the other hand, it might have negative medium-term effects on employment and on entrepreneurship. If so, the government must stand ready to introduce remedial measures. Some murmurs of dissent have come in from sectors, such as textiles, which are labour-intensive. It is worth recalling that the purpose of the GST is to make it very easy for small companies to pay tax, not to push them out of the economy. If it appears that the latter is happening, then the government must work swiftly to further simplify compliance requirements and reduce compliance costs. 

Obviously, the government must not add to the confusion. One quick fix could be the swift introduction of a single nodal point to disseminate information about the application of the GST, and to respond to queries. There are worries that multiple ministries have issued complex and contradictory advisories — even the official GST Twitter handle has been accused of providing misleading information. This can easily be fixed. Clarity from the authorities is essential in an already chaotic environment.