22nd Jul, 2022
The Goods and Services Tax (GST) recently celebrated its fifth anniversary.
- While the idea of “one nation, one tax” has seen the light of day with the implementation of GST, the law is still evolving and can be a better version of itself, let’s say with GST 2.0.
- In India, the idea of adopting GST was first suggested by the Atal Bihari Vajpayee Government in 2000.
Goods and Service Tax (GST)
- Being touted as one of the biggest indirect tax reforms in the country, GST was introduced to mitigate the double taxation
- Slogan: ‘One Nation One Tax’.
- Objectives: To mitigate the cascading effect of taxes, a multiplicity of taxes, classification issues etc., and has led to a common national market.
- The GST that a merchant pays to procure goods or services (i.e. on inputs) can be set off later against the tax applicable on supply of final goods and services.
- The set off tax is called input tax credit.
- The GST avoids the cascading effect or tax on tax which increases the tax burden on the end consumer.
- Levied on:
- The GST has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
- It is essentially a consumption tax and is levied at the final consumption point.
- In 2002, the Vajpayee government formed a task force under Vijay Kelkar to recommend tax reforms.
- In 2005, the Kelkar committee recommended rolling out GST as suggested by the 12th Finance Commission.
- GST was introduced through the 101st Constitution Amendment Act, 2016.
How the implementation of GST has impacted the economy?
- Single taxation: The introduction of GST has brought a single indirect tax regime for the whole country, attracting foreign investment without any tax complexities.
- Stability in tax rate: GST has also provided stability in the tax rate, reducing the multiple and unstable tax rate complexities, further providing an impetus to the foreign capital inflow.
- Common technological platform: A common technology platform has been introduced in the form of a GSTN where key business processes of registration, payment of duties and filing of returns are done online in a transparent manner.
- Ease of payment: The ease of payment method in a transparent manner, led to increase in the GST registration from 1.08 crore in 2018 to 1.36 crore in 2022.
- Gain in revenue collection: The implementation of GST has increased the revenue collection for both centre and states. The proportion of GST collected to GSDP (Gross State Domestic Product) rose from 5.8 per cent to 6.4 per cent.
- Rise in overall tax to GDP ratio: If we consider the RBI's proposed three-percentage-point reduction in the incidence of GST tax from 14.8 to 11.8 percent, the real proportion in 2021-2022 would have been 7.4 percent of GDP.
What are the major factors contributing to such success?
- Rationalization of Input tax credit: Input tax credit to the buyers will only be provided if the supplier uploads the invoice in the GST portal.
- E-invoicing: The introduction of the e-invoicing process has created a transparent, easy, and efficient method of invoicing, increasing the number of invoices and reducing discrepancies.
- E-way bills: E-way bills have also been introduced for interstate trade, making the trade flow easy and barrier-free among the states, further contributing to more revenue generation.
- Coordination between CBIC and CBDT: Greater coordination between the Central Board of Excise and Customs (CBIC) and Central Board of Direct Taxes (CBDT) in compliance verification.
- Seamless implementation: It would also be important to laud the success of the Centre-State partnership under the aegis of the GST Council which has ensured that all policy decisions are implemented seamlessly across states.
What are the persistent issues with the GST?
- Controversies – The basic weakness of GST is its political architecture as it is asymmetrically weighted in favor of the Centre.
- Design flaws-Nearly 45% to 50% of commodity value is outside the purview of the GST, such as petrol and petroleum products.
- Disputes Resolution: The fundamental weakness of the GST is its political architecture as it is asymmetrically loaded in favour of the Centre.
- No specific body is tasked with adjudicating disputes between states and between the center and states.
- This is despite the fact that the original constitutional (115th Amendment) Bill of 2011 (GST Bill) contained such an institution.
- Compensation Scheme - GST Compensation Cess was introduced to compensate the losses of the states in the first 5 years under the GST regime.
- As per the GST, the states were guaranteed compensation at the compounded rate of 14 percent from the base year 2015-16 for losses arising due to the implementation of the taxation regime for five years since its rollout.
