The Big Picture – State Laws in GST -What is the final shape?

With the GST Council approving the remaining two draft bills; the UTGST and SGST all the five enabling draft bills stand approved to enable a likely rollout of the new indirect tax regime from July 1st this year. The other three draft laws; the Central GST, Integrated GST and compensation draft laws have already been approved by the Council. The SGST draft law will now have to be approved by the Legislative Assemblies of states and union territories. With the approval of the five draft laws, the legislative action of the GST Council will be over after which there will be another meeting for the fitment of goods and services in the tax slabs.

Analysis:

The legal hurdles particularly on the legislative front are more or less over. However, all the states should not be taken for granted that their states would approve the bill. In case of Jammu and Kashmir, not only the SGST but CGST and IGST also needs to get approval. Recent victory of BJP in the northern states such as Uttar Pradesh and Uttarakhand also in some ways has endorsed the attempts of the Central Government to bring changes on the economic front.

GST is probably one of the most important strategic economic reform movement. GST is essentially a destination based tax unlike local taxes. Therefore, by being a destination based tax, manufacturing states tend to stand on the losing front which was the argument of these states. This has been reconciled now.

Through the GST Network (GSTN), the Government is working to provide the technology backbone to introduce GST and connect the databases of states and the Centre which will ease some of the burden on corporations. Companies will have to take these steps:

  1. To have a system to facilitate determination of tax as per the new regime which will include consideration of source and destination along with special provision for states, products and schedules.
  2. They will have to make sure that there are periodic updates/uploads of sales and purchase data with reconciliation for tax payments and credits.
  3. They will also have to conduct analysis on pricing, supply chain networks and costs because of tax changes.

How far the states are willing to stick to what the GST Council has rolled out is important to see and how far the ground level officers are in sync with what the GST Council has decided who are responsible for actual implementation.

As far as fixing of rates is concerned, the Revenue Secretary has already made a public statement that the rates will be broadly in line with the current existing rates. The real issue might be the applicability of the cess on demerit goods. There is a cap on the cess on demerit goods which is a welcome step but how effective this step will be to compensate revenue losses for states has to be seen.

Conclusion:

Though GST is an example of cooperative federalism but it has to be noted that states do have competing and diverse interests. Therefore, it is essential for the Council to take all of them through the same level irrespective of the differences in minor interests of the states.

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