One Year has passed since the ‘One Nation, One Tax’ regime has been in place. Despite initial apprehensions, its success has to be measured on the yardsticks of ‘common man friendliness’, ‘advantages for trade and industry’, benefits to economy’ and ‘simplified tax structure’
Dr Sarangapani Bommaraju
The Modi Government has accomplished the biggest tax reform after Independence with the successful implementation of the Goods and Services Tax (GST). It was first mooted by the Atal Bihari Vajpayee Government in 2000. The Kelkar Committee, which examined the issue in 2004, observed that a tax reform of nationwide dual GST would be able to achieve “a common market, widen the tax base, improve the revenue productivity of domestic indirect taxes and enhance welfare through efficient resource allocation”. It took nearly 17 years before GST was finally launched on July 1, 2017.
The division of powers between the Centre and the States are clearly delineated in the 7th Schedule of the Constitution, which was amended in 2016 to introduce the GST which subsumed a number of central and state taxes. A dual GST structure has been designed empowering the Centre and the States to concurrently levy GST on intrastate trade. In addition, an integrated GST (IGST) is designed to tax supplies in the course of inter-state trade.
India now a Common Market
The Constitution intends through Article 301 to have “a free flow of trade, commerce and intercourse throughout the territory of India”. Since the safeguards provided in the Constitution were not in operation effectively, the Central and the State Governments used flexibilities provided in Article 302 and 304 to levy multiple taxes. The domestic trade barriers in the form of having different tax rates and procedures in different states and complexity of tax structure and administration stood in the way of India emerging as a single common market. The complex multi layered indirect tax structure had fragmented Indian market into 29 regional markets.
While the Central Sales Tax was imposed on the export of goods from one state to another, entry tax and octroi were imposed on the import of goods into a local area. Administration of these taxes led to the establishment of check posts and other physical barriers. Consequently, a good exported to another state has become more expensive than that exported to another country. For example, in the pre–GST regime, a good manufactured and sold in Andhra Pradesh attracted a 29 per cent tax inclusive of 12.36 per cent central VAT and 14.5 per cent of state VAT. If that good was sold in Maharashtra, overall tax became 48 per cent because of additional taxes—2 per cent CST and 12.5 per cent Maharashtra entry tax. If the same good was exported, neither CST nor entry tax applied nor the good attracted only 29 per cent tax! If the same good was produced in Maharashtra and sold in Andhra Pradesh, it attracted a lower tax rate driven by a lower VAT in Maharastra. If the same good was imported, it attracted a still lower tax rate-17 per cent only (CVD of 12.36 per cent and the SAD of 4 per cent)! Besides these anomalies in the tax rates, there were also restrictions on the free movement of goods and services across the states, leading to economic fragmentation. The main purpose of this radical tax reform is to dismantle these trade barriers and transform India into a common economic union (one country, one tax and one market).
Time to move towards a simplified structure — Rashesh Shah, President, FICCI
The introduction of Goods and Services Tax (GST) on July 1, 2017 has been a landmark in the country’s taxation history. The one year of GST shows a remarkable journey of an entire nation to ensure its successful implementation.
The last one year, though, had also been full of challenges. For the common man, the GST implementation faced transitional issues in the beginning, but has stabilised now. However, for the industry, it has been a big challenge adjusting to the new national indirect tax framework.
Amidst all this, the most commendable aspect of GST implementation has been the proactive and consultative way in which the government and GST council took corrective measures to ensure smooth implementation of GST.
In the second year of GST now, a lot more needs to be done to achieve the real objectives — a transparent and simplified tax collection framework with reasonable rates.
The return filing process needs to be made simpler and before the new return filing system is actually implemented, it should be fully tested, and finalised after due consultation with the stakeholders by putting in the proposed return form in the public domain.
Further, to make the GST reform truly effective, the Central Government and State Governments must recognise the need of eventually bringing the excluded sectors, including petroleum and real estate, within the ambit of GST, and converge the existing band of GST rates to three in line with international standards.
Stand-alone multiple taxes have cascading effect on cost leading to competitive disadvantage to Indian industry. Central Sales Tax (CST) on interstate movement of goods is not integrated with VAT and hence CST paid on inter-state procurement was not eligible as a credit and hence became an extra cost of doing business. Similarly, manufacturers were unable to avail themselves credit of state taxes and certain central taxes, against excise duty and vice versa and these have become added costs along the supply chain adversely affecting exports and encouraging imports. With GST, there are taxes only on value addition at each stage, with the benefit of setting off the taxes against the central or state GST paid on each consecutive purchase. Thus, the new regime aims at ensuring a continuous mechanism of tax credit and a unified tax structure benefitting manufacturers, retailers and end consumers alike across the country.
