From baby steps to giant strides, GST gains momentum
The historical tax reform, which marks its second year today, has offered stakeholders a mixed bag thus far
The historical goods and services tax (GST) which was implemented across the country from July 1, 2017 is now two years old. India was not new to indirect tax levies, but consolidating Central and State levies and achieving uniformity was no joke. Credit is due to the Central Government as well as each and every State Government and officials who participated in this exercise.
The industry loves GST for harmonising taxes, elimination of cascading effect of tax, widening the scope of input tax credit and for achieving a uniform tax rate for a product or service across the country. Tangible benefits include faster refunds, less interaction with tax authorities, abolition of checkposts, etc. There are other intangible benefits on account of GST. In the past, a manufacturer in State A would lose a customer in State B if he made a CST supply.
To prevent the loss, the manufacturer would open a depot in order to effect a local supply in State B. The depot was not a business requirement, but one of tax.Under GST, a supplier can supply goods from any part of India and tax or input tax credit is no longer an arbitrage in competition.
The customer is now in a position to source from any supplier and the latter is in a position to access markets across India.
Industry gains include elimination or dismantling of structures created under the pre-GST era for tax purposes, supply-chain efficiencies, direct customer access, and a robust transparent trail for the movement of goods. On the flip side, the industry is extremely unhappy with the massive increase in compliance requirements, frequent battles with the GST portal, wastage of manhours in dealing with technical glitches, and facing potential loss of ITC on account of supplier facing similar problems.
The industry is also not happy with frequent changes in law, including scenarios where the portal does not permit what the law permits.
Monthly revenue from GST has crossed ₹1,00,000 crore, even though the GDP growth is low and the economy is witnessing a slump. GST has resulted in the widening of the tax base. Excellent data mining has resulted in identification of tax evasion at an early stage. E-way bill system has brought in an effective, transparent movement trail.
Higher tax collections even without intervention indicates compliance. As more and more vendors and service providers walk into GST, the formalisation of economy takes place.The walk-in is voluntary and sometimes compelled by the bigger player, who prefers only registered compliant suppliers since ITC is linked with vendor compliance.
The natural corollary would be the increase in direct tax collections from these new assessees. Many manufacturing states had anticipated huge losses on account of GST compared to their pre-GST collections.This has not happened probably due to significant consumption of services in such manufacturing States.
The government, however, is extremely unhappy with the fake invoice racket and rightly so. These players provide a disservice to the economy and also to honest tax payers. While action is welcome, the government should pursue the route of adjudication, prosecution and early conviction instead of the threat of non-bailable arrest provisions which have a potential for misuse.
Unlike many other countries which faced massive inflation on account of introduction of GST, India did not face any inflation. This was probably due to an effective rate of tax policy, as well as timely course correction.
The National Anti-Profiteering Authority had also played a role, but has outlived its objective. There was no necessity for a two-year extension. The consumer has gained the most in GST. From an era of cascading taxes, which had nearly 30% of taxes on goods; dual and multiple levies on services, the consumer is now seeing massive reduction in the rate of tax for goods and services.
In a typical restaurant, where there used to be VAT of 2% or 12.5% and a service tax of 6%, the customer is enjoying a flat 5% which is lower than the VAT rates applicable in many countries in the European Union. Awareness of GST among consumers is at an all-time high, thanks to social media.
However, the downside to this is tax evasion, which is now driven by consumers. In the past, when a customer procured goods or services, he was least bothered about the tax rate since excise duty was invisible. The VAT rate was low and was not a significant deterrent. When the overall indirect tax levy was 30%, it was not reflected in the invoice, but when the rate has declined to 12% and 18%, awareness about GST makes the customer assume it is a new levy which affects his pocket, and the consumer opens the cash channel.
The law
GST law has turned out to be the most complex one on account of design faults and frequent tinkering. The distinction between goods and services manifests itself in GST in multiple segments.
The Advance Ruling mechanism has failed since most rulings are in favour of the revenue and in some cases, against the provisions of the statute. The constitution of the AAR is the issue, since it is not presided by a judicial member and comprises sitting officers of the tax department. The GST Council has played a stellar role in cooperative federalism since 35 meetings have taken place, where resolutions have been passed unanimously despite political differences.
This kind of unanimity is unseen even in flat association meetings. In only two years of existence, 32 amendments to the CGST Act; 31 amendments to the CGST Rules; 87 CGST rate Notifications; 179 CGST non-rate Notifications; 90 IGST rate Notifications; 19 IGST non-rate Notifications; 101 Board Circulars; 10 Removal of Difficulty Orders; matching Notifications from 29 States, do not indicate a simple law.
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