JULY 01, 2019

By Sumit Dutt Majumder

INDIA has completed two years of implementation of GST. Besides, the General Elections of 2019 is now done and dusted and the government that implemented GST is back with huge mandate thus ensuring the continuance of GST implementation with renewed vigour. In short, GST is back in focus.

A period of two years is a good time to look back and take stock of our hits and misses and then plan for the years ahead.

Main Objectives of GST Broadly Fulfilled

Of several objectives of GST, the ones relating to reduction of cascading of taxes through continuous flow of credit in the entire supply chain and that of compliance cost have been broadly achieved. The third objective of reduction of logistics and transportation costs has also been achieved through subsuming of Entry Tax and abolition of inter-state border check posts. The other target of making India a Common Economic Market has been reached by ensuring the same tax rates in all states. The fifth objective was of equitable growth of industries across the states by provision of road, power and other infrastructural support to industrially backward states; they complained of shortage of fund. This is on its way to be achieved because of the GST principle of destination based consumption tax. Now, in case of interstate trade, states' shares of GST are enriching the destination states which are generally industrially backward, but populous.

Implementation Glitches

Said that, it is also true that there were certain glitches, both in technology and policy issues in the initial few months of its implementation. It goes to the credit of the GST Council that it realized the glitches soon and from the fourth month of its implementation it started taking corrective steps through frequent Council meetings. In last two years, the Council has met 35 times; the last meeting was on June 21, 2019.

The technology glitches in respect of GSTN, the IT infrastructural support, in the initial months were painful for the taxpayers. In fact, when GST was introduced the GSTN was not fully operational and the required test runs were not completed. The situation was partially recovered by going back to off-line mode in respect of certain business processes for some time. The glitches in the GSTN were also corrected soon.

But, meanwhile the technology glitches hit the Small Business in particular, very badly. Having known that the Small Business won't have the means and wherewithal to have their own IT system, it was planned to have the services of a class of IT professionals to be called GST Suvidha Providers (GSPs). They were to help the Small Business in their interactions with the GSTN in respect of filing of returns, replying to queries etc. The GSPs were identified and authorized but because of the glitches they could not be made operational, and the Small Business suffered miserably.

GST Worries of SMALL BUSINESS

There were certain other worries of the Small Business because of some policy glitches. One of the objectives of GST was also to formalize the informal sector by bringing the informal sector within the ambit of GST. In the GST regime, the flow of credit is seamless from the first point of supply until the end of the supply chain where the goods are sold or services are supplied to the final consumer. A small business who does not pay GST remains outside this supply chain and thus misses out on doing business with the big businesses who won't buy from someone who has not paid GST that would have added to his input tax credit.

Broadly, there are two types of Small Business. The first one is an aspiring one who wants to become big; so, he would voluntarily pay GST although his annual turnover is below the threshold because he wants to be a part of the supply-credit chain so as to do business with big ones. The second one is a non-aspiring one who is happy and satisfied with his present status and does not want to come within the ambit of GST.

Thus, GST has been formalizing voluntarily a sizeable section of the informal sector where the Small Business are aspirational. So far, no problem.

Low Threshold - that too with Fetters

But, problems arose with the non-aspiring Small Business who were made to forfeit non-voluntarily even their threshold entitlement because of certain ill- conceived policy decisions. First of all, the threshold itself was kept very low compared to the international standard - annual turnover of Rs. 20 Lakhs against the international practice of equivalent of Rs. 80 Lakhs to One Crore. It has been increased to 40 Lakhs from April 1, 2019. Secondly, a condition was put that there will be no threshold exemption if the supply of goods and services is inter state. This meant that a Small Business, otherwise much below threshold with an annual turnover of say Rs. One Lakh will have to get registered and pay GST if he supplies to another state. While it's not an issue with an aspirational Small Business, it did hit the non-aspirational one who did not want to pay GST. So, he was forced to stop his interstate supplies and his business shrank. After all, on an average, 40 per cent of total trade in India is inter-state. Subsequently, by the end of 2017, this condition was withdrawn for interstate supply of services; but it still holds good for the goods, and the Small Business continues to suffer.

Thirdly, there was a second condition which also restricted his business. There were many situations where the Small Business who were not paying GST, being below threshold, were supplying goods and services to the Big Business. In terms of the second condition, the GST-paying Big Businesses were told to pay GST on the supplies he received from the Small Business on their behalf, based on Reverse Charge Mechanism, and then take credit. But, this meant blocked capital for some time between payment of GST and taking of credit; this also meant extra compliance cost which was an expense. So, naturally he stopped buying from those unregistered Small Business, thus shrinking their business further. This condition has been kept in abeyance by the end of 2017; but the fear of reintroduction still persists.

