JULY 01, 2018

By Sumit Dutt Majumder

GST in India is one year young today. On its first birth anniversary, let us have a look at how has it fared till now. Let us start by booking at some fundamental questions. Did the policy decisions work out well? Were the decisions properly implemented? Was the technology support adequate? What about the revenue collections? What was the impact? These issues coupled with some more will now be discussed.

One of the five basic aims of GST was to substantially reduce, if not totally eliminate, the cascading of taxes by providing seamless flow of input tax credit at each stage of the flow of goods and services in the supply chain. The second aim was to cut down the compliance costs by clubbing together seventeen indirect taxes of Center and States like Central Excise, Service Tax, and State VAT etc.

These two targets have been achieved substantially, except that five Petroleum products and Alcohol for human consumption could not be effectively brought within GST. Besides breaking the credit flows, this also dented the efforts of reduction in compliance costs in the supply chain of Petroleum products, an essential input in any industry. In case of goods other than these, the process of availment and utilisation of credit has also been simplified over the past few months, and further simplification is on the anvil.

The third aim was to reduce the logistics and transportation costs. In the pre-GST era, worst thing was the Central Sales Tax (CST) for inter-state trade as CST could not be taken as credit and hence was a cost to be added to the value of goods. Therefore, often there was a business compulsion for tax-avoidance or tax-planning by having warehouses at different states to facilitate 'stock transfer' since it did not attract CST. In the GST regime, there was no such need since the Integrated GST (IGST) for inter-state trade that replaced CST, provided credit facility in the entire supply chain. This has started the process of consolidation of warehouses and consequent savings on cost. The other disruption in the transportation sector was stoppage of trucks, examination of goods and collection of Entry Tax or Octroi at the inter-state check posts. This led to delays and malpractices, thus adding to costs. Abolition of Entry Tax and imposition of same rate of State GST (SGST) for a particular commodity across the states made these routine checks unnecessary and hence the said check posts were abolished. Consequently, transportation time came down sharply leading to savings.

In this context, there has been one development which would need to be watched carefully. As the GST revenues started going south, both Centre and States decided to have an anti-evasion measure by way of a system of generation of E-Way Bills that would contain particulars of transportation and the goods. The GST officers have been empowered to stop the trucks, examine the E-Way Bill and the goods anywhere on the highway. The scheme has been implemented from 1 st April, 2018- first for interstate movements, and then for intra-state movements in phases. The Government has said that this will check evasion of GST. It has also issued instructions detailing the procedure for interception of trucks so as to ensure that there is no unnecessary disruption of truck movements. If these instructions are not strictly followed in the field, there would be risks of slowing down the truck movements. This has to be monitored carefully. In fact, instead of such random highway checks, the better option would have been to strengthen the Directorate of GST Intelligence so that the checks could be undertaken in specific cases of surreptitious clearance, based on intelligence and risk assessment. The E- Way Bill must not be allowed to disrupt the free flow of goods, one of the fundamentals of GST. Upto this point, it seems to have worked well, though.

The fourth aim was to make India a Common Economic Market. In the pre-GST era, India was not a common market; State VAT rates were different in different states. This led to distortions in investment decisions based solely on considerations of tax concessions. Besides, as mentioned, Entry tax and mandatory stoppage of truck at inter-state check posts, coupled with different State VAT rates, were ideas contrary to Common Economic Market. These malaises have been remedied in GST regime. In the GST regime, for one particular commodity, the rate of GST is same across the country. Therefore, one can now look at India as a country having 'one nation, one commodity, one tax'.

The fifth aim that stemmed from the collateral benefit of the structure of GST was to have equitable growth of industry across the country. While some states like Karnataka, Gujarat, Maharashtra etc were highly industrialised, there were the populous states of Bihar, U.P., Odisha, West Bengal, Kerala etc. that lagged far behind. GST being a destination based consumption tax, in a case of interstate trade the state's share of GST accrues to the destination state. Broadly, forty percent of the country's trade being interstate, the destination consumption states like U.P., Bihar etc will have more revenue from IGST, besides their own SGST for intra-state trade. Since these states would get richer in revenue, it is expected that this extra revenue would be spent in development of infrastructure and power generation, the two fundamental requirements for facilitating industrial growth. Thus, in course of time, all these populous but industrially under- developed states would also become industrialised, and that would make the program 'Make in India' successful. Green shoots are expected in two or three years.