Tax Base Widening
GST is neither disastrous nor has brought the economy to a grinding halt as many people would want us to believe. Though it took decades from concept to planning stage, the implementation was remarkably quick. Launching it in June rather than in September, 2017 gave enough time for the government to sort out the teething problems. As GST is to be levied on all goods and services across entire supply chain (with a few exceptions), it is expected to increase the tax revenue due to wider tax base and better compliance. According to Minister of State for Finance Shiv Pratap Shukla, a total of 1,03,99,305 taxpayers are registered under GST as on March 2, 2018. Of them, 64.42 lakh taxpayers have migrated from the erstwhile tax regimes and 39.56 lakh have taken new registration under GST.
These figures indicate how the tax base is widening. Not only that the tax revenues are also increasing. Contrary to the expectations of sceptics, the Government is able to collect on an average around Rs 90000 crore every month during the last fiscal. As GST is to be levied concurrently by the centre and the states, the taxpayers with turnover of more than Rs1.5 crore are equally divided between the centre and the states and those with turnover of less than Rs 1.5 crore are divided in the ratio of 90:10 between the states and the centre for administrative convenience. The tax officers are cross empowered both under central and state laws.
GST is a destination-based tax and the tax accrues to the state where final consumption takes place. The manufacturing states thus have a disadvantage. They have apprehensions about probable shortfall in the revenues and the centre assured not only to protect their revenues but also provide for a 14 per cent nominal growth every year for a period of five years through the compensation cess levied on select demerit and luxury goods.
Turnaround time for Trucks cut Significantly
The turnaround time for trucks has witnessed a substantial reduction since the introduction of GST a year back. In states like Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar, which were once known for notoriously high waiting time spent at their borders, the impact has been much more pronounced, rating agency ICRA said. The study involving approximately 50 transport companies (pan-India) and 15 consumer-oriented companies (across various sectors) was conducted by the ICRA to comprehend the impact of GST on the ground since its introduction on July 1, 2017.
“The removal of inter-state check-posts has resulted in significant reduction in waiting/idle time for trucks, thereby improving their turn-around time and efficiencies, as confirmed by 60% of transporters that we interacted with. As per ICRA estimates, so far there has been about 18-20% improvement in turnaround time because of GST,” the study report said.
The newly created constitutional body, GST Council, has emerged as a unique institution, where the Centre and the States are willing to pool their sovereignty and give fiscal space to each other. The Council, since its formation in September 2016, has worked at a fast track and has been responsive to the needs and feedback of the trade, industry and other stakeholders and made a number of mid-course corrections after the roll-out of GST. The Council’s structure and working gave inspiration for being replicated in other crucial areas for the promotion of cooperative federalism.
Many proactive steps to ease out the difficulties faced especially by the small enterprises and the exporters have been initiated. The composite scheme has been extended to taxpayers having annual aggregate turnover of up to Rs 10 million benefitting the SMEs. The government"s move to issue refunds of GST paid by exporters as soon as possible and introduce an e-wallet system with automatic credit of a notional amount from April 1, 2018 will ease the working capital problems of exporters. GST is expected to provide boost to exports by mitigating costs which could increase exports in the range of 3.2 to 6.3 per cent.
Relief to Common Man
The implementation of GST has had more than its fair share of problems. The GST is supposed to eliminate the cascading effect of taxes i.e. tax on a tax. Tax is to be paid only on the value added at each stage. Besides, there is credit for the tax paid on the inputs. Only the input cost should enter the pricing of the product and not the taxes paid on the inputs. Input tax credit thus results in lower cost to the business leading a lower basic price on which the GST is to be levied. However, prices of many essential goods have in fact increased after the implementation of the GST.
Implement the Recommendations of Advisory Committee — Jitendra Gupta, President, Laghu Udyog Bharati
The Laghu Udyog Bharati has welcomed the GST. But the one year experience of the new tax regime shows that the difference in taxation between the small and big industries should be maintained. We feel the small industries and small traders continue to suffer due to non-implementations of the recommendations of the advisory committee, constituted by government to curb the drawbacks.
Instead of composition, the job work in GST has been put into open category. Earlier there was no VAT on job work, but now they have to pay equal tax as is paid on the finished goods. Only in textile and Gem and Jewellery, it is 5 per cent. But on other goods it is higher. The advisory committee had recommended to put job work in composition and the tax rate for all kinds of job work should be 5 per cent only. If it is done, it will prove to be a big boost to the small industries. Those who are in job work already do not get payment in time, now the compulsion of paying advance GST has put them in more cash crunch. They are in more trouble now.