Closure of Small Business Contributed to Unemployment

These policy glitches hit the Small Business very hard, and many had to stop business leading to massive unemployment. The Small Business contribute around 70 to 75 percent of employment in India. Thus, going overboard on formalization of the economy was a misadventure. We should have been content with voluntary formalization of only the aspiring Small Businesses.

Incorrect Fitment of Goods in GST Rate Slabs

The four tier GST rate structure, i.e. 28%, 18%, 12%, and 5% is broadly based on the principles of 'capacity to pay' and 'who use the goods - poor, middle class, rich etc. Besides, most of the items in the highest slab of 28% also suffer GST Compensation Cess - a Cess levied by Centre to sustain paying of compensation to the states in case of loss of revenue due to implementation of GST. Because of the fear of revenue loss, at the outset more than 250 items were put in the 28% slab which contained many items of general use for Common man too. It effected the industry. So, between November 2017 and January, 2019, the GST Council devoted five meetings exclusively to re-fix the fitment of different items in different rate slabs. In the process, currently only around 28 items remain in the 28% slab. Many items that were at 18% and 12% were also brought down to 12 % and 5% respectively. Too many changes in GST rates for a particular item were criticized by economists as it disturbed the financial planning and led to undue profiteering in many cesses. But, this exercise was necessary because of the initial mistake as explained before.

GST Revenue Concerns

The success of a new taxation is finally measured, to a great extent, by achieving the revenue targets at the end of a financial year. In the first two years after introduction of GST, the revenue collections have been falling short of target. One view has been that the targets were ambitious, given that an ideal situation suitable to revenue collection cannot be expected in the first two years of its introduction. The overall target for GST revenue including that of Centre and the States was Rs.11.48 lakh Crore for the financial year 2018-19. Out of this amount, the Centre had initially fixed the CGST collections at Rs 6.03 lakh crore, and this was lowered to Rs 5.03 lakh crore in the interim Budget of February 2019, since the month wise revenue from CGST was quite below the monthly targets. Going by the recent data released by the Controller General of Accounts (CGA), actual collection in FY 2018 has been even lower at Rs. 4.57 lakh crore.

For the current fiscal 2019-20, the overall target of GST revenue, both for Centre and States, has been pegged at Rs 13.71 lakh crore up from 11.48 lakh crore for the previous fiscal 2018-19. This includes CGST and SGST collections of around Rs. 6.1 lakh crore each, Rs. 1 lakh crore from the Compensation Cess and Rs. 50 thousand crore of unallocated IGST at the end of the year. Going by these numbers, the monthly CGST run rate (including IGST settlement) should be around Rs.50,833 crore. But, so far, CGST collections have averaged at Rs. 41,721 crore per month, quite below the required run rate. Another important factor must also not be lost sight of - that is Refunds. The above estimates do not include refunds. With refunds included, the actual collections would be even lower, thus increasing the revenue collection deficit.

According to a report by Kotak Institutional Equities, the required run rate for the remaining part of the year has gone up to Rs 52,830 crore. Even though the overall GST collections have stayed above Rs 1 lakh crore mark for the last three consecutive months of March, April and May, achieving the aforesaid run rate for CGST would be a tough job.

Reasons for Revenue Shortfall

The first reason for such shortfall is a series of GST rate cuts in five rounds as mentioned before. A slew of relief measures including rate cuts have been estimated to have created a dent of Rs. 80,000 cores in F.Y. 2018-19. In the current fiscal, there will be an additional dent in revenue because of doubling the threshold exemption from Rs.20 lakhs to Rs 40 Lakhs.

The second reason for the shortfall is low compliance rate in the payment of taxes. It has been stated in the Parliament that the percentage of taxpayers who had not filed GST returns had steadily increased from 10.56 percent in November 2017 to over 28 percent in November, 2018. Even for the composition dealers, the non-filers increased from 15.03 percent to 25.37 percent.

The third reason is that there has been tax leakages and tax evasion in large numbers. Evasion cases detected by the GST enforcement authorities are simply tips of the iceberg.

The Fourth reason is that there has been considerable slowdown in the economy, particularly in manufacturing, and also in the service sector. This affected revenue collection adversely. After all, GST is a tax on supply of goods and services. If supply is less, obviously the tax collection would also be less.

The Road Ahead -Wish list on GST

No doubt, the Centre with the proactive cooperation of the GST Council has been doing a lot in improving the implementation of GST. But, more will have to be done. While cascading of taxes has indeed been reduced to a great extent, much more can be achieved by including certain critical items within the GST supply chain. They are Petroleum Products, Alcohol, Real Estate (Stamp Duty relating to land) and electricity.