On the issue of technology support, it was clear from the day India decided for Dual GST with IGST scheme that for administering it a robust IT infrastructure would be sine qua non. Thus we got GSTN, an IT infrastructure based on the recommendation from an Expert Group. It may be recalled that the GSTN was to facilitate the administering of certain basic business processes like registration, payment, filing of returns and claiming of refunds. It was also to facilitate invoice uploading and matching of Returns and invoices so as to ensure that the credit taken by the recipient was actually paid by the supplier. Given the huge responsibility on the GSTN, it was expected that the GSTN would undergo Test Runs in respect of all the aforesaid business processes before implementing GSTN, However, the policy makers could finalize all the business processes and formats only a few days before the target date of 1 st July, 2017 for GST, thus leaving very little time for the GSTN to make all the business processes operational on the day of its implementation. Worse still, full scale test runs could not be undertaken for all the operations before the day of its introduction. There must have been some compelling reasons for the government to stick to the target date. But, the consequence was that there were many glitches in the GSTN system in the first month of implementation itself. To add to the woes of the small and medium business, the much publicised services of GST Suvidha Providers (GSPs) for helping them in their interactions with the GSTN could not be made available. Thus, the experience of the first month of GST implementation was bitter. One felt that all these things could have been avoided if only the implementation was deferred by two months so as to facilitate the GSTN to make it fully operational in all respects, after undertaking full-fledged Test Runs. Currently, the GSTN has been working well. Even the scheme of E-Way Bills, for both inter state and intra state is being implemented successfully.

As for the policy issues, by and large, these worked out well except for some monumental blunders. One was with regard to the small business. First, the threshold exemption for the small business was lowest in the world at only Rs. Twenty Lakhs of annual turnover. The argument was to bring maximum possible number of people within the ambit of GST, and thereby increase the market share of formal economy by reducing that of informal economy. But, the international practice has been otherwise. Internationally, the threshold varies between Rs. Eighty Lakhs to One Crore equivalent . Then, there was a policy decision that there would be no threshold exemption for inter-state trade. It meant that the moment someone did inter-state supply like, say, from Okhla in Delhi to Gurgaon in Haryana, he would forfeit the benefit of threshold exemption of Rs. 20 Lakhs, and he would have to pay GST and do all the compliance requirements. So, most of such small business decided to stop inter-state trade; but, in the process, they lost business in a big way. Their business shrank for another reason- Reverse Charge Mechanism. The big businesses were mandated to pay GST and do all compliance requirements on behalf of the unregistered suppliers (read small business below threshold). The result -big business stopped transactions with small suppliers. Coming soon after 'demonetisation', this broke the backbone of small business. One may remember, on a rough estimate, the small businesses contribute around 75-80% of total employment in the country. This impacted employment sector adversely.

Now, the GST rates. Leaving aside the exempted goods, GST has a four- tier rate structure - 5%, 12%, 18%, and 28%. Broadly, the rate structure is based on the principles of 'capacity to pay' and 'who use those goods' - very poor, poor, common man, rich and superrich. Besides, most of the items in the 28% rate also suffer a Compensation Cess, a cess collected by the Centre to compensate the states for the revenue loss after implementation of GST. Most of the countries except Australia, Singapore, Malaysia etc. have more than one GST/ VAT rate (mostly 2 rates) ;France has 5 rates. In a country like India where the people are at different levels of poverty or richness, it is absolutely fine that it has four rates. Of course, there is scope to reduce the number of rates to three, after GST settles down next year. Perhaps the rates of 12% and 18% could be merged into a rate in between 12% and 18%. As for the commodities or items put in different slabs, there were many discrepancies. Too many items were put in higher rates of 28% and 18%, and there were discontent.

