Initial technical challenges over operating the GST portal have been ironed out over a period of time.
New Delhi: The Goods and Services Tax Act, 2017 (GST) was launched with great fanfare on 1 July 2017 by the Government of India and was claimed to be the biggest reform in indirect taxes in the country since Independence. The GST regime sought to tax both goods and services under a common legislation while subsuming all other indirect tax laws.India is the only country in the world which has a dual GST i.e. Central GST(CGST) and State GST (SGST) and it has shown to the world that such a structure can not only exist, but function very well. As the nation celebrates the fourth anniversary of GST, let us reflect on the journey so far in terms of the hits and misses of this levy.
Multiplicity of Taxes and Cascading effect
Before introduction of GST, there were multiple taxes i.e Excise Duty, VAT, Entry tax, Entertainment tax, Service tax , Octroi etc.These taxes were in addition to various cesses imposed by State and Central Government like Krishi Kalyan Cess, Clean energy cess etc. All this made the tax structure very cumbersome.In many cases there was imposition of tax on tax which lead to a cascading effect and affected the final price. For example, sales tax was charged even on the amount of excise duty that was levied on manufacture. To that extent the purpose of introduction of GST has been met as GST has subsumed all the other indirect taxes and consolidated them in one levy. This has also resulted in lowering of the indirect tax burden on an overall basis which has been beneficial for the end consumer. In the initial few months, there were technology challenges with regard to operating the GST portal which have been ironed out over a period of time.
Revenue Collection
In the pre-GST era, the aggregate indirect tax collections were Rs. 7.09 lakh crore for the FY 2015-16. The Indirect Tax collection during FY 2016-17 which includes Customs duty, Excise Duty and Service Tax was Rs 8.62 lakh crore. The total indirect tax collection (GST & Non-GST) for the FY 2017-18 jumped to Rs 9.11 lakh crore registering a growth of 5.68%. This included Non- GST collections of Rs 4.69 lakh crore and GST collections for the nine month period of Rs 4.42 lakh crore. The indirect tax collection for the FY 2018-19 were Rs 9.37 lakh crore, including GST collection of Rs 5.82 lakh crore. For the FY 2019-20 gross indirect tax revenues collection was Rs 9.54 lakh crore which included GST Collection of Rs 5.99 lakh crore. The Provisional Net Indirect Tax collections (GST & Non-GST) for the Financial Year 2020-21 are at Rs 10.71 lakh crore. These numbers would indicate that moving to the GST regime has augured well for the Government as there has been a steady increase in the tax collected on account of GST. Covid-19, though has been a dampener in terms of collections; however, in the second half of FY 2020-21, the GST collections registered a good growth and collections exceeded Rs 1 lakh crore in each of the last six months of the said financial year.
Federal Structure
The rollout of GST has also brought in federalism in a true spirit as the Central Government and the state governments are taking decisions collectively through a constitutionally constituted GST Council. To date, the GST Council has met 43 times during the past four years and has taken important decisions to administer the law. In the last few months the meetings of the Council have not been held regularly which concern has been expressed by some state finance ministers. Timely meetings of the Council are very important to take stock of the situation and come up with corrective action.
Digitization and Use of Technology
GST must be credited in ushering almost a completely automated system of administering the law. Implementation of E-way bills, E-invoicing and other steps taken by the authorities have further helped in checking the errant taxpayers, Barring initial hiccups use of technology has been successful in GST.
One nation one tax
A lot of hype was created on this aspect that GST is “One Nation One Tax”. If one were to read this literally, then yes across the length and breadth of the country there is one tax which is applicable i.e. GST; however, in reality, it is “One Nation and as many taxes as are number of states and UTs in the country”. This is because each state has a separate SGST law and depending upon the nature of transaction the levy could be subject to an Integrated GST (IGST) or an aggregate of CGST and SGST. It is important to note that tax paid under CGST cannot be set off against SGST. Even if one were to digest the fact that because of the federal structure a two tier levy was required but even then why should there be a restriction on set off of the SGST tax with the CGST tax. These artificial restrictions in the law does not make GST as One Nation One Tax.
Due to the dual structure of GST, businesses are forced to set up offices in other states to claim credit of the input tax paid. This is then re-invoiced basis the cross-charge mechanism. There is ongoing litigation just to decide whether the entity has to pay IGST or CGST & SGST. The moot question here is that why should business not be allowed to freely carry on the activities without grappling with these location issues? If a company has to litigate to know which tax it has to pay i.e. whether IGST or CGST & SGST then it is a failure of the law.