Inclusion of Petroleum Products

Petroleum products may broadly be classified into three categories: (i) Industrial Fuels which are basic inputs for most industries such as Crude Oil, (ii) Transportation Fuels like Petroleum, High Speed Diesel (HSD), Aviation Turbine Fuel (ATF) and (iii) Household Fuels like Kerosene and LPG. While Industrial Fuels are indisputably intermediate inputs in industry, Transportation Fuels and Household Fuels, collectively referred to as 'Emission Fuels' are used more in final consumption, and to a large extent as intermediate inputs as well.

The entire range of petroleum products is subject to multiple taxation in India - Central Excise at Central level and State VAT (Sales Tax) at State Level. Further, there is no input tax credit in the supply chain of these items. Consequently, the incidence of tax on products essentially used as intermediate inputs cannot be estimated, and it leads to a cascading effect on downstream products. However, Emission Fuels referred to above generate negative externalities and their consumption would need to be checked. The problem is that in a large number of cases such Emission Fuels are used as intermediate in industries. As a result, the cascading effect of embedded input taxes becomes significant. One possible solution suggested by economists is to have dual levy of GST with the benefit of input credit as well as the traditional excise duty on the Emission Fuels, and to subject all industrial Fuels to only GST.

Natural Gas is akin to Petroleum Products and derived from the same source. But unlike Petroleum Products, Natural Gas does not generate negative externalities. The general view of the economists, therefore, is that the tax regime for Natural Gas should be necessarily different from the one applicable to other Petroleum Products and, therefore, Natural Gas should be subjected only to GST, with the applicable benefits of input credit.

In the above perspective, time has now come for the GST Council to give nod for effective inclusion of these products in GST. Much will depend on the persuasive efforts of Nirmala Sitharaman, the Union Finance Minister in the new government; the states may find more comfort in continuance of their exclusion because the State VAT collections from the Petroleum products contribute 50 to 55 percent of their total State VAT collection. As explained before, industrial fuels like crude which are basic inputs or intermediates for most industries may be subjected to GST rates at the appropriate slab to be decided by the Council. Emission Fuels may be subjected to a dual levy i.e. GST and an additional tax. By this measure, the revenue concerns can be taken care of, even when the Petroleum products come within the ambit of GST with full benefit of Input Tax Credit.

Inclusion of Alcohol, Real Estate (Stamp Duty) and Electricity

After inclusion of Petroleum products, the next step for the government would be inclusion of Alcohol, Electricity and all sectors of Real Estate within the ambit of GST.

Alcohol

Constitutionally, 'Alcohol for human consumption' has been kept outside GST. Article 366 (12A) of the Constitution has defined GST as any tax on supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption'. So, inclusion of Alcohol will require an amendment of the Constitution. By keeping Alcohol out of GST, the credit chain for the entire supply chain for manufacturing Alcohol gets broken, and it brings in distortion. Inclusion of Alcohol will rectify this default. Since the process of amendment will take time, the government will have to start the process on priority.

Extra Neutral Alcohol (ENA)

While exclusion of Alcohol will take some time, the Government may consider including ENA within GST. That will not need any amendment of Constitution. In the pre-GST era, Central Excise was being levied on Industrial Alcohol which is not for human consumption, and now it is under GST. Therefore, the most critical question would be whether ENA is an industrial alcohol or 'alcohol for human consumption'. It is not in dispute that ENA is used for manufacturing alcoholic liquor for human consumption and that it's not fit for human consumption direct. Therefore, there should not be any difficulty in bringing in ENA under GST, Reportedly, on a previous reference by the Council, the Attorney General had also opined that it can be included in GST since ENA is not being consumed directly by the people. Once included in GST, this will be an additional source of GST revenue to be shared between Centre and the States.

Real Estate

While most of the sectors of Real Estate like construction materials, services related to construction, sale and purchase, renting etc. are already under GST, the matters relating to the land like stamp duty on transactions in Real Estate are still within the jurisdiction of the states. Bringing of all sectors including those relating to the land within GST will bring great relief to the Real Estate sector.

Electricity

The next in line for inclusion in GST would be electricity which is an essential input for manufacturing. Electricity constitutes up to 30 per cent of the cost of production in many key industrial sectors, and its exclusion from GST results in huge cascading of tax. Currently, it is within the jurisdiction of the States.

By bringing all these within GST, the tax base for GST would be substantially widened which in turn would provide the opportunity to bring down the GST rates at each slab.

