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Monday, April 23, 2012

Developments on implementation of the GST

by Viral Shah and Ajay Shah.

As with many other problems in Indian economic reform, getting to the right destination on the GST requires winning on policy, politics and administration. On the policy side, the basic design of the GST needs to be done right. Pulling this off will require great political skill - a coalition of beneficiaries from the GST will need to champion it in the Indian federal setting. Finally, assuming that the policy and the politics has been done well, it will require the right plumbing. In this blog post, we review progress on this third element.

Done right, the GST ought to replace all existing indirect taxes. This would remove barriers to inter-state commerce, and create an Indian common market. It should treat all goods and all services identically. It should be a single administrative system covering tax payments to both Centre and States thus eliminating the compliance cost that is associated with dealing with multiple tax authorities. It should be globalisation-compatible: goods and services sold to non-residents would be fully refunded the entire burden of indirect taxation that has been incurred at all stages of production. India would then follow the principle of not taxing non-residents. This would be fair for domestic producers who face foreign competition, and ensure competitiveness of domestic producers selling abroad.

These are powerful and important economic concepts. However, their translation into reality is critically about execution. In the case of the GST, as with the New Pension System, the problem of execution is substantially (though not entirely) a question about building large IT systems.

While much of the legal and policy framework around GST is still being worked on by the Central Government in consultation with States, some progress has been made on setting up the infrastructure for processing registration, returns, and payments in a standardised manner. A detailed note on the IT infrastructure for GST has been put up by the Ministry of Finance.

In terms of organisation structure, existing success stories include the Tax Information Network (TIN) and the New Pension System, both of which are being managed by NSDL. A more general concept of `National Information Utilities' (NIU) was proposed by the TAGUP Report. This report drew on the success of establishing market infrastructure institutions such as NSE and NSDL, and recommended that NIUs be such non-Government companies, with Central and State Governments as joint shareholders, dispersed shareholding among other institutions, avoiding shareholders that may have a conflict of interest, and avoiding listing on exchanges. In spirit, NIUs must have the efficiency of a private corporations, but be animated by a public purpose.

In the Budget Speech of 2012-13, the Finance Minister announced that a NIU for implementing the GST would be constructed. It would be called GSTN and would be fully operational by August 2012. The first steps towards constructing GSTN have now been taken, with a Cabinet approval for GSTN. The official press release on this says:

The Cabinet has approved a proposal to set up a Special Purpose Vehicle (SPV) namely Goods and Services Tax Network SPV (GSTN SPV) to create enabling environment for smooth introduction of Goods and Services Tax (GST). GSTN SPV will provide IT infrastructure and services to various stakeholders including the Centre and the States. 
The GSTN SPV would be incorporated as a Section 25 (not-for-profit), non-Government, private limited company in which the Government will retain strategic control. It would have an equity capital of Rs. 10 crore, with the Centre and States having equal stakes of 24.5% each. Non Government institutions would hold 51% equity. No single institution would hold more that 10% equity, with the possibility of one private institution holding a maximum of 21% equity. 
GTSN SPV would have a self-sustaining revenue model, based on levy of user charges on tax payers and tax authorities availing its services. While the SPV's services would be critical to actual rollout of GST at a future date, it is also expected to render valuable services to the Centre / State tax administrations prior to the GST implementation.

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