Will the GST regime adopt blockchain technology?
Blockchain technology has a huge potential to iron out glitches and improve efficiency in India’s mammoth GST Network.
We live in an era of rapidly evolving technology, and with technological changes come challenges as well as opportunities. For example, India’s government saw an opportunity to increase transparency and curb corruption by requiring digital reporting in the new Goods and Services Tax (GST) system.
Yet, there are still small businesses, particularly those in rural villages, with limited access to technology. The unreliability of the GST network (GSTN) has also been a challenge.
Still, some experts are already discussing the next technological leap for the GST era: blockchain technology.
What is blockchain technology?
A blockchain is a digitized, decentralized public ledger of all financial transactions.
Transactions are recorded as completed blocks that grow chronologically with subsequent transaction blocks. This allows market participants to keep track of digital transactions between participants without central record keeping. This is the crux of the idea behind bitcoin as well.
In simple terms, a blockchain can be defined as a shared, or distributed, ledger. All participants in the system can see the same version of the ledger and can make entries in the ledger that other participants can see.
Updates to the ledger are distributed in blocks that are linked together in an unbreakable chain. Because each block is mathematically linked to prior blocks, it’s not possible for any participant to go back and erase or change prior transactions.
Blockchain has become the protocol for bookkeeping over the internet without an intermediary. Some experts say it has the potential to transform multiple industries, making their processes more transparent, secure, and efficient.
Can blockchain technology help the GST system in India?
Fundamentally, blockchain technology is a concept of distributed ledgers. Many experts believe it could benefit GST’s digital transaction infrastructure immensely, by potentially protecting sensitive GST records and authenticating the identity of users.
For instance, keyless security infrastructure (KSI) stores data hashes on blockchains and runs a hashing algorithm for their verification.
Public key infrastructure (PKI), an encryption approach that is particularly vulnerable to man-in-the-middle and distributed denial-of-service (DDoS) attacks, would therefore be deleted out of the equation with the use of blockchain.
Data manipulation would be easily spotted, as the original hash would be available on other nodes linked to the system.
Invoicing would likely also benefit. At present, under GST, tax invoices are fundamental documents required at each and every stage of the supply chain, from the point of purchase to the filing of returns. Blockchain has the potential to provide automatic settlement and payment and to fully authenticate the matching of documents between suppliers and purchasers.
Despite its seeming complexity, a blockchain is just another type of database for recording transactions. For example, GST administrators might create blockchains for the transmission of tax data and payments between taxpayers and the GST portal.
The transparency afforded by blockchain would allow businesses to verify whether other businesses are being compliant or not, although this could raise privacy concerns as not all businesses would be comfortable with others viewing their data.
Taxpayers are required to file GST returns every month, and once the system is in place, transactions for the previous month will need to be reported by the 10th of following month.
Blockchain technology calls for real-time recording of transactions — a cumbersome task to achieve without a proper system in place. Blockchains would therefore help increase the speed, accuracy, and ease of collecting data.
Will the government adopt blockchain technology within the GST system?
GST has already been challenged by the inefficiency of its current IT infrastructure. Had better systems been in place from the beginning, the process of filing returns might be smoother now.
Yet, before widespread adoption, blockchain would need to address certain implementation challenges, such as onboarding users, regulatory acceptance, infrastructural issues, and incorporating firms and businesses that operate on a small scale.
The Institute for Development and Research in Banking Technology (IDRBT) will be setting up a working group to look at blockchain use cases and determine whether there is the potential to build the necessary fiduciary trust through software mechanisms and cryptography to go ahead and begin incorporating blockchain technology within the GST system rather than continue to rely on human-only institutions.
Though our appetite for transformative change has increased over the years, the Indian government will need to be very cautious about introducing any new technology. Blockchain technology will need to be thoroughly tested and its worth proven before incorporating it into the GST system.
About the author: Harshad Shinde, Product Manager, GST India, Avalara