GST at Three: Hits, Misses, Reform

Today marks three years since the Goods and Services Tax was implemented in India. Sumit Dutt Majumder, former chairman, CBEC (Central Board of Excise and Customs, now Central Board of Indirect Taxes and Customs) and author of three books on GST tracks the journey of this tax so far, and lists suggestions for the road ahead. 

Since its implementation on July 1, 2017, the Goods and Services Tax has travelled a rocky road. Sumit Dutt Majumder, former chairman, CBEC and author of 3 books on GST takes us through its hits and misses over these years and gives us his list of proposals for much-needed, urgent reform.  Let’s start with the hits first. What have been the positives since the implementation of GST on July 1, 2017? In discussing the glitches and issues that have come up in connection with GST so far, it’s easy to forget why GST was and is necessary in the first place. 

- The GST has led to a reduction in the cascading of taxes (taxing the tax, eg. before GST, the states would tax the sale of goods and services the centre had already taxed, not offering credit for the taxes already paid) which was adding to the cost of the goods. This reduction in the cascading of taxes contributed to a seamless flow of credit (tax credits). 

- There has also naturally been a cutting down of compliance costs because, well, 17 taxes of the centre and the states have been combined into one. 

- It has also done away with the entry taxes and the need for checkposts between states for taxation purposes (these may still exist, but they do so primarily for security purposes). This has facilitated the transportation and logistics sector, also, in turn, contributing to reducing the cost of goods and services. 

- This point, coupled with the fact that the centre and the states are charging the same rate of GST now, means that India has, in practice, moved much closer to its ideal of a common economic market.

- Also, this being a destination based tax, the states’ share of GST (the SGST) goes to the destination or consumption states. Do keep in mind that these states are more often than not the more populated states which do not have industry as compared to the five or six Indian states that industry is concentrated in. Hopefully, in the long run, this will mean that these destination states will invest money into infrastructure and industry, thus boosting the ‘Make in India’ process in an equitable manner. 

- Finally, the GST Council and its processes provide a model for cooperative federalism that can inform decision making in other areas where both the centre and the states must have a say.  Now, let's come to the mistakes. What hasn't worked since the implementation began? What could have been done better? There were many issues with implementation, some of which remain.  

- While planning GST, it became evident that we would need a robust Information Technology (IT) infrastructure. That’s how the GST Net, or GSTN, came to be. This takes care of the primary business processes: registration, self-assessment and payment and the filing of return. There is also a refund module. On the government side, action is meant to begin after the returns are filed. You see, there is supposed to be an inbuilt mechanism for the matching of e-invoices of separate parties to transactions (the sellers and buyers), to ensure there is no incorrect availment of credit. 

However, while the date for implementation of GST was fixed for the 1st of July, the GSTN wasn’t fully operational. Test runs hadn’t been done, even in the month of June. The government should have postponed it, but they went ahead. Many things didn’t work. The small enterprises sector - accounting for over 90% of entrepreneurs and establishments in manufacturing and over 80% of employment in the unorganised sector - were badly hurt. Because small enterprises weren’t proficient in IT, GSPs (GST Suvidha Providers) had been authorized by the government to help them. But in the circumstances this didn’t help either. There was chaos.

- Now the consequence of all this - put simply - was a knee-jerk reaction in which the government went on to make a drastic cut in processes (manual processing in some areas, simplified documentation formats, the postponement of e-invoices and invoice matching) and offer up a far more simplistic system instead. Taking advantage of the loopholes in such a system, delinquents and fraudsters went on to commit massive evasion and fraud, particularly in the area of availment of credit. There have been cases where the exporters used fake input tax credit to pay duty, and then claim a cash refund. To illustrate, in 2019 it was discovered that a group of people had created a web of 500 firms, including fake manufacturers of hawai chappals who sold to fake retailers to claim and enchash fake tax credits. The raw materials were taxed at 18% whereas the chappals were taxed at 5%. The total fake credit amassed by this group ran up to Rs 600 Crores. 

Now, many cases of evasion and fraud came to light only in the second year of GST, because in the first year authorities were more focused on the acceptance of the new tax regime by taxpayers, than on anti-evasion measures. However, the GST Net with its in-built e-invoice matching mechanism, if this was functional, could have avoided many such evasions and frauds and increased tax revenue. 

- Next, what I would call the pure policy errors. Internationally, the threshold for exemption from GST or VAT (these are two nomenclatures of the same tax- different countries refer to it differently) is kept high: at least the equivalent of Rs 80 lakhs annually. The idea is to keep small businesses outside the ambit of GST. This is because small businesses aren't good with maintaining books, because taxing them would not be cost-efficient (the revenue collected won’t be worth the expenditure incurred to ensure payment of tax) and because dealing with so many small businesses tends to breed corruption. 

In India, conversely, we seemed to be determined to bring the informal sector under the ambit of GST, because the threshold was fixed at Rs 20 lakhs. 

- The threshold has since been raised to Rs 40 lakhs, but only for goods and not services. This goes against a basic principle underlying GST: that goods and services will be treated at par. 

- Distressingly, the threshold for goods (not services) apply only to intra-state trading. The moment the trading of goods is inter-state - eg. a business supplying goods of even Rs 1 lakh from Gurgaon to Delhi - no threshold for exemption applies. What has happened as a consequence of this is that many small scale units have decided not to supply goods inter-state, for fear of having to pay GST, and as a result their businesses have closed. 

- The next area of concern is revenue collection. We have missed our revenue targets quite badly, even though there was improvement in the first half of the second year. There are different reasons for this. 