It may not be difficult for the new government at the centre to give a push for inclusion of these items, because Congress, the main opposition party had also promised in their manifesto to bring most of these items within the ambit of GST.

Rationalization of GST Rates

Talking about GST rates, the next important step would be further rationalisation of the rates. Of the four rate slabs, it would be quite sensible, and feasible too, to merge the two GST rates of 18% and 12% into one rate in between. Once that is done, there would be three GST rates-one standard rate at 15% or 16% percent for most of the goods and services, one higher rate of 28% for demerit and luxury goods and one lower rate of 5% for the goods of consumption by the poor. This rationalisation will also reduce the classification disputes.

Simplified Return Filing System & GSTN Prototype

As a part of procedural simplification, the GST Council, has been continuously bringing in changes in Return Formats. The Council had decided to have simplified Return Forms named 'Sahaj' meant for businesses which make supplies only to Consumers (B2C) and 'Sugam' meant for businesses making supplies to both businesses (B2B) and consumers (B2C).

The GSTN was tasked to finalise and release a prototype of the new simplified Return Filing System. It has recently released a demo tool for the new and simplified return filing form which will be launched sometime later in the year.

The prototype available on  webportal gives stakeholders a feel of what the new return filing system will look like. GSTN has also sought stakeholder feedback on the proposed offline tool.

It will allow users to use functionality such as drop down menus, invoice upload, upload of purchase register for matching with system created inward supplies.

In the proposed system of new GST return filing, which is expected to be implemented from October 1, 2019 a normal taxpayer would have to file form GSTR-1 (Normal) or Form GSTR-2 (Sahaj) or Form GSTR-3 (Sugam) on either monthly or quarterly basis.

Annexure of outward supplies (GST ANX-1) and Annexure of Inward Supplies (GST ANX-2) will be filed as part of these returns. All the outward supplies will be detailed in GST ANX-1 while GST ANX-2 will contain details of inward supplies auto-populated mainly from the suppliers' GST ANX-1.

Suppliers will have to file a detailed return in form GSTR-1. Businesses which make supplies to only consumers (B2C) have to file return form 'Sahaj'. It includes details of outward supplies and inward supplies attracting reverse charge as well as summary of inward supplies for claiming input tax credit (ITC). Besides, businesses making supplies to both businesses (B2B) and consumers (B2C) have to file returns form 'Sugam'. It includes summary of supplies made and tax liability, summary of inward supplies for claiming ITC, along with details of interest due and tax payment.

Stakeholders can share their comments on 'feedback.newreturn@gstn.org.in'.

The new return filing format would replace the current requirement of filing final sales return GSTR-1 and summary sales return GSTR-3B.

With this prototype being released, the companies would now need to ensure that appropriate modifications are executed to their ERPs, business processes, etc. for culling out correct information on all aspects including eligibility of input tax credits. The users and developers are expected to use the interactive tool and give a feedback on the prototype, allowing users to use various functionalities including uploading of invoices and purchase registers.

GST Council Decisions of June 21, 2019 on RETURNS

The GST Council, in its 35th meeting held on 21.06.19 decided that the new return system will be introduced in a phased manner in order to give ample opportunity to taxpayers as well as the system to adapt. Between July, 2019 to September, 2019, the new return system (FORM GST ANX-1 & FORM GST ANX-2 only) will be available for trial for taxpayers. Taxpayers will continue to file FORM GSTR-1 & FORM GSTR-3B as at present.

If only such best practice of trial runs was followed in respect of GSTN before introduction of GST, much of the implementation problems could have been sorted out before the implementation. Anyway, one learns from mistakes.

From October, 2019 onwards, FORM GST ANX-1 will be made compulsory. Large taxpayers (having aggregate turnover of more than Rs. 5 crores in previous year) will file FORM GST ANX-1 on monthly basis whereas small taxpayers will file first FORM GST ANX-1 for the quarter October, 2019 to December, 2019 in January, 2020.

For October and November, 2019, large taxpayers will continue to file FORM GSTR-3B on monthly basis and will file first FORM GST RET-01 for December, 2019 in January, 2020. It may be noted that invoices etc. can be uploaded in FORM GST ANX-1 on a continuous basis, both by large and small taxpayers, from October, 2019 onwards. FORM GST ANX-2 may be viewed simultaneously during this period but no action will be allowed on such FORM GST ANX-2.

From October, 2019, small taxpayers will stop filing FORM GSTR-3B and will start filing FORM GST PMT-08. They will file their first FORM GSTRET-01 for the quarter October, 2019 to December, 2019 in January, 2020. From January, 2020 onwards, FORM GSTR-3B will be completely phased out.