Compliance burden
One of the objectives of GST was to reduce the compliance burden on the taxpayer. However, that has not happened. In fact, the compliance burden has increased over a period of time under the law. This coupled with the number of notifications that are issued has only accentuated the problem.In a span of 4 years around 75 amendments have been made to the law and 126 notifications for changes in tax rates have been issued. In addition to this the key challenges being faced today are:
>> Complexities on reconciliation of Input Tax Credit i.e. GSTR-2A & GSTR-2B with GSTR-3B.
>>Non-backing of statutory provision in the CGST Act, 2017 for restriction on input tax credit provided in Rules 36(4), blockage of E-Credit Ledger under Rule 86A and 1% payment of output tax liability in cash under Rule 86B of the CGST Rules, 2017.
>> Section 16(2)(c) which provides for denial of input tax credit to buyer on account of default in payment of tax to the government by supplier.
Introduction of new provisions such as provisional attachment, blocking of electronic credit ledger, denial of access to e-filing portal, and uncurbed powers with the authorities requires a serious review. In the desire to strengthen the law to deal with the menace of fake invoices the frequent changes has made the law complicated.
Multiplicity of Rates
One of the drawbacks of the GST law is the multiple rate system. This not only makes the law cumbersome but prone to litigation. Selling a product in loose quantity vis-a-vis in a packed condition or as part of a goodie bag attracts different rates of tax. This distinction should stop. Latest litigation that has come to light is whether hand sanitisers are medicaments and subject to GST @ 12% or they are disinfectants subject to GST of 18%. The Government should seriously think about this aspect as multiplicity of rates will only add to further litigation.
Deeming fiction
Under the law there is a concept of place of supply which in-turn determines the tax that is supposed to be charged i.e. IGST or CGST/SGST. For various types of situation, the law deems a ‘particular place’ to be the ‘place of supply’ for levying tax. As a result of which tax is sought to be levied when in effect no tax ought to be paid. The case in point here is “intermediary services”. The intermediary renders services to a foreign principal and earns money in convertible foreign exchange is liable to pay tax. This is against the general rule wherein place of supply is deemed to be the place of the recipient. Such instances are forcing businesses to relocate abroad to remain cost-effective.
Seamless Credit
One of the features of the GST law is the flow of seamless credit across the value-chain. However, there are multiple situations artificially created in the law which deny the credit to the recipient of the goods/service even though the goods/services are utilized for the furtherance of business. One example which comes to mind is of the input credit of hotel accommodation expenses in a state where the taxpayer is not registered, though has business activity. Therefore, this restriction should be removed, and free flow of credit should be allowed. Input tax credit reversal on expired goods, unpaid creditors, sale of fixed assets, construction expenses, employee welfare expenses, canteen expenses, employee cab expenses, hotel expenses are other irritants which need to be fixed.
Other challenges
Other challenges which the government needs to focus and provide a solution in the near future are:
>> There are still certain supplies like petroleum crude, High Speed Diesel, Petrol etc. that are not in the ambit of GST, so a roadmap should be laid out to include those items under GST purview.
>> Frequent Changes of Law, Notifications creates more inconsistency and complicates the law.
>> Absence of Monetization of input tax credit accumulated in Electronic Credit ledger causes liquidity problems for the taxpayers.
>> At present refund in case of Inverted Duty Structure is applicable for inputs only. The need of the hour is to amend the law to extend refund of input tax credit of input services along with inputs and refund of input tax credit on capital goods in case of zero rated supplies without payment of taxes.
>> A National Appellate Authority /GST Tribunal should be introduced to bring consistency among the divergent rulings given by the various AAR’s.
Conclusion
During the last four years, there have a slew of notifications/circulars/orders that have been issued. While this does complicate the law, but it also shows that the government is listening to the issues raised by the stakeholders. There is, however, a general consensus among businesses that there is a need for further simplification, rationalization and smoothening of inherent structural defects to make GST simpler to comply and administer. We hope that the government does take stock of all the issues which are proving to be a roadblock in the success of GST.
(Sachin Vasudeva is Senior Partner, SCV & Co. LLP, Chartered Accountants)