The actual challenge before the Finance Minister is not of drafting a model GST but of its proper implementation and smooth transition from the prevailing system.

The challenges which the Government has to face in introducing GST are as follows:

* Rapid increase in Assesses: The dual GST model will widen the tax net by taxing every economic supply in the distribution network. This will lead to rapid increase in assesses. It will require some of the businesses to restructure their distribution network to reduce additional tax burden on the consumer with a view to be price competitive. Though it will generate revenue in a neutral and transparent way, the Government will have to ensure that the ultimate consumer is not burdened with tax beyond his capacity.

* Place of Supply: One of the main challenge in introducing in GST is defining the place of supply in respect of certain services and intangible properties. In the existing tax regime, place of supply is not a big issue because service is taxed by the Centre and the place of levy does not affect revenue receipts. In GST, however, the place of supply will have to be clearly defined to avoid disputes among states in case of inter-state transactions. Time of supply will explain the point at which tax would be levied - invoice date, due date or payment date. Currently, different taxes are levied by the Centre and the states at various stages. The service tax is levied on the receipt of payment, excise duty is imposed by the fifth of following month and sales tax is levied when the sale happens. These variations will be eliminated in GST.

* Legislative Challenge: The Constitution of India provided powers to the Union and the States to levy and collect taxes as per Union , State and Concurrent List. The challenge is whether this can be treated as the basic structure of the Constitution thereby restricting the Government from bringing about any change in this structure. In order to enable the Centre and the State Governments to levy GST, the Constitution of India requires amendment to provide for powers to levy and collect GST both by the Union and the States.  However, in a landmark decision, the UPA Government has resolved to amend the Constitution to enable states to have the same powers as the Centre in administering the proposed Goods and Services Tax (GST). For the purpose, a new Fourth List is proposed to be created in the Seventh schedule of the Constitution. The Fourth List visualises a governing council headed by Union Finance Ministry and comprising state finance ministers as its members. The council will have overriding powers on issue of indirect taxes.

* Improvement in Banking System: In case of destination based principle of taxation, the recipient State will have to levy the tax as per the law of the dispatching State. This is bound to create problems if there is no uniform law and rates across India . This requires tax collected by the recipient State to be credited to the exporting State. For the Governments it would be a challenge to allocate revenue to the respective States .The banks as an intermediary can play a key role in collection and transfer of revenue to respective States in Dual GST model. The person collecting the tax on his supply in case of inter-State transactions should deposit the tax in the account of the State where the supply has been made. Then on the basis of revenue reports of the respective Governments, the banks can allocate the revenue to the respective States or the Central Government, as the case may be. The banking system needs to be improved for this purpose. The challenge can be met by proper training, upgradation of tax administration with technological interface.

* IT infrastructure: If the Government wanted to introduce the proposed indirect tax by April 2011, IT infrastructure for the Goods and Services would have to be put on fast track. "IT infrastructure will play a huge role in interstate GST. IGST will be collected and passed on the states. It will have to be transferred electronically".

* Effective Credit Mechanism: The success of dual GST model will depend on effective credit mechanism to avoid cascading effect of multi-stage taxation in the supply chain. The credit mechanism is the lifeline of GST. As far as Central GST is concerned, there is no difficulty in giving credit of Central GST anywhere in India as is evidenced by success of the present CENVAT scheme. But, in case of State GST presently there are issues in giving credit in relation to inter-State transactions.

The challenges posed by GST are no different from what other countries have faced while implementing major tax reforms. Despite the various impediments to the proposed transition, once implemented GST is likely to usher in a more taxpayer friendly regime that could help make various business decisions 'tax neutral' . Until the time GST is implemented, however, it would be worthwhile to monitor the developments closely and assess their potential impact on business operations in India .