Earlier, the exemption for small industries was 1.5 crore. Now after GST the difference of big and small has been removed. The advisory committee had accepted refund of 25 per cent GST to small industries with the annual turnover of Rs three crore. But it has not been done so far. By and large the big industries are happy, but the small industries are in trouble. We feel the recommendations of the advisory committee should be implemented without delay.
The common man is clueless as to why prices have increased with the GST. The prices should remain the same at least as they were earlier, if not decline. Most of the essential goods are kept out of the GST net by the GST council. Why then are their prices rising? Even the retail prices of those products on which the GST has been reduced have not come down. Some have argued that important items like, petroleum products are out of the purview of GST and are heavily taxed. Since they are the key inputs, there is a strong cascading effect associated with them. But that was also the case earlier.
Even though the essential goods are not taxed, they need to be transported and stored, and accounts have to be kept. All these services attract GST. Besides, many goods and services which were earlier exempted from taxation are brought under GST. Prices of most services have increased as they are now taxed at 18% while they were charged at 15% in the pre-GST regime. The burden is silently passed on to the consumer by the service providers-be it the banks, insurance, finance, or transport firms and others. The rise in the prices of services is not reflected in the inflation index based on WPI (Wholesale Price index) since they are not part of it, leading to underestimation of inflation. There is a strong case for the downward revision of service tax to benefit the common people.
Woes of Taxpayers
The taxpayers expected a simple and uniform tax structure, clarity and transparency, ease of compliance, faster and simpler grievance redressal mechanism with this major tax reform. However, multiple revisions in the format of returns and rates created confusion. The software companies providing GST software also have had difficulty in revising accordingly. Collating GSTN registration number of customers and vendors and entering them into the system was not easy as any error would lead to delay in claiming input tax credit.
Allow a Pan India Registration Number— Praveen Khandelwal, Sect. Gen., Confederation of All India Traders
GST has brought fundamental changes in the taxation system as most of the commercial taxes stands subsumed in GST relieving the traders from the burden of multi-compliance and subject to multi-Authorities. The e-compliance in GST has virtually ended the direct interaction of the traders with officials reducing corruption to a great extent.
One of the important advantages of GST is availability of input credit, which means no one has to pay the tax from his pocket except consumer as GST is destination based taxation system and last consumer in the supply chain is liable to pay tax. This feature makes GST a unqiue tax system. Once GST is established as a stable taxation system in the country, it will be beneficial for both traders and the Government.
However, issues like filing of multi returns, refunds from the Department, awareness and education about GST fundamentals and its compliance obligations are some of the issues which need immediate attention of the Government. It is suggested that instead of monthly returns, quarterly returns should be prescribed and for one more year it should be on Form 3B only. It is also suggested that refund process should be automaticlly credited to the Bank Account of the traders. The HSN Code should be made applicable only on the manufacturers and not on traders.
Instead of taking Registration in each State, one Registration number should be allowed Pan India. Those traders who do not have computers should be provided subsidy by the Government to equip with Computers etc. With mutual cooperation between Government and Traders, GST will emerge as a good taxation system.
Previously returns were filed centrally. With state level compliance requirements, documentation and return filing, GST necessitated branch level accounting. Inter branch and intra branch invoicing has become necessary due to internal tax transfers. The valuation of services particularly in cases where services are shared within the organisation across the states has given scope for manipulation both in valuation and categorisation. As Input tax credit for inter-state transfers of goods can only be claimed at a later stage, working capital got blocked for manufacturing companies with warehouses across the country. Compliance requirements under GST is causing lot of hardship to the small traders .Presently, there is no scope for revision or rectification of returns once filed. In some cases where the amount of tax paid on the inputs is more than the amount of tax paid on the output, the trader has to wait indefinitely for getting full credit for the tax paid on the inputs resulting in the blockage of working capital.
Trickle Down the Benefits
Now that the major objective of dismantling trade barriers has been achieved with collateral benefits of a widening tax base and increasing revenue yield, every effort must be made to further standardize and simplify the processes and procedures, keeping the small business man and the ultimate consumer in view. The selection of 4 or 8 digit HSN codes should be made standard across the value chain. Each and every business should be made to register under GST irrespective of whether it is liable to pay taxes or not. This would eliminate the need for RCM and even big companies can deal directly with smaller vendors. Small firms should be allowed to file their return and pay taxes on a yearly basis instead of quarterly.
The GST implementation process has shown that the policy makers are willing and capable of quickly reacting and responding to unique problems as and when they have arisen. They have not shown any complacency leading to policy paralysis. The enthusiasm shown to manage the change is remarkable. Hope Modi government works with the same spirit and brings down the prices to benefit the common people. Let the benefits of GST trickle down sooner than later.
(The writer is a former Professor of Economics at Hindu College, Machilipatnam, Andhra Pradesh)