GST-One Year Assessment

After one year into the goods and services tax (GST) regime, earlier apprehensions have given way to general acceptance that this may not be the most perfect single tax system, but it’s working. There are many issues that remain to be addressed, but the fact that some of the knotty ones have been resolved gives rise to confidence that even the others will be sorted out.

Many countries that launched a single tax regime, witnessed an abnormal inflation due to structural transition. It was widely feared that GST would cause inflation to rise but that hasn’t happened in India. The recent spike in consumer inflation has been due to high food and fuel prices, unrelated to GST.
The much-criticised multi-slab structure ensured that the levy was as close as possible to the existing rate, which meant the incidence of tax didn’t rise. The second factor was the Antiprofiteering Authority. Though the body was set up after the GST rollout, the prospect of its establishment was enough to ensure businesses did not abuse the transition.

b) Single national market: Long queues of trucks at state borders disappeared as checkposts were dismantled, creating a seamless national market. These barriers had restricted movement of goods across the country, leading to huge delays and increasing transaction costs for the logistics sector, eventually translating into higher costs for consumers.

c) One tax nationally: A consumer in Kanyakumari now pays the same tax on an item as one in Jammu & Kashmir. GST has also allowed businesses to streamline distribution systems— production, supply chain, storage—to make them more efficient, having previously been forced to design them keeping state taxes in mind.

d) Formalisation kicks off, tax base begins to widen: One of the expected benefits was that GST would encourage formalisation of the economy. Evasion would stop making sense, due to transparent digital processes and incentive of input credit and invoice matching. With number of registrations crossing 10 million, it seems more businesses are signing up for GST. Rise in the Employees’ Provident Fund Organisation subscriber base provides further evidence of the same. More people filing income tax returns could also have something to do with GST.

e) A win-win Situation: As many as 17 taxes and multiple cesses were subsumed into GST, aligning India with global regimes. Central taxes such as excise duty, services tax, countervailing duty and state taxes — including value added tax, Octroi and purchase tax — were all rolled into one. The new regime provided for free flow of tax credits and did away with cascading due to tax on tax, thereby boosting company financials and resulting in reduced prices for consumers. It also ensured a single law for the whole country with uniform procedures and rules, which reduces compliance burden and business complexity. The government sacrificed revenues, but improved compliance should cover any gap.

CONSENSUS: The GST Council, comprising central and state representatives, is the kind of federal arrangement that might easily be bogged down by ego and politics. The Centre has a 33% vote while the states account for 66%, with any dispute needing 75% support to be resolved. It has never had to vote on any issues, with just one dissent recorded so far. There may have been bickering and differences of opinion, but matters were always thrashed out and a painstaking consensus achieved. The council has found solutions to most issues and these have not been shoddy compromises but sound decisions that have only improved the single tax. More importantly, the council has provided a template for more such structures where the Centre and states could work together.

AGILITY: A GST Feedback and Action Room was set up to take care of initial launch issues. The government remained open to addressing issues as they cropped up, with feedback flowing in fast via phones, messages and even Twitter. Return filing dates were deferred, tax slabs were rejigged to address industry and consumer concerns and procedures and rules were amended to ensure hardships were alleviated. The officers’ committee — comprising state and central officials — still meets regularly to draw up options for the GST Council to act upon.

Compliance has miles to go: The biggest dampener was the compliance process, as information technology glitches took more than the anticipated time to be resolved. The filing system that was put in place in the beginning was quickly abandoned as businesses struggled with compliance. A new return form is being crafted to help make the process much less painful for businesses and is likely to be available soon.
Cumbersome registration system: Multiple registration requirements have complicated things for industry, which was expecting simplicity. In many cases, registration is required in all states. Companies fear that multiple audits and assessments due to multiple registrations could bring more difficulties for them going forward.
New cesses crop up: While GST scrapped a multiplicity of taxes and cesses, a new levy in the form of compensation cess was introduced for luxury and sin goods. This was later expanded to include automobiles. A new cess on sugar is also being examined.
Refunds problem for exports: The refund mechanism for exporters, including data matching law, besides procedures governing them, have irked the sector. Particularly, the smaller entities saw that their working capital requirements have risen. Though several efforts have been made to address the issue, it may require more intervention.

 

There is consensus among experts and industry that GST has made vast progress from its early days of teething troubles. It has settled in as far as the consumer is concerned, but businesses want to see improvement. A simpler tax filing regime, fewer slabs and a broader tax base are some things the government needs to address in the year ahead
Expansion of tax base: There are many goods that are still outside the GST net, which comes in the way of seamless flow of input tax credit. Key items outside its ambit are electricity, alcohol, petroleum goods and real estate. Among fuels, it may be possible to bring natural gas and aviation fuel within GST. But it may not be easy to do that with diesel, petrol and kerosene as most states are opposed to such a move. Getting real estate under GST may also be difficult as it will require a constitutional amendment.
Tax slab rationalization: There are as many as six slabs, excluding exempt goods. Though most goods fall in the 12%, 18% and 28% brackets, there is a case for merging slabs to reduce complexity and classification disputes. The 12% and 18% bracket could be merged into one single slab in the 14-16% range.
Lower tax rate There has been a substantial reduction in the number of products in the 28% bracket with goods moved to the 18% one. There is further scope for cutting the peak rate on all products other than ‘sin’ goods. Products such as cement, paint, air conditioners, washing machines, refrigerators etc should also see a reduction in the tax rate to 18% from 28%.
GST returns simplification: This is the biggest sphere for further reforms as far as businesses and compliance are concerned. The government has already taken an initiative in this direction with the proposed consolidation of all periodic returns into one. The committee set up for this task has been working on the new format and the IT-related changes required. A new and simplified return filing process may become effective in the next six months.
More data analytics: The government has already started detailed analysis of a number of data sets to plug leakage. The format of the e-way bill has been designed to capture invoice related information so that the government can use data analytics to identify concern areas and plug revenue leakages. Businesses have already started receiving notices about discrepancies between amounts mentioned in different GST returns and those reported on the e-way bill portal. Income tax return forms released for this year have also sought specific information in relation to GST. The government can use the granular data to check tax evasion.
Anti-profiteering agency: The agency, which was constituted for a period of two years, has been functional for about six months and issued a few orders following investigations. The GST Council needs to decide whether to wind it up after two years or keep it going until the tax regime matures.