GST: An ‘Act’ Of Improvement Over Time
India’s Goods and Services Tax is now 18 months old, somewhat similar to a child who is now able to walk on its own, but still needs to be handled with care.
Looking back, GST does appear a lot different now from how it looked when it was born. It is set to change further, as it enters into the New Year 2019. What really changed in these 18 months?
Rate Structure Simplified
Before the rollout of GST, a study by the Federal Reserve in the United States predicted that an aggregate weighted GST of 16 percent could lead to a positive impact on real gross domestic product by 4.2 percent, whereas at 20 percent, it would result in a positive impact of 3.1 percent on GDP.
We started with a complex multi-rate structure, with five tax slabs: zero-rated and exempt from GST, 5 percent, 12 percent, 18 percent, and 28 percent. In addition, a compensation cess was levied on a few items, including motor vehicles, tobacco and aerated drinks. A publication of World Bank on the India Development Update mentioned that India has one of the highest peak rate of 28 percent, among the countries which have implemented GST or the VAT system.
Soon, the government realised that putting so many products under the 28 percent slab was never a good idea, and should have been restricted to select items, as recommended by the chief economic adviser’s report before GST got introduced.
In November 2017, GST rate was slashed from 28 percent to 18 percent on over 170 items in one stroke, ranging from sanitary fittings to detergents. This was followed with further pruning of the list in July 2018 and then in the most recent meeting of the GST Council on Dec. 22.
While there are still a few items like cement, auto parts, air conditioners left in this bracket, besides those contemplated initially, it’s only a question of ‘when’ and not ‘if’ that rates on these will also come down to 18 percent.
Structurally, this should also pave the way for simplification of the rate structure, possibly from five slabs to possibly three over the next couple of years.
The obvious positive effect of this simplification has been the reduction in disputes over classification, which used to be a perennial problem under the erstwhile tax regime.
Compliance Mechanism Substantially Changed, More In The Offing
We started with an ambitious and complex compliance framework, where businesses were to submit three returns every month, with GST Network offering to do the reconciliation between vendors’ invoices and purchase records, linkage of debit/credit notes with original invoices, acceptance or rejection of invoices etc.
Notably, GSTN hardly got any time to test the systems as the regulations were getting finalised till the last moment and then changed frequently.
This invited strong resistance from businesses, particularly SMEs, and threatened to become a major disruptor. The GST Council had to go back to the drawing board and a committee was formed to urgently look into measures to simplify the compliances.
After extensive brainstorming with various stakeholders, a simplified system has been worked out, a pilot of which is expected to start from April 2019.
Besides the rates, the government also learnt that significant simplicity is needed in compliance processes, and also that the focus of tax administration has to shift to larger taxpayers. One of the major moves was to offer a higher threshold of Rs 1.5 crore per annum for smaller businesses, which entailed 1 percent GST on sales without input credit entitlement and consequent paperwork.
Despite the ongoing and impending simplification, compliances under GST are likely to continue to be more elaborate and hence, taxpayers will have no choice but to learn to live with the new framework.
Critical Operational Challenges Addressed
One of the biggest operational challenges posed by GST was the requirement of paying tax under reverse charge mechanism upon purchases from unregistered suppliers. Though the GST paid was available as a credit to the buyer in most cases, even identifying such transactions on a regular basis was a compliance nightmare for many. The government finally took cognisance of the issue and the provision has been suspended, with the hope that it may not be reinstated at least in near future.
Likewise, the levy of GST on advance payments received towards goods was posing both operational and working capital challenges. This was also withdrawn in the wake of numerous industry representations.
Integrated GST on the import of goods by export oriented units and software technology parks were also exempted, and it was indicated that the government may come up with an e-wallet scheme to address the concerns of working capital blockage of exporters. As of now, the exemption has been extended till March 2019.
Important Legislative Changes Proposed
The GST Council constituted a Law Review Committee, which recommended many changes to the laws. While all the recommendations were not accepted, a few important changes were carried out. One controversial change was the retrospective amendment denying the transitional credit of cesses paid under earlier laws.
There were a few welcome changes as well, which included doing away with the requirement of input credit reversal in case of high seas and in-bond sales, allowing a single credit/debit notes for multiple invoices issued in a financial year, and removing the ambiguity on taxation with respect to billing from an Indian office to overseas office of a same entity.
The ambit of input tax credit provisions was also widened a bit.
Benefits Of Centralised Approach Recognised
While there is a common GST law across all states, the federal structure does warrant independence of state legislatures and administration. State-level advance ruling authorities, for issuance and adjudication of appeals, began to create chaos and uncertainty, as different states started to take divergent views on same issue. In the recent GST Council meeting, a decision was taken to create a centralised body to address a situation where different states take contrary views on same issue.
Instances of state specific variations keep cropping up, mostly on procedural aspects, which is an irritant for businesses and needs to be looked into. One glaring example was a recent circular issued by Haryana asking the authorities to block the input credit of businesses in various situations, despite there being no enabling provisions for such an action in GST laws. This is one area, where GST Council perhaps needs to work a bit more.
In summary, GST does look different and the changes have definitely helped it making better. While many changes have had their expected impact on the stability of the regime, there are reasons to believe that in the next 18 months, it will even look better. After all, at three, the baby is expected to start running.
Pratik Jain is Partner and India Indirect Tax Leader at PricewaterhouseCoopers.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.