Introduction of the Goods and Services Tax is a significant step in indirect tax reforms in India by amalgamating many centrals and State taxes into a single tax; GST is an attempt to mitigate the ill effects that accompany cascading and/or double taxation in a major way. Such a path leads to a common national market. The new system also seeks to improve tax compliance by applying strong data reporting requirements electronically and cross-matching of the reported data.
As we are entering into 4th year of implementation (GST-4.0), GST faces its toughest test. It has been a roller-coaster ride for the government, industries and consumers due to the changes and reforms introduced in the past three years. The upcoming challenge to GST, however, does not only stem from its design or structure flaws or the way it has been managed, which made effective implementation near impossible. Besides, it is up against a pandemic that has wreaked havoc on the global economy and India is no exception.
As we head into 2020-21, the toughest challenge for the GST Council would be, to devise ways to compensate the huge deficit to the states. The usual compensation cycle got delayed and the situation is not likely to improve anytime soon with the collection for the first four months of current financial year (April-July) declined by 34.48 per cent to Rs. 2,72,662 crore compared to the year-ago period.
Recent statements from the AG viz., “the Centre has no statutory obligation to make up from its coffers any shortfall in GST revenues of states, which may now have to look at market borrowings against future revenue mop-up” – may seem to suggest the decision by the Center to renege on unequivocal promises made when GST was introduced, which also led to a major pushback from the states. It is time to take measures for compensating states and to prevent the them from slipping into a serious financial crisis. These measures will not only define the future of GST but also the course of the unique cooperative federalism that it has ushered in the country.
Cluttered rate structure:
The criticism is that GST is essentially a flat tax (single rate) and not having designed it as a flat tax has been a big mistake. Multiple tax slabs and frequent rate changes only increased complexity in terms of classifying a product for tax purposes are often perceived as reasons for poor collections. A change in the nature of a product can be exacerbated by changing of the classification of goods affecting both declarations and ultimately the tax payable. Also, Classification can be a time-intensive and complex exercise that makes space for discretion on the part of tax inspectors, interpretation disputes and litigation. The way forward would be a single GST rate which is easy to administer and will result in far larger compliance.
Any move like raising GST rates to fill the revenue gap could be politically sensitive, likely lead to public outrage and adversely change in taxpayer’s compliance behaviour. The foremost need for the trade and industry is ‘liquidity’. Rate cuts will go a long way in reducing prices thus boosting demands of consumers in an economy which is already in midst of a crisis.
Enormous challenges of compliance:
The GST framework through onerous reporting requirements for businesses, places a huge compliance burden especially SMEs. There is no denying that GST Act is still evolving with a myriad statutorily prescribed notifications and the related procedural formalities are proving to be a ‘bane’ for the smooth implementation of GST regime. Multiple and complicated returns, cumbersome return – filing process, ill-conceived statutory requirements reflecting revenue-oriented, rigid attitude coupled with ill-prepared GSTN Portal have ensured that the GST implementation and the compliances by ‘more-than-willing’ taxpayers is anything but smooth! The situation has reached such amass that the whole system appears to be running on extensions, promises and assurances. The way forward is to make return filing process easier as well as allowing seamless input tax credit. E-Invoicing, if well executed, reduces the compliance requirements to a great extent for it propels pre-populating of various returns and E-way Bills system simultaneously. In addition, it standardizes the invoice format ensuring inter-operability of the data, eliminates fake invoices, provides complete trail of B2B transactions and enables system level matching of ITC and output tax. As the system evolves, in due course inter-communication of the transactions between the buyers’ and sellers’ software, E-way Bill system and the banking systems is also likely to be mooted. This captures the complete transaction trail and is believed that it can arrest tax evasion to a larger extent.
Restrictions have been imposed on availment of Input Tax Credit to the extent of 10% of the total eligible credit will have a huge impact on the trade, since the seamless ITC is the backbone of the GST framework and any such irrational and impractical restriction may turn out to be a counter-productive for the industry as well as for the revenue. it is hoped that GST Council should take note of such regressive provision of restriction on ITC and revisit the same towards making GST a really good and simple tax.
Blocked input credits under Section 17(5) places many hurdles in the way of taxpayer, and excludes many classes of goods and services even though they undoubtedly are used in the course of in furtherance of the assessee’s business. Thus, some of the incidence of input tax borne by the registered person becomes his cost. To that extent, cascading effect of tax on tax will subsist. All credits ought to be available as ITC, as long as they have nexus with the business of the assessee.
As per the time of supply provisions in GST, where goods are supplied to the customer and invoice is raised the liability to pay GST arises for the supplier irrespective of whether the payment for such supply is received at all or not. But where a recipient of a fails to pay to the supplier the amount towards the value of supply along with the tax payable thereon within 180 days from the issue of invoice then the recipient has to reverse the input tax credit along with interest. Thus it can be seen that on one hand where the Government has received its share of the taxes for the supply made, subsequently there is disallowance of credit and penal interest for the non-payment of consideration by the recipient to the supplier which in no way concerns the Government as it is a pure business outcome.
Simplification of refund procedures, long delays in not setting up of GST Tribunal, failure to prescribe an anti-profiteering methodology based on which one could determine whether or not there has been profiteering by an enterprise and a failure to provide a statutory appellate mechanism to deal with challenges to orders of the NAA leading to un-due burden on High Courts are some of the other key challenges.
Challenges of technology:
The Government began the journey of GST administrative system on the premise of ‘one hundred per cent invoice-matching and availment of input tax credit that would remove taxpayer – tax officer interface. The sole intention of this is that once implemented, it can help arrest tax evasion which has become an uncontrollable menace, exploiting the Government’s benevolence, as it enables pre-populating of GST returns with the supply details. Return filing also will become simpler with reconciliation becoming easier and will encourage better tax compliance. It will also ensure self-policing by capturing the trail of transaction from both the ends.
The design of a tax system must recognise that the administrative needs of an efficient tax officer converges with the interest of an honest taxpayer and the system must provide officers with the software tools to identify and quickly stop errant behaviour. GSTN is responsible to monitor and shall ensure the redressal of all grievances relating to the GSTN, including IT-related grievances in the working of the network and to comply with the orders as well as the aspects on which agreements have been reached and assurances have been given. GSTN has let down the Government due to failure in effectively carrying out its assigned tasks. It is very much required to put in an effective system of control like E-invoicing to plug in the menace of fake invoices which has reached an epidemic proportion.
To conclude – slow growth of GST collections, failure to reach consensus on rationalisation of rates, plethora of compliances and the inclusion of items such as petroleum products, electricity & alcohol in the GST ambit are some the key issues to be addressed. The need of the hour is to apply caution and to not look for ‘potential tax evader’ in every ‘taxpayer”. Lending a helping hand is emphatically required if the Trade and Industry have to survive the new norm of business. GST has a significant ground to cover, to live upto its promise and potential.
(This article is compiled and edited from articles published in various internet forums)