V Keshavdev, executive editor, Outlook Business: Good evening ladies and gentlemen, it’s a pleasure to be in Delhi. I’m excited to moderate a discussion on a topic that is going to change the way India Inc does business. We’re going to talk about the Goods and Services Tax (GST), a reform that has been in the works since 2000. Seventeen years on and we are exactly a week into the implementation of this tax regime. So given the shape and form of this tax reform, is this the ideal verison of GST for India? Kavita, you had written a paper on what would be the ideal GST, so what do you think?
Kavita Rao, professor, National Institute of Public Finance and Policy: There is something ephemeral about the ideal GST. We are a country where one union government is working with 30 state governments trying to get on to the same page and deliver a product. The longer we would have waited, the more would be the compromises that would have got incorporated into the design. Is it ideal? By no stretch of imagination can you call it ideal but it’s a step in the right direction and I am hopeful that we will continue this process of reforms.
Keshavdev: Mohan, you represent the interests of micro and small industries down South. You said there is enough pain in the system because it’s been a rushed affair. But it’s something that the industry has been clamouring for and now that it’s not turned out the way you envisaged it, what’s your reaction?
CK Mohan, general secretary, Tamil Nadu Small and Tiny Industries Association: Yes, GST is something that the industry wanted for a long time. It is a step in the right direction and you can’t be delaying it. But there are certain problems faced by the micro industries as a whole. It needs to be corrected otherwise it’s going to be a problem for the existing industries. The problems that arise are that those exempted under the earlier excise regime were not registered under the excise. People who have already registered, are far more organised and thus able to adapt to GST immediately.
But that’s not the case with most of the manufacturers in the SME sector. If you talk about the success of the corporate sector, be it in automobiles or any other segment, the micro and small industries have a huge contribution. But they are not yet ready. One, it is going to increase costs because all along they have been depending on some small time fellow to do the sales tax returns and dealing with the income tax department, now they need to have a complete system on a daily basis. Their knowledge about the same is limited. This is an area where we need lot of awareness and education that needs to be done beforehand. Investments have to be made. These are areas that the government must look into. Now suddenly, the ancillaries which were at zero percent, the manufacturing services are kept at 18%. This is where the problem lies.
Since they are not prepared, they cannot file tax returns and they will not be able to pay. One more thing is that most of the problems are created by delay in payments for SMEs in India. Now with GST, it is going to add to the working capital requirement of small and micro enterprises because you have to pay within a certain time limit otherwise fines will be levied. If you don't pay for three months, then the enterprise will be blacklisted. One can't do business with such restrictions. Instead of fines, we need to have a more incentive-based system that gives enough time for such companies to become a part of the system. Banks also have a major role to play here.
Keshavdev: Have the SMEs been lackadaisical in their approach? Surely, they knew that a transformation was set to take place. So, who is at fault – the government or the SMEs?
Mohan: You must understand that the SMEs are afterall mostly run by not very highly educated people. These are single-proprietor companies, who with some experience start a business and provide some employment. When this type of a tax regime is coming up they need to be given some additional support. It does not work by instructing them to start adopting a new format from the very next day. It is just not possible because it is not one or two companies, it is almost 80 lakh industries. You cannot do it overnight. Even the corporates and officials are finding it difficult. It is not that the industry is against it, we welcome it but there are certain changes that are required.
Keshavdev: Rajiv, down south the view is not so rosy and up north, I heard you had a gala night to celebrate the onset of GST. So, what’s the reason behind this different approach?
Rajiv Chawla, chairman, I am SME of India: I believe that now that it is happening, why not enjoy the entire scenario? I do agree with some of the pain points mentioned earlier, however, one must realise that it is never easy for a nation of this size to come up with a GST which is ideal. I’ve read articles where people have criticised the different rates of taxation and argued saying that there are many other GST-enabled nations where they have a single-tax rate format. I believe that India does not need to look westward or eastward to adopt a system. We need to find India-centric solutions for everything we do. In that spirit, I believe this GST in many ways is India centric. There are pain points due to the transformation. But I want everyone to recollect the transition 1985-1986 when the then government wanted to computerise banks. There was a two-day national strike by bank employees resisting the same. But today, would anyone open an account in a bank that is not computerised? So we resist change because it takes us out of our comfort zone.
I agree there are technology issues. The micro enterprise sector particularly, is not tech savvy. But why can’t we move in that direction? There are sections in the SME sector that are purely digital. For example, all my ESI payments, central excise payments, service tax payments have become mandatory e-payments for the past few years. I agree that there is a section that was exempted from the earlier central excise regime, where goods sold at 1.5 crore or less didn’t come under the ambit, so perhaps they had a great time earlier. So maybe they are feeling uncomfortable because this limit has come down to 20 lakh but the government has given a window of the composite scheme up to 75 lakh. What more do we ask for? In the future, this highest rate of 28% may reduce. Let the tax base increase in the meantime. I feel that all these efforts will bring in a large section of the trade and industry sector including the micro and small enterprises to the mainstream. This is going to transform India and strengthen our economy in the future.