In light of the issues discussed above, there were protests. The small business were worst effected. So were the exporters whose huge amounts of export refund claims were blocked because of the skewed procedure. This compelled the GST Council to undertake a series of course corrections. First, the clause regarding withdrawal of exemption in the case of inter-state supplies which affected the Small Businesses most was suspended. So was kept in abeyance the clause relating to Reverse Charge Mechanism. These provided some relief to the small business. Further, relief was provided to the MSME sector by expanding the scope of Composition Scheme. The upper limit of eligibility was raised to Rupees One Crore. The export procedures were also simplified and certain innovative export facilitation schemes were outlined. The list of items in different slabs of GST were rationalised. There were more than 250 items in 28% slab. But by November 2017, 178 items were taken out of this highest slab and put in different lower slabs. Similarly, many items at 18% and 12% slabs were brought down to 12% and 5% slabs respectively.

Thus, IT glitches, irrational tax structure and aforesaid policy glitches jointly contributed in giving a bad name to GST in its initial months of implementation. IT glitches could have been minimized if the GSTN was given two more months time to complete the Test Runs. However, it's creditable that the GST Council acknowledged the mistakes and undertook immediate course corrections from September, 2017 onwards. The GSTN too got into the act quickly. As of now, their challenge is to continue to provide a seamless E-Way Bill system, particularly after all the 31 states introduce the scheme for intra-state trade . It may be recalled that 60% of total truck movements are intra-state, the balance 40% being for inter-state trade. These apart, the Council will have to finalise the new formats of returns and an effective mechanism of seamless flow of credit.

Finally, let's come to GST revenue collection. It is a given that in almost every country, in the first year of implementation, GST revenue collection takes a dip due to various reasons related to beginner's hiccup. Notably, in India, GST collection was higher in the first three months of implementation-Rs.93,590 crore, Rs.93,029 crore and Rs.95,132 crore in July, August and September, respectively. It fell in October and November to Rs.85,931 crore and Rs.83,716 crore, respectively. Then the collections picked up a bit in December with Rs.88,929 crore, only to fall in January and February at Rs.86,318 crore and Rs.85,174 crore. Then it picked up again and the March collections were Rs.1,03,458 crores. Thus, the revenue collections on account of GST can be said to be satisfactory, so far.

Arvind Subramanian, the Chief Economic Advisor has also recently written that based on the first nine months data , revenue collections were Rs 8.2 Lakh Crore (11 Lakh Crore statistically annualised). This would mean that revenue growth on account of GST has been of 11.9 percent, compared with the relevant pre-GST numbers for Central Excise, Service Tax, State VAT etc. According to him, on current trends and given the likely improvements in compliance, with the introduction of e-way bills and invoice matching, all the states would register revenue growth in excess of 14 percent guarantee in the years ahead.

As for the tax base, around 1.05 crore taxpayers were registered till March 2018, out of which 18.17 lakhs were composition dealers who were required to file returns every quarter. Thus, the balance of 86.37 lakh tax-payers were required to file monthly returns. As against this, only 59.51 lakh filed GSTR 3B returns for February. This is around 70 percent of the total expected returns, which means there are around 30 percent non-filers. Among them, a good number would be those who got registered as per the law on threshold in the beginning, but came out of GST after the clauses relating to inter-state supply and reverse charge mechanism were amended. Even leaving them aside, there will be a substantial number of non-filers who could be potential tax evaders. There has also been evasion by way of mis-utilisation of input tax credit, particularly during the transition period. Therefore, a more pro-active role for Directorate General of GST Intelligence and quick introduction of new return formats and some sort of invoice matching will have to be considered on top priority to catch these tax evaders.

Summing up, notwithstanding the initial hiccups in the first few months of its implementation due to IT glitches and a few wrong policy decisions, the subsequent efforts by the GST Council to set the GSTN right and rectify wrong policy decisions and a skewed tax rate structure have made the Indian GST move ahead. It's a matter of pride for India to have a GST which is quite good when compared with international best practices in GST/VAT. In the long run, the country will see many benefits some of which are listed below:

(i) It will bring down inflation through reduction in cost of goods and services by minimizing cascading, reducing the multiplicity of compliance costs, providing seamless flow of credit etc. It will promote manufacture across the country covering even the currently industrially backward states, and thus give a boost to the 'Make in India' initiative of the government. It will make India a Common Economic Market with uniform tax rates, uniform procedures and the abolished inter-state check posts.

