Vedant Madan and Deepak Joshi
Indian Good and Service Tax Regime implemented on 1st of July, 2017 have brought a dynamic shift in India’s economic and political landscape. From formalizing and modernizing the informal economy, to leveling the market, undoubtedly, GST’s benefits outweigh its costs, but for it to become instrumental in pushing India through the 21st century, we have to fix the ‘GST Glitch’ which could happen only if the Government leverages the strengths of GST against its weaknesses.
In this Article, we have attempted to perform a SWOT study on GST and study glitches in the GST which according to us, the Government should fix if GST is to be taught as a success in future economics books.
• One Nation One Tax & One market
• Efficient Tax Compliance
• Reduce Cascading affect
• Simplified Law
• State and central Govt at common platform
• IT driven compliances for unaware public
• Heavy Expense on GST by Govt
• Multiple Tax Rates
• Many State Taxes still not subsumed in GST
• Complicated Compliance Procedures
• Frequent Changes in law bring confusion
• GST Portal not working properly
• Transparency in Govt Procedures
• Ease of doing business
• Reduces the tax Cost
• Attraction for foreign Investment
• Reduce fight between state and center
• Improve the rate of tax compliances
• Dual control of state and central government may cause conflict of interest
• Some provision are so hard that they may increase corruption
• Some provision disallow the credit which ultimately increases the cost
• Multiple compliances may discourage the assesse to do compliances
- One Nation, One Tax, and One Market: The GST is applicable on all goods and services except some exemptions provided in the GST will help India to become one market, under one tax.
- Federalism: GST has brought together the Union and State Governments through the institution of the GST Council, which has provided the States with a seat on the table. This is beneficial as it brings together different political spectrums, different ideas and views, which help to improve the GST through deliberations and discussions: a textbook example of a democracy and a republic.
- Compliance: As tax compliance becomes digital and involves less papers and bureaucratic interference, compliance will increase leading to increased revenues for the Government thus leading to fiscal performance.
- Subsuming multiple Union and State Taxes into a single Tax (GST): This will decrease the effects of excessive and redundant’ taxation on production, distribution and consumption.
- GST will drop out the cascading effects of tax on production and distribution of goods and services which eventually reduce the cost of goods for end consumer. E.g. the taxes paid on inter-sate transactions were accounted in cost of goods as no ITC was available in earlier regime but in GST tax paid on interstate transactions are eligible as ITC by way of IGST which will reduce the cost of goods.
- Because of the complication of the regime, producers and traders are confused leading to chaos in the market which has hit the GDP growth.
- GST Regime is digital and India as a developing country doesn’t have the required digital education and footing to facilitate the regime especially in rural regions and with uneducated producers and traders.
- Specific commodities namely electricity, alcohol and petroleum, natural gas have been left out of the regime thus missing out a window to bring GST’s benefits in these sectors to the consumers.
- The expenditure of Government revenue on the implementation of GST has been mammoth. Maintenance of GST Network this will require continuous and increased expenditure by the Government.
- Multiple Slabs: There are five Tax Slabs: 0%,5%,12%,18% and 28%. This is contrary to the principle of GST that promises One Tax. The government’s excuses itself by saying: we cannot tax a hawaichappal and BMW’ under a single tax rate. This is a great excuse Mr.Finance Minister, but other countries have also adopted GST but with either one or two tax slabs but no country has five, then why India? Also, the Government has levied a separate tax ( compensation cess) on tobacco, drinks, cars and other luxury commodities above the 28% tax slab.
- GST subsumes many state and center level taxes but there are still many taxes left for which state has power to levy tax which will deceives the purpose of GST i.e. one nation one tax
- Confusion regarding the taxation of various goods and services. (Example, crypto currency)
- Frequently changes in Law and compliance under law create a situation of dilemma in trade that whether they are undertaking compliances correctly.
- The portal of GST and newly introduced E-way bill are not performing at it desired potential which is creating a situation of harassment in trader
- Integration of domestic and international markets as GST has brought standardization and accountability, transparency to the market, bringing them to the level of international markets.
- Anti-Corruption Crusade: GST if implemented properly can be the nail in coffin to corruption. Increased compliance and checks by the enforcement agencies has helped to throw light on the trail of black money. Demonetization in this regards has been successful, what I call, A Flush for the Indian Economy’. Money laundering can now be caught and prevented by the agencies with minimum efforts. Also bureaucratic interference has decreased, decreasing red tape and in turn, corruption.
