GST glitches

Centre must work to ensure a smoother transition

The roll-out of the goods and services tax (GST) has hit a few bumps on the road, and it is essential that the government stays alert and responds swiftly if needed to ensure that the promise of the GST is not dissipated in its implementation. For example, of the Rs 95,000-crore revenue collected in July, around Rs 62,000 crore has been claimed as input tax credit. If only about Rs 33,000 crore, once input credits are disposed of, is indeed collected in the first month of the new indirect tax, then it might be seen as a problem going forward. However, it is important not to overreact; this may be a one-time problem. It may be, for example, the consequence of massive de-stocking in the months before the GST was due to be introduced; in other words, input tax might have been paid at an older, higher rate but final tax on a newer rate. Naturally, this will not be a permanent problem. But other, more systematic problems are now emerging. 

For one, the GST demands a great deal of the digital backbone run by the GST Network or GSTN. However, there have been recurrent problems about registration and uploading of invoices to the network. It is clear that the GSTN was not properly stress-tested before it was rolled out. Whatever additional capacity needs to be installed must be done as a priority. Another problem that is being reported by enterprises is integral to the GST as currently designed. It is to do with the fact that input credit is not available to a purchaser of a good or a service until the tax on that good or service has been paid by the supplier. This was always unnecessary; surely the presence of a matched, genuine invoice should be enough. Beyond that, ensuring tax is paid is the responsibility of the government and not that of the purchaser. 

But, as it stands, purchasers will have to wait till 10 days after the conclusion of the returns cycle — the end of the following month after the transaction — to know if they are eligible for a credit. This is already raising working capital requirements and driving some small businesses out of the market. The invoice matching itself, while a clever mechanism to increase transparency in theory, may put enormous strain on the capacity of the system – the matches will stand in the millions, with a proportional number of false positives and negatives. It may be necessary for the system to be redesigned to reduce the capacity required to carry out invoice matching. Certainly, the effects on working capital and profitability of the requirement that tax be paid first should be monitored, and that clause be adjusted if necessary.

Finally, it is also true, as states complained at the meeting of the GST Council over the weekend, that the revenue impact of the GST continues to be uncertain, at least in the short and medium term. It is up to the central government to ensure that no catastrophic shortfalls in revenue hamper the normal functioning of state governments as a consequence of the new tax.