(ii) All the forgoing factors coupled with the fact that in GST regime, exports are 'zero rated' in entirety will make Indian products and services globally completive and give a major boost to exports.

(iii) By virtue of providing a largely technology driven GST with the help of GSTN and because of factors mentioned above, GST will bring in 'ease of doing business'.

(iv) As GST stabilizes it will bring buoyancy to the Government revenue by widening tax bases, improving the tax payer compliance and also with effective enforcement;

(v) With tax buoyancy, one can expect a reduction in GST rates, which will further bring down the price of goods and services.

Now, the way forward. As I can see, the pending work, in order of priority, would be as follows:

(a) The new GST Return filing system that has been approved by the GST Council will have to be put in practice on top priority. However, it should not be done in haste. There must be thorough pilot runs in the GSTN before it is implemented.

(b) The scheme of availment and utilisation of input tax credit immediately after uploading of invoice by supplier, coupled with some form of instant reconciliation of supply, receipt and payment of tax, either through invoice-matching or otherwise, should be the next priority.

(c) Different decisions by Authorities Advance Ruling (AAR) on same or similar issues are creating lots of confusion. Instead of regional AARs at rather junior levels, there should be a suitable system of a Centralised AARs headed by very senior officers and a decision by that authority should be made applicable to similar issues across the country for CGST as well as SGST/ UTGST officers.

(d) Refunds for exporters, though improved in the last few months would need to be further straightened out.

(e) The proposed e-wallet scheme for exporters would need to be expedited. This will ease the exporters' woes to a great extent.

(f) Tax base for GST will have to be further expanded. One simple way would be to bring along all the Petroleum products first, and then alcohol within the ambit of GST. Simultaneously, the non-filers will have to be traced through intelligence and other means and brought within the ambit of GST.

(g) Once the tax base is increased and tax leakages (read evasion) are plugged, there will be further buoyancy in revenue. With enhanced revenue, both Centre and the States will feel comfortable; that will be the time to think of restructuring of GST rates. First of all the number of items in the slab of 28% should be reduced, by taking items of common use like Cement, Camera etc. out of this slab down to 18%. In the next stage, the reduction of number of rates from 4 to 3 can be considered by merging the rates of 18% and 12% to one, say 15%.

(h) Among other items of pending work, the following would need to be expedited:

(i) Doing away with Reverse Charge Mechanism where the tax liability lies on the recipient (buyer) and not the unregistered supplier, which has been kept in abeyance now.

(ii) Tax Deduction at Source (TDS) for supplies to Government Departments

(iii) Tax Collection at Source (TCS) in case of e-commerce operators.

One unique feature of Indian GST is that it has been introduced by following the important concept of 'co-operative federalism'. Centre and thirty one States engaged themselves in prolonged negotiations through the platform of 'Empowered Committee of State Finance Minsters' for eleven long years, to get the idea of GST passed in India's Parliament, almost unanimously . Even after its introduction on the 1st of July, the GST Council, the constitutional body which replaced the EC of State Finance Ministers, displayed tremendous spirit of co-operative federalism in deciding everything in the Council meetings unanimously. There is a provision for voting in the GST Council Meetings; but so far, there has been no such need.

Now for immediate future, for at least one more year, both the Council and the taxpayers will have to look at the implementation of GST as 'work in progress'; the taxpayers, trade & industry will have to bring forward their difficulties and problems as and when they arise, to the Council's notice. The council, in turn, will have to redress the grievances urgently, as it has been doing during the past one year. Let us all put our best to make the Indian GST better and better, as the months pass by, through requisite course corrections as a continuous process. Implementation of GST in India has to be looked into as 'Works in Progress' for at least one more year.

(The author is former Chairman, Central Board of Excise and Customs (CBEC) and author of three books on GST; he is also the Consulting Editor, TIOL.)

GST - First Anniversary | Simply inTAXicating

 

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