FEBRUARY 22, 2021

By TIOL Edit Team

THE Traders' call for nation-wide strike on 26th February should turn focus on Goods and Services Tax (GST) reforms recommended by 15th Finance Commission (15thFC).

We urge the Union Finance Ministry to urgently convene a meeting of GSTC Council to decide on 15thFC recommendations. The meeting should, in fact, consider all inputs available in public domain that can help simplify & stabilize GST regime.

In its final report made public on 1st February 2021, 15thFC has made a slew of suggestions including restoring the revenue neutrality of the GST rate; correcting inverted duty structure; rectification of GST network and simplifying tax compliance system. We would revert to these recommendations a bit later.

The Confederation of All India Traders (CAIT), which gave the Bharat Bandh call, is obviously not satisfied by the changes in GST framework unveiled in the Union Budget 2021-22.

Listing out steps taken to simplify GST system in her Budget speech, Finance Minister Nirmala Sitharaman said: "The GST Council has painstakingly thrashed out thorny issues. As Chairperson of the Council, I want to assure the House that we shall take every possible measure to smoothen the GST further, and remove anomalies such as the inverted duty structure".

It is good to learn that she has an open mind for improving further GST. We hope she would strive for consensus on stable GST regime at next meeting of GST council.

CAIT intends to issue a white paper on how GST is hurting trade and economic growth. This marks complete change in its position: In 2017, CAIT had unveiled white paper to educate traders on GST, which Prime Minister Narendra Modi referred to as good and simple tax.

The implementation of this well-intended reform has neither been good nor simple since its launch in July 2017. It has always been a major reform in the works, characterized by too many, too frequent changes in regulations of all hues including legislative and fiscal.

From a small retailer to biggest entity such as the Railways, almost everyone has had to rely on a Consultant to find the way out of the GST maze.

A news story has quoted President of Federation of Surat Textile Traders Association (FOSTTA) Manoj Agarwal as saying "Traders' community is totally exhausted with the frequently changing rules under the GST law. Instead of doing business, the traders are busy all day to resolve the GST issues arising out of the distorted system".

We acknowledge their discomfort. We, however, urge CAIT and other hartal-sponsoring bodies to defer or drop the agitation till GST Council takes decisions on the 15thFC's recommendations & their specific suggestions to simplify and stabilize GST regime. 

Coming back to 15thFC's final report released on 1 st February 2021, it has rightly recommended merger of 12% and 18 percent GST rates, an idea which has been talked about for too long. The Commission has advocated three GST rates – merit rate, standard rate and demerit rate. It has also called for minimizing exemptions to harvest efficiency and revenue gains.

As put by 15thFC, "The rate neutrality of GST, which was compromised in the multiple downward adjustments of rates subsequent to the introduction of the tax, needs to be restored. Immediately, the focus should be to streamline its technology platform and to ensure prompt filing of returns and invoice matching. The streamlining of the GST rate structure will greatly help to move towards its revenue potential ".

The Commission has estimated the gap between potential GST receipts and actual collections in 2015-16 as 2% of the Gross Domestic Product (GDP). For all direct and indirect taxes put together, it has estimated tax gap at 5% of the GDP. This gap should guide multi-facet tax reforms without creating hardships for tax payers.

15thFC has also recommended streamlining of multiple tax structure to resolve the inverted duty structure between intermediate inputs and final product. The Commission believes: "This can be corrected even without the weighted effective tax rate going up, with a salutary impact on net revenue collections of the general government".

As for compliance, 15thFC has referred to Comptroller and Auditor General's (CAG's) Report No. 11 of 2019 on GST. CAG had noted that even after two

years of roll out of GST, system validated Input Tax Credit through ‘ invoice matching ' is not in place and non-intrusive e-tax system still remains elusive.

The Commission noted that the complexity of return mechanism and the technical glitches resulted in roll back of invoice-matching, rendering the system prone to ITC frauds. Thus, on the whole, the envisaged GST tax compliance system is non-functional. "There are serious handