A look back at the past five years shows that GST hasn’t been the game-changer that was promised. Shivanand Pandit reports

Five action-packed years, 47 GST council meetings, manifold tax rates, and several boundaries set on obtaining input tax credit. Appellate tribunals yet to be established. Hostile assessment orders and many technical glitches. This is a synopsis of the Goods and Services Tax (GST) regime, which celebrated its fifth anniversary on 1 July. Five years is a decent length of time to raise the question: Has GST been the game-changer as it was advertised? Regardless of who asks the question, the response is not a resounding “Yes”.

Five years ago, the Central Hall of the parliament launched a new indirect tax system for the collection of GST. Flaws and faults in the previous system, such as the cascading effect of duties, an extensive range of local taxes along with central taxes and duties, and non-integration of tax management forced the government to introduce “One Nation – One Tax”.

Taking into consideration the enormous size of the nation and the difficulties involved in getting everybody on board, the GST’s performance has been average, despite the repeated contrary claims of the government that it has been a success. The introduction of a GST brought numerous positives including a unified national market from Kashmir to Kanyakumari, cessation of a cascade of taxes, check post-free state borders, condensed inducements for tax circumvention, and the replacement of several indirect tax laws and rules.

But the many compromises made along the way to bring more than one billion people living in 29 states on board have been damaging to this revolutionary tax reform. Since its launch, the collection of GST has been more or less constant, excluding a few months during the pandemic. July 2022 witnessed the second-highest collection of GST after April 2022, at INR1.49 trillion (USD18.7 billion). The figures are very encouraging as far as the central government is concerned, but the same is not the case at all state and territory levels.

A WELCOME CHANGE

In the past five years, implementation of a GST has witnessed numerous policy changes together with procedural and technical repairs. A few of these have substantially altered the face of the tax system. These include:

E-invoice

The launching of the e-invoice system in India on 1 October 2020 was a bold change, demanding the assessee to authenticate each tax invoice via the GST government portal before issuance. The government took a segmented approach to the law, beginning with companies having a turnover of more than INR5 billion. At present, all companies with a turnover above INR200 million are included, giving the law broad coverage. However, according to the latest notification, e-invoicing will be implemented from 1 October 2022 for business entities with an annual turnover above INR100 million. Although companies initially dealt with technology-linked problems, the law has now been accepted as a way of doing business in India.

E-way bill

The government announced the e-way bill regime on 1 April 2018, to track the movement of goods by the issuance of electronically created documentary evidence. The idea of tracking the movement of goods by way of documentation was not a new idea, and the electronic generation of the same concept was seen as progress in the right direction. The IT support for the creation of e-way bills, after several teething problems, has been steady and the nation has seen stable growth in the use of e-way bills.

Reconciliation of input tax credit

In October 2019, the government brought in the statutory obligation to electronically reconcile the input tax credit to be obtained by an assessee with the electronically created records of the GST adherence assumed by the vendor. This condition was introduced to stimulate timely adherence by sellers and vendors (with an additional push from the receivers of supply, or purchasers). The invoices of the supplier and the recipient would be matched, preventing tax leaks and offering an easy flow of credit.

Rate reshuffling

One of the important principles of the GST is a simplified rate structure. The government has made attempts to reshuffle the rates, with the number of goods in the 28% and 5% tax brackets coming down considerably in the previous five years.

ISSUES OF CONCERNS

Nevertheless, the implementation of a GST in India has been modified considerably in the past five years due to the number of judicial and technological amendments, and there are still some issues that warrant the concern and consideration of the government.

They include:

Refining the compliance system of GST

A GST in India continues to be a compliance burden with manifold filing obligations and lengthy returns. This has led to exorbitant compliance costs and efforts. An urgent need is to have rationalised, simplified, robust and reduced compliance conditions with sufficient scope for rectification and amendment to guarantee that correct disclosure can be made with the minimum difficulty and delay.

One of the big challenges is that the GST Network (GSTN) compliance portal is yet to reach full operating capacity. From a credit standpoint, the GSTN portal has not accomplished a capability to match the efficacy of invoices. This is perhaps the main reason for fraudulent activities and fake invoices. The basic idea behind the digitalisation of returns was to guarantee accurate compliance, leading to an accurate streamlining of credit and taxes.

Anti-profiteering laws have been passed to protect the welfare of consumers, however, they have not been free from criticism and disapproval. Although these provisions were introduced to safeguard the interests of consumers, officials that determine profiteering grievances have ended up generating a price regulation that adds to the disappointment of consumers. The provisions fail to offer a method to monitor businesses in deciding the amount of profiteering, and the corresponding decrease in price.

Further rate streamlining

A uniform and rationalised tax rate structure is a central characteristic of any effective GST legislation. Although the GST legislation has made some advances on this front, much work is needed to attain this target. Many nations implementing GST have only one rate for all items. From zero to 28%, India has seven rates, and this number goes up if we also take into account compensation rates. It would be better to reduce the GST tax rates to two or three. GST data from the past five years identify less important classes from a revenue angle, which could have tax rates reduced without compromising income. The government must use this data for research objectives while protecting commercially sensitive information.

There is also the requirement to restructure the GST rate list and make it compatible with machine processing. The GST uses harmonised structure (HS) codes for classifying most items. HS codes are an accepted product classification system in more than 180 countries and those codes are stated in two, four, six or eight digits. The larger digits depict a more detailed product description.

The government, for instance, may order everyone to use the HS six-digit code. This gives an adequate product description, and a call centre could assist organisations in locating the correct code. All GST rates should confirm to HS six-digit standard description. The perfect way would be to take a standard HS six-digit table and match the GST rate against each code. Such a neat grouping will erase confusion caused by the current complicated grouping and help match invoice level particulars.

