The model GST law should be firmly aligned with the digital economy needs

The government has released the 'draft' model GST law. This is the first major building block for a GST rollout

  • Updated On Jul 29, 2016 at 09:24 AM IST
By T V Mohandas Pai and Sudhir Singh

It seems that the nationwide anxiety on the Goods and Services Tax (GST) Bill is about to end soon in the current monsoon session. The government has released the ‘draft’ model GST law. All eyes are now set on the empowered committee of the state finance ministers chaired by Amit Mitra.

This is the first major building block for a GST rollout. All states and the Centre will be adopting a GST (Central GST, State GST, Integrated GST) Act based on this model law. The other major building block is the information technology (IT) backbone, the Goods and Services Tax Network (GSTN). It is in a relatively more advanced stage, under a separate body also called the GSTN.

Wrong code
The GSTN is going to be end-to-end digital, thus giving GST a ‘digital frame’ or body. It will perhaps become the largest digital platform in the country and will be set to an Open API (application programming interface)-based futuristic technology platform right from the architecture stage. By design, the GSTN will support seamless interface and operational integration of diverse business applications. But when one reads the fine print of the model GST law, the euphoria evaporates, at least for the ICT industry. It does not incorporate the needs of the digital economy. Nor does it make progress on a number of issues that plague the emerging digital industry.

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A digital economy is powered by both ‘digital goods’ and ‘digital services’. New technology trends like the Internet of Things, deep learning and cloud computing will soon precipitate a ‘digital world’ in unprecedented ways. The GST Bill doesn’t acknowledge the reality. Strangely, it still harks back to the old formulation where ‘all intangibles are services’. By doing so, it completely disregards the emergence of ‘digital economy’.

The plea, that most countries treat intangibles as ‘services’, sticks well to single tax (VAT) systems. It does not stand ground in the scheme of ‘goods’ and ‘services’. The HS (harmonised system) code-dependent oldworld order was limited to the physically transported goods era. This has to be extended to digital goods. It must provide for intangibles to be products. Both digital products and services have an important role to play in the new economy.

China has defined an HS code for software products. The US has a Bill pending in Congress on defining ‘digital goods’ and ‘digital services’ distinctly. Why is India missing this opportunity of defining ‘digital goods’? Getting the definitions right is important to having a fair and neutral tax regime.

‘Digital goods’ have all inherent properties of goods, except ‘tangibility’. As per the model GST law, tax will apply on stock transfers. Both stocking of ‘digital goods’ and stock transfer is possible. But services can’t be stock transferred or stocked. In services, provisioning and consumption are almost simultaneous events.

As far as possible, the structure of the tax regime should be business model-agnostic. The recent overexcitement over e-commerce has resulted in definitions like ‘aggregator’ and ‘electronic commerce operator’. While defining of business models can be an aid for taxmen on the ground, using business model-based tax treatment is detrimental to fairness and neutrality in the long run.

Future-vulnerable
Who could conceive the business models of Ola or Uber five years ago? Businesses will use a mix of new systems and technologies like the Unified Payment Interface, cloud computing, IP telephony and biometric authentication to reimagine financial services, education, healthcare and agriculture sectors in the coming years. Currently unthinkable new models will emerge. This challenge will multiply as we progress into a datadriven digital economy.

It is essential that the GST Bill accommodates heterogeneous platforms and business models. The tax levy should be on the nature of the transaction and on the nature of the relationship between the two parties. Our tax regime should not have favoured business models. The model tax law seems to raise apprehensions on increased compliance. Many registrations across states are needed and this goes against the concept of a simplified tax system. GST should not lose focus on ‘ease of doing business’.

The empowered committee and finance ministry should look at a consultative process as an opportunity to produce a futuristic law. Accepting the reality of ‘digital goods’ at par with tangible goods is a serious issue that needs to be addressed. It will help harness the power of a subcontinental-sized single ‘digital products’ market. Dependence on specific business models should be reworked.

India can provide thought leadership to the world. Several international fora, such as the World Trade Organisation and the World Customs Organisation, will welcome India’s decision on these issues.

Pai was CFO, Infosys, and Singh is a fellow, iSPIRT
  • Published On Jul 29, 2016 at 09:20 AM IST
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