Keshavdev: Bela, you work for Shell that operates in different markets where GST is prevalent. But India is a unique market where you are part of GST and still not a part of it. That’s because some products come under GST and some don't. So how are you viewing this change?
Bela Sheth-Mao, GM, GST Projects, Shell India: For the oil and gas sector it’s generally a mixed bag. But overall, it's a big leap in terms of policy reforms. I won’t say tax policy because it is more of a business restructuring reform. But it’s going to take us a few years before we actually stabilise on GST. Apart from all the issues that have been raised earlier, there is this issue of not having the oil and gas sector fully under GST. Currently, there are five products, which are out of GST and everyone in this room would be a consumer of those products in some way or the other. And that is going to create some added anomalies in the system because to get these products to the market, a certain GST will have to be paid to them. For instance, if you buy fuel, there is VAT only on petrol but to transfer the petrol from the refinery to the retail station to your depots, there is a transport charge on which there will be a GST and that GST is going to go up on 5% reverse charge. So there are inefficiencies that are present in the design, which we have to deal with. For an industry like ours, it is complex in terms of managing compliances. It is going to take some time to settle down but we at Shell genuinely believe it's a big positive change for India. Not the most efficient design for GST but in the end it will do good.
Now how long it takes will depend on a lot of us in this room. How quickly do we adopt and adapt to this change? How quickly do we bring in the mindset change that is required and not start creating multiple companies below 20 lakh just to ensure we get exempted. Several companies also require handholding through this process. It’s important for the larger companies to guide the entire supply chain to ensure that they are up and running. The government has put its entire machinery to work and it is time for the industry to partner with the government to put all our machinery at work to ensure that we adapt to the change faster because in the end it is going to be beneficial for all of us.
Keshavdev: Mukesh, among all the panellists you are better placed because the general perception is that there is more business trickling in for tax consultants. So what is your reaction and what are your clients saying? On a lighter note have you increased your rates for tax consultation for GST?
Mukesh Butani, managing partner, BMR Legal: Fortunately, I don’t do it as a lawyer, my colleagues do it. On a more serious note, the GST law has created employment for not just consultants and advisors but also for people who provide IT solutions. Just a couple of observations on what the earlier panellists said: The more appropriate question would be to ask, should we live with an imperfect GST? Or should we have waited for 10 more years? The choice is very clear. The landmark development was the constitutional amendment in September 2016. Most people missed out on the manner in which the amendment was carried out. The industry should have been prepared because what the amendment said was that we are re-allocating the powers of the federal and state government and giving dual powers. But the amendment also said that states will not have any power from September 2017.
That's the reason everybody said that you are holding a gun to our head. It was a very smart way for the government to carry out the constitutional amendment. We have a GST that prima facie may sound imperfect but it’s entirely not imperfect. You cannot compare the GST in India to the one in continental Europe which is a VAT. I feel confident that as far as this group is concerned you really get to know reading the newspapers how small and medium enterprises are impacted but I accept the point made by the earlier panellists. I think long-term gains from transparency that results from moving towards a more compliant economy is very good. It's not just the state and central government that will benefit, even the taxpayers will benefit from this. I think the small and medium enterprises will continue to seek the benefits of this by way of increased investments in that area because it could mean possibilities for collaboration in technology and know-how transfers.
So it's incorrect to say that GST will benefit the large enterprises only. I think the difficulty in working with large enterprises primarily is they get equally impacted when their vendors [who fall under the small and medium scale industries] are not at a level of preparedness. I chair the audit committee for a large UK multinational FMCG product, which has three plants in India. I used to chair the GST committee for this organisation in my capacity as an independent board member and we realised that no matter how well we are prepared and despite the liberty we have by engaging with advisors and consultants, if our vendors are not prepared then the GST chain breaks. For example, if my logistics partner or distributor or wholesaler is not GST compliant, the chain breaks. Somebody has to bear the cost for it - it goes to the customer or the manufacturer or any of the intermediaries. So I find the GST ecosystem to be a self-enabling system, which over a period of time will settle down. Yes, there are lots of criticisms about dual rates of structure, which the lawyers call characterisation of issues, which are potential areas of dispute. I don't think to some extent these concerns are valid because in the past characterisation disputes arose primarily because state governments did not follow what is called harmonised International classification code for products. But now GST law mandates the same. Having said that there still would be classification-related disputes and I think the ball is in the government’s court to make sure that they have an administrative mechanism to be able to alleviate the concerns of businesses particularly those of the small and medium enterprises.
This is the first of a two-part series. Read the second part here.