Transparency on historical concerns

Although GST law was developed on the service tax and value-added tax outlines, many historical concerns, like those about intermediaries, real estate, etc., continue to exist today. Historical concerns accompanied by precise directives to the tax authorities for the resolution of issues would offer much-required help. Considering that most of these matters date back to the earlier system, the government must consider amnesty schemes under services tax and excise to deliver an opportunity to the assessees to close on older lawsuits.

Formation of the GST Appellate Tribunal

Even after half a decade of GST execution, the GST Appellate Tribunal is yet to be established. This has resulted in multiple court cases, heavy interest costs and GST refunds being trapped. The wait for the creation of a statutory appellate tribunal discourages the dispute resolution method. The GST has resulted in a sharp rise in litigation largely because of ambiguous legal stipulations and the way in which officials have issued orders.

The postponement of the establishment of an appellate tribunal is also placing a burden on high courts. Furthermore, the pattern of the GST Appellate Tribunal, where technical members surpass judicial members, may influence the freedom of the judicial forum. The constitution of the GST Appellate Tribunal and a fast-track settlement procedure may aid both the assessees and the judicial system.

Increased investment in technology

With technology impacting all parts of business, greater investment in technology for updating the user interface and making it simpler to use, especially for small and medium enterprises, could place the GST in India on par with the rest of the world and help accomplish the bigger goal of the ease of doing business.

Raising the exemption limit

The government must set small business firms free by lifting the exemption limit. As per GST data, out of 14 million registrations, companies with less than INR15 million annual turnover account for 84%, but contribute less than 7% of the tax collected. The exemption limit must be lifted to INR15 million for goods and services. This is a monthly turnover of INR1.5 million, which at 10% of profit margin converts into just INR120,000.

Only a portion of this money will remain with the business owner after the for t payment of working capital and fixed expenses. The new limit would lessen the burden on the GST system, which will handle less than 2.3 million taxpayers compared to 14 million now. Also, the system of state registrations should be abolished. Today, if an entity does business in 10 states, it must obtain 10 GST taxpayer identification numbers and maintain a separate account for each. The GST rules set a limit on the use of available credit.

NO MUDDYING THE WATERS

In recent times, while dealing with a case of the levy of GST on ocean freight, the Supreme Court pronounced an important judgment covering the scope, authority and limitations of the GST Council. The top court said that the GST Council’s suggestions are mere recommendations, and are not binding on the central and state governments.

The Supreme Court verdict will go a long way in determining how the GST Council operates in the future. States will be encouraged by this ruling, since revenue compulsions are different for each state. The GST Council should be guided by the need for a co-ordinated GST design and for the growth of a harmonised national market for goods and services. It is unfortunate that numerous modifications have been made to the rate of tax notifications based on the council’s approvals, leaving a trail of confusion and avoidable interpretation.

The verdict has also raised a lot of questions, including:

  • Could this lead to different rates being charged by the central and state governments?
  • What impact will it have on Integrated Goods and Services Tax (IGST) rates – that is, the sum of the central and state government GST rates?
  • How will the distribution of IGST happen among the states if there are different rates? Will there be a different IGST rate for the import of goods at ports in different states?
  • What impact would it have on the GSTN framework?
  • Would the states find it worth their while to participate in the discussions of the GST Council?
  • What could be the fate of past decisions made by the GST Council?

Undoubtedly, many more questions will be raised in future. It is important not to lose sight of the fact that the design of the GST legislation is such that both the central and state governments are conjoined twins. The day the GST was introduced the fates of the central and state governments became interwoven. Any attempt to separate them could lead to disintegration of the framework that has been designed to create and encourage uniformity.

The GST Implementation Committee takes many decisions after the conclusion of GST Council meetings. Just accepting resolutions made by the committee, or any other sub-committee, without debate will become a thing of the past. In the future, it may not be easy for the GST Council to form judgments given the fact that issues such as compensation, loss of revenue on account of the pandemic, and different opinions on new levies or taxes are likely to dominate the agenda.

The Supreme Court’s pronouncement is anticipated to lead to several interpretational matters. The revenue secretary, Tarun Bajaj, has mentioned that it doesn’t change the present GST system substantially, and is just a restatement of the law as it stands. Nevertheless, many professionals say the judgment may permit the states to have amendments specific to their legislation. It will be unfortunate if the top court’s judgment is employed to needlessly muddy the waters.

It is now crucial for the states, particularly the ones not ruled by the ruling National Democratic Alliance, to work towards the development of the GST system. For its part, the central government must be more sensitive to the states’ concerns, especially with the compensation procedure on its way out and a debt mechanism to cover the revenue deficit substituting it.

GST collection in recent months shows India as a union of states, and a nation that has a lot to gain from a steady GST regime. Politics will have to take a backseat if this momentum is to be retained. It is hoped that both the central and state governments will comply with the suggestion of the Supreme Court to make sure that the enterprise of taxpayers in a number of states should not be impacted.

The government and tax authorities must vigorously work to eradicate the hurdles in the GST system, which is indispensable for the redesigning of the nation’s indirect tax system. Learning from the experiences of the past five years, the cracks between hope and progress that have emerged so far can be filled to further modernise the tax system and augment the ease of doing business. As Winston Churchill remarked: “Success is not final, failure is not fatal; It is the courage to continue that counts.”


SHIVANAND PANDIT is an independent finance and tax adviser with 25 years of experience in the fields of finance, accounting, taxation laws, wealth management, audit, corporate and banking laws. He can be reached at: panditgoa@gmail.com.