Time Ripe For GST 2.0; Government Needs To Move On Pending Reforms, Rate Rationalisation

At its 52nd meeting on October 7, the GST Council decided to make a few more changes to GST on a range of goods and services, improve the appeal redressal system and, most importantly, agreed to look at the issue of compensation cess for states. Finance Minister Nirmala Sitharaman said the council will take up the matter in its next meeting.

While such incremental measures have been, and will continue to be, part and parcel of the GST Council agenda, it is time the government took a more comprehensive approach to address several pending issues that could go a long way in making the GST regime robust and growth-augmenting.

Moving ahead

There is a further need to rationalise classification. Initially, it had a 4-tier rate structure, and many items were put in the highest 28 per cent slab. In the Indian context, it’s not advisable to have a single GST rate, but four slabs were simply too many. Most of the disputes arose in the classification under the middle slabs (18 and 12 per cent). Going forward, these two slabs should be merged, possibly at 15 per cent.

The next issue pending before the policymakers is to bring petroleum and alcohol within the ambit of GST. There is no valid reason for not doing so. Because these items are outside GST, the input credit chain is broken, and credit is denied and, thus, gets added to the cost of the finished product.

A seamless flow of input tax credit (ITC) has been one of the fundamentals of GST as it does away with the cascading impact of input taxes. Certain restrictions on the availability and utilisation of ITC have made a dent and it would need an immediate relook.

Since the concept of GST is based on the primary belief that taxpayers are tax compliant too, one sees the need for a liberal approach in administering GST. But the policymakers are also aware that a small percentage of taxpayers are tax evaders and fraudsters too. Hence, there is a need for a strong audit and anti-evasion authority. There is already a well-set Directorate of GST Intelligence (DGGI). But the Audit Directorates and the Divisional or Commissionerate Audit Cells will have to be more active. In fact, both these directorates have to be strengthened.

Further, Reverse Charges may be allowed to be paid through accumulated GST credits and GST credits may be allowed to be utilised for tax payments pursuant to an audit, in cases where there is no fraudulent intent.

Looking back

When GST was implemented in July 2017, expectations were high. These include a process that would be easy to understand and comply with, prevalence of the spirit of cooperative federalism between Centre and states and expecting that revenue would reach the target and even cross it from the second year. The reality was very different.

On the first day of GST implementation, technology failed the taxpayers and the taxmen because the new regime was introduced without making GSTNet fully operational. Consequently, there was a switch-over to manual mode for certain business processes and some fraudsters took advantage of it. It was only from the second year that robust enforcement led to detection of massive tax evasions.

By the beginning of 2018, when the country’s economy was performing well and technology and some policy glitches were corrected, the GST revenue improved and one expected a tax buoyancy. But the encouraging environment was short-lived. By the end of 2018, the GDP started going south and so did the GST collections.

When the economy does not grow, it hurts employment and leads to less purchasing power and a lack in demand and supply. With less supply, GST revenues too come down.

With time, some bright sparks in GST revenue collection were seen, mainly due to the efforts of the Directorate General of GST Intelligence and the enforcement wings of the GST Commissionerates in detecting frauds and evasion, and taking punitive measures against tax evaders. These measures had a salutary effect on the delinquents among the trade. This is one important reason for the increase in the number of taxpayers and GST revenue. Covid-19, which raged for almost three years, also left its imprint on the economy and GST revenue collection.

Thus, except for recovery of the GST evaded in the past, through enforcement measures and through strict auditing, one could not have expected any tax buoyancy until the economy bounced back. This is exactly what happened when the GST collections started growing above the target from the latter part of 2022.

Further, at the time of GST introduction, the tax was neither easy to understand nor easy to comply with, particularly for small and medium businesses. For example, the threshold for coming under the ambit of GST was too low, at an annual turnover of merely Rs 20 lakh. Besides, for inter-state supply, this exemption was not available.

Thus, for a supply of goods and services worth Rs 50,000 from Delhi to Faridabad in Haryana, the supplier will lose the benefit of the threshold. This hit small businesses badly. Later, this condition was waived only for the service providers. Thereafter, the threshold was increased to Rs 40 lakh only for suppliers of goods. So the supply of services continued to have a threshold of Rs 20 lakh.

Internationally, no difference is made between goods and services, and the threshold is kept in the range of Rs 80 lakh to Rs 1 crore.

Another example was collection of GST on Reverse Charge Mechanism from the recipient of goods and services and not the supplier. This policy made the recipients not buy from small businesses who were outside GST. This again hurt the small businesses badly.

Summing Up

Today, six years after GST introduction, it has been proved that the various complexities of taxation can be largely resolved by technology-led digitalisation. But one thing is now clear: GST has come to stay and its future is bright, provided the deficiencies are corrected. The motto should be, ‘facilitate the honest taxpayers more and increase the anti-evasion surveys and action against tax-evaders.’

(Sumit Dutt Majumdar is former Chairman, Central Board of Excise and Customs, and author of four books on GST. Views expressed are personal)