(a) Many items which were placed in the higher rate slabs of GST in the beginning - when the revenue targets were fixed - were pushed to lower rate slabs later. Eg. the highest rate slab with 28% GST - applied to demerit goods (like tobacco) and luxury goods - contained 272 items when GST was introduced; but this was eventually reduced to 28 items after protests from the relevant sectors. So, in view of such an altered scenario, the older targets were overly ambitious.  

(b) Secondly, as mentioned already, there has been a lot of evasion, fraud and a lack of compliance. The 15th Finance Commission had estimated that GST defaults and evasion were costing the exchequer Rs 5 lakh crore annually

(c) The most important reason is the continuous slowing down of the Indian economy, even before the COVID-19 crisis hit our country. The GST revenue is connected to the economic condition of the country. It is, after all, a tax on the supply of goods and services. With low demand, and low supply, there was low revenue. After COVID-19 and the lockdown, things have deteriorated further. In the third week of June the collection of GST was Rs 45,000 crores against a monthly target of Rs 1 lakh crore. Sadly, we cannot anticipate any bouncing back of the economy in the short run. The government will have to think of ways to compensate for this loss of revenue with non-tax revenue like, for instance, that which could arise from disinvestment.  If you were to list out key suggestions for improving the GST regime, what would they be?  We have to accept the fact that GST revenue collection, for a period, will be low. And with this acceptance we can view this period as a window of opportunity through which to take corrective steps that will make for a healthier GST in the long run. Such steps have been avoided in the past for fear of loss of GST revenue. But they needn't be so any longer.

- For the purpose of the first suggestion, let’s consider the four primary GST rates: 5%, 12%, 18% and 28%. We need to rationalize these rates further by cutting them down to three rates: 5% for goods and services of mass consumption, 15% which will be a rate covering most other goods and services and 28% for demerit and luxury goods. So the items which are currently under the 12% and 18% rate slabs can be brought under 15%. Currently many disputes with regard to GST are whether certain goods fall under 12% or 18% (there are relatively far fewer disputes on whether a good is a demerit or luxury good falling under 28% or a mass good and service under 5%; these are more obvious). So merging the 12% and 18% into 15% will bring an end to many such disputes. 

-  Petroleum and electricity have been kept outside GST, even though these serve as necessary inputs for many industries. As a consequence of this there is a cascading of taxes with regard to these two products. They have to be brought within the ambit of GST. Similarly, while most things that affect the real estate industry are covered by GST - including raw materials like steel and cement and even rent from property - stamp duty on transactions have to be subsumed within the GST as well. 

- Frequent changes in GST rates have to be stopped for the financial uncertainty they cause. Rates have to be fixed once a year, preferably before the central budget, so that they’re aligned with the budget. There may be exceptions in the case of natural calamities or public health emergencies. 

- There is a need for the implementation of a new GST return-filing system, which incorporates e-invoicing and invoice-matching to avoid evasion. 

- GSTN needs to be upgraded with a strengthened IT infrastructure. India has produced world class IT engineers and software developers. GSTN should recruit from such pools of excellence and the government should provide the additional funds required. 

- Anti-evasion has to be further strengthened by expanding the number of personnel, creating more posts in different places and also a greater use of data-analytics to detect fraud. 

- A robust audit regime has to be instituted. Audit is essential as audit can address those cases of non-compliance which have arisen not out of mal-intent but for other reasons (eg. procedural lapse). It is only if they find wrongful intent, that Audit officials will pass the case on to anti-evasion. Unfortunately, this has not been initiated even though three years have gone by. A draft audit manual that is being circulated for comments is yet to be finalized. An additional problem is that the last date for filing of annual returns - even for the year 2017-18 - is continuously being extended. It will be these annual returns which will be scrutinized and audited. So the last date for the filing of these returns have to be fixed, without any further extension, so that they can then be audited. 

- The purpose of GST’s anti-profiteering mechanism was to ensure that the benefits that accrued to businesses as a result of paying lower taxes overall, under the GST regime, was passed on to consumers. But this was applicable for the initial few years. Today, the necessity of its continuance - under the GST regime - must be reviewed. Anti-profiteering, after all, is not a taxation matter and better governed by price control, consumer welfare and competition regulation laws and authorities.

- The GST compliance rating mechanism was supposed to be activated, under Section 149 of the Central Goods and Services Act, for rewarding and giving governmental recognition to honest taxpayers (thus providing an incentive for compliance). But this has not yet been activated. It must be. 

- The centre is obligated to compensate states in the event of loss of revenue under the GST regime. This obligation, however, is set to end on June 30, 2022. The centre and states should soon begin discussions on whether this scheme of compensation will be continued or stalled and, if it is to be continued, on what terms. We must remember how important it is for the states to remain financially strong for the sake of a healthy Indian federalism. No equitable GST regime can allow Indian states to grow economically weaker. 

- As already discussed, goods and services have to be treated at par, in keeping with the essential GST principles. Therefore the revised threshold for exemption of Rs 40 lakhs, currently applicable only to goods, has to be made applicable for both goods and services. Similarly, this threshold for exemption must not be denied in the case of inter-state trading of goods. Sumit Dutt Majumder is former Chairman, CBEC (Central Board of Excise and Customs, now Central Board of Indirect Taxes and Customs) and former DG DRI (Director General, Directorate of Revenue Intelligence). He is the author of three books on the Goods and Services Tax. Two books, written primarily for academics and practitioners having to deal with the law are ‘GST in India: Its Travails, Tribulations and Challenges Ahead’ and ‘Know Your GST: GST Unraveled’. His last book on the subject, however, was written for the better understanding of the layperson: GST: Explained for Common Man

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