- Trade: India recently jumped 30 positions on World Bank’s ‘Ease of Doing Business Report and Ranking’. If India continues on this trajectory, it has the potential to facilitate doing business in the country unlike any other country. Let’s study these components: Paying Taxes and Trade. India’s scored an improvement of 18 Points in the former and only 0.9 in the latter. This is suggestive that it has become easier for businesses to comply and pay taxes as paper becomes less and more In trade, the country does the worst in South Asia and OECD. The Government has to leverage this into an opportunity by cutting down border and documentation compliance hours, providing seamless trade across state and national borders.
- Growth and Development: GST is India’s magic wand to promote economic growth and development. As foreign and domestic investments increase, market is formalized, production increases due to decreased taxes, the GDP will increase. Formalization will help in economic development of the country. As GST is a destination tax, both the producing and the consuming states, cities, towns, villages will benefit, promoting regional development.
- Fostering Entrepreneurship: GST will help to foster entrepreneurship and help turn India into an entrepreneurship hub, as Government’s Start Up India and Stand Up India combined with GST will provide a sustainable environment for entrepreneurs helping them in starting businesses.
- GST will reduce the cascading effect of taxes which will reduce the cost of goods by this the goods can be sold at competitive prices by the exporter which will eventually increase the exports of goods/ services and improve the foreign reserves and balance of payments of India.
- Further India is seeking foreign investment from many countries. By the implementation of GST with automated system of reduced and standardized compliance and efficient taxation system, India could succeed in attracting the foreign investor to invest in Indian market.
- GST may provide an opportunity for India to become a tax compliant nation from non-tax compliant nation.
- GST bring the States and Center at a common platform which reduces the disputes between them and encourage the development of India as whole
- Wrong Use by States:The GST Acts provides for compensation to States by the Union for 5 years, if they incur revenue losses due to GST. States may thus deliberately rig the State GST regime to pocket compensation, a problem that has been the bone of contention between the Union and the States since 1947.
- Anti-Profiteering Provision:
- Provides for producers to pass the benefits of GST (i.e. Rate reduction or increase in Input tax credit )to the consumers to decrease inflation in the country. (Example, in Malaysia this provision was adopted but has since been diluted and applicable to specific goods and services only as the country realised the drawbacks of the provision)
- We present an argument against this provision: there are costs in the production and trading of goods and services
which are invisible. Also, the product’s costs could have decreased, but the component costs could have increased.
- For determination of profiteering, the whole producer to consumer chain would have to be studied and investigated. India doesn’t have a defined mechanism to determine GST benefits to be passed on to the consumer. The Committee set up in this regard can’t provide 100% efficiency and effectiveness in determining the compliance and penalty. Let’s take an example, the National Restaurant Association has claimed that although the Government has reduced the GST for restaurants, it also has withdrawn their Input Tax Credit. Withdrawal of ITC and reducing of GST is negating their businesses although they have only profited 1%, and thus they have to increase their primary costs. Now, they would have to comply with this provision.
- Thus, this provision is a threat to businesses, potentially hurting production over a period of time and should be amended or withdrawn. The excuse that it will check the inflation caused by the regime change is pointless as the country will normalize over a period of time and inflation will be in check by itself.
- Section 129 The GST law provides the right and duty to Tax Officials to seize goods and service and penalize producers, traders or transporters if they are in contravention with any provision of the GST. This is an ambiguous provision as it doesn’t define any specific provision under which the Goods and Services are to be seized and penalized. It is contrary to the aim of achieving of Ease of Doing Business with India ranking 146th in the World in Trading Across Borders.
- Therefore, GST Council should amend GST Acts and/or provide provisions under which the seizure and penalizing is to take place. Ambiguity will lead to corruption, red tape and unscheduled powers and responsibilities contrary to the aims of GST.
- Input Tax Credit:
- Various sectors in which producers and traders can take their due ITC are hurt due to Government’s delay in providing it and the associated bureaucratic problems.
- Small and Medium Exporters have to pay either IGST or provide a bond for getting export invoice, although they can later get back tax credit, as exports are zero rated supply. However, exporters have not received their due Input Tax Credit which is having a negative effect on them due to absence of incentives and lack of money, and bureaucratic red This negates an opportunity for Indian exports to become internationally competitive, potentially improving our Balance of Payments, Foreign Exchange Reserves and Exchange Rates.
- The compliances under GST are very stringent and difficult. This may cause that the trader to avoid the compliances and indulge themselves in unlawful practices
- There is dual control of the transaction in GST which may create disputes in Center and State Govt. which in result disturb the trade.
The GST is a new law for India and every new law has its own strength and weakness. To make GST a good tax reform the Government India has to work on the strength and weakness of GST to cash the opportunities and to dilutes the threats. French Economist Guy Sorman said, ”India is on the cusp of revolution with GST Regime.” GST is the India’s train to ‘New India’. Let’s not miss this train, and come together with the Government and the Market, to make GST a success.
(The author can be reached at email@example.com)