- When this 14% compensation comes to an end by the end of 2022, severe fiscal strain is expected and a reduction in GST revenue across the country to overcome the issue means that the compensation amount is going to be higher.
- Exclusion: Petroleum products remain outside the purview of GST. This would have otherwise been shareable with the States.
- Inflation: The more significant impact of the GST hikes is on inflation, specifically for food. While steps have been taken to initiate anti-profiteering at the retail level, no concrete action as such has been taken.
- Increase in operational costs: Requirement to hire experts to manage accounts and taxes.
- Some sectors are at a loss- Sectors like Textile, Media, Pharma, Dairy Products, IT, and Telecom are bearing the brunt of a higher tax.
What to expect from GST Version 2.0?
After four years, of implementation, the promises of the Goods and Services Tax (GST) remain substantially unrealized. An updated version, namely GST version 2.0 may have to be designed soon given the flaws in the existing structure.
- Increased working capital requirement: Manufacture who import raw material from other countries has to pay 14% GST, as compared to the old slab it used to be 14%. This has increased business working capital. It is expected that the issue will be taken care of in GST 2.0.
- Blockage of working capital: Payments are frequently getting blocked at various levels in the value chain, and it is becoming difficult for manufacturers to timely get the input tax credit.
- Central GST (CGST) pool made fungible across states: Companies having a central GST balance in one state should be able to utilize the balance in another state.
- Allowing conversion of the accumulated input tax credit into tradeable scrips in the market: This would help free up the working capital and mobilize unproductive assets in the financial statements of businesses.
- Resolution of issues: A National Bench of Advance Ruling can be put in place to solve the GST issues in rulings directed by several states. Formation of GST Appellate Tribunals can be one such step to be expected from GST in its new avatar.
- Simplifying and rationalizing of ITC provisions: In many cases, GST continues to carry vestiges of the erstwhile regime in terms of credit restrictions.
- The GST laws have specific restrictions on the construction of the immovable property. Hence, the government must consider permitting such construction-related input tax credit.
- Expansion of TAX network: With petroleum outside the ambit of GST, a large part of the economy is still outside the tax net. Major reform is to be expected from GST 2.0 the inclusion of leftover sectors.0
- Streamlining of audits, assessments, and investigations: In recent times, there has been a surge in summons issued by GST authorities to top management of companies.
- Although the intention is to plug evasion, genuine companies have also come under the radar of investigating authorities, causing undue disruptions in their business operations.
- There is a lack of uniformity in the manner in which information and documents are sought during audits.
- GST 2.0 must come up with detailed SOPs for processes to be followed during summons and investigations. GST 2.0 should be a step forward in overcoming such issues and add to the ease of doing business.
- A key step would be to change the law to require all units purchasing from unregistered GST providers to pay duty on a reverse charge basis.
- To give more procedural comfort to bigger units, provisions pertaining to the issuance of e-way bills and other regulatory procedures must be eased if purchases are made from a smaller unit with a turnover below a certain level.
- The Securities and Exchange Board of India (SEBI) can provide higher credit ratings to such units to further incentivize and encourage them to trade on the TReDS platform (the institutional mechanism to facilitate the discounting of invoices for MSMEs from corporate buyers through multiple financiers), encouraging them to expand.
- Creation of federal independent body: GST .0 requires an independent body at the state level which can bridge the senior officers from the center and the state, providing a common point of contract.
While GST has helped achieve significant changes and objectives of a unified indirect tax regime, in the backdrop of 5 years of GST and the increasing audits/ investigations, the journey towards a "good and simple tax" will only continue.
GST 2.0 changes need the establishment of federal entities for dispute resolution. Another institution, in the shape of a GST state secretariat, is required to bring together top executives from the Centre and states in an institutional forum recognized under the Society Act. This forum might also serve as a point of contact for commerce and industry to address non-policy concerns. This would show that, notwithstanding recent dissonance, India's federal institutions remain intact and that Indian politics is founded on cooperative federalism as an intrinsic ideal.
There is a need for balancing revenue augmentation measures and ensuring ease of doing business for taxpayers. A change in mindset coupled with a hard look at reforms will go a long way in providing further thrust to India's economy as we continue on this road to recovery, post the pandemic.