In order to provide sufficient time to the Trade and Industry, the time limits for filing of Returns have been extended.

Certain Other Important Decisions of Council Meeting

In order to ease the compliance burden, the GST Council took a slew of measures including a decision to allow Aadhaar number for GST registration. Aadhar would be used as the identity and address proof required for registration for GST.

Secondly, the tenure of the National Anti-Profiteering Authority has been extended by two years. The aforesaid authority was created to ensure that any reduction in the rate of tax on any supply or any benefit of input tax credit are passed on to the consumer by way of commensurate reduction in the price of goods or services.

The authority did serve its purpose. Till date, the Authority has passed 67 orders on allegations of undue profit. There are many cases where the Authority has intervened justifiably against defaulters, even as it has been fair about determining 'undue profiteering' and even passed orders in favour of the assessees in deserving cases. Considering the foregoing and also the fact that a number of actionable complaints are under examination, the said extension was necessary.

Steps to Address Revenue Concerns

As explained before, revenue concerns are serious and these need to be addressed on priority. Simplified compliance procedure, laws and rules drafted without any ambiguity and without leaving any scope for disputes coupled with reasonable and rationalized GST rates would no doubt help in more taxpayers becoming GST compliant. But there are certain incorrigible tax evaders who do not respond to these gestures. Strict enforcement action is the only answer for these tax evaders.

In its 35th meeting, the GST Council decided to introduce electronic invoicing system in a phase-wise manner for business-to-business or B2B transactions. The move is set to help tax authorities contain the menace of tax evasion. Another anti-evasion measure taken by the Council is requiring registered multiplexes to issue tax invoice. Accordingly, the electronic ticket issued by them would be deemed a tax invoice.

While e-invoicing system would initially be implemented for B2B segment only, with e-ticketing for multi-screen cinema halls, a similar mechanism is also proposed for B2C segment. If this experiment turns out to be successful, one can expect this mechanism getting extended to other B2C segments as well.

The Phase-1 is proposed to be voluntary and would be rolled-out from January 2020.

These apart, Rule 138E of the CGST Rules, pertaining to blocking of e-way bills on non-filing of returns for two consecutive tax periods, will be brought into effect from 21.08.2019, instead of the earlier notified date of 21.06.2019.

Thus, stringent enforcement action with revamped anti-evasion wings of the GST Commissionerate and the Directorate General of GST Intelligence, together with simultaneous extension of trade facilitation to bona fide taxpayers is the need of the hour. An impression had gained ground that the GST authorities being busy in implementation of GST and sorting out the teething troubles, did not give much attention to the anti-evasion measures. The delinquents among the trade and industry took full advantage of this situation and evaded GST substantially through various means like availment of credit through fake invoices without making any supply, stopping of filing of returns, surreptitious removal of goods without payment of GST and also by keeping the entire supply chain out of GST ambit.

To some extent, this may be correct. But, it must be understood that when a new tax reform is launched, the policy-makers and tax administrators do take care to ensure acceptability of the new tax system by the people in general, and they do not intend to start vigorous anti-evasion measures with hawkish approach right from the inception of the new system. But it is also a fact that from the second year of implementation, the enforcement actions have started vigorously and good detections are being made. There will have to be further strengthening of anti-evasion machinery through technology as well as collection of human intelligence from informers. Trade facilitation for bonafide trade has to go side by side with stringent enforcement actions against tax evaders.

Concluding Remarks

In light of the discussions above, it may be convincingly said that India implemented GST successfully, notwithstanding the initial technology glitches and policy glitches in respect of Small Business, wrong fitment of goods at different GST rate slabs and complicated Return formats. The initial technology breakdown and wrong policies towards the Small Business gave the otherwise fairly well implemented GST a bad name. The shock given to the Small Business led to their closure and consequent heavy unemployment. Said that, it is also a fact that the GST Council acted very responsibly and retrieved the situation through course corrections in frequently held GST council meetings from October, 2017. It is also praiseworthy that the Centre and thirty-one states showed the maturity of our democracy by coming together in the spirit of Cooperative Federalism. A point not to be missed is that decisions in all the thirty-five meetings of the Council have been unanimous, without resorting to voting.

The process of implementation of GST has always been a 'work in progress'. Now, at the end of second year of implementation, time has come to expedite completion of the important pending work on GST reforms, as have been outlined in foregoing paragraphs. And, for taking the things forward without any loss of time, the Council may not shy away from resorting to voting in case of lack of unanimity.

[ The author is Former Chairman CBEC, and author of three books on GST, the last one being "GST Explained For Common Man"; he is also the Consulting Editor, TIOL. The views expressed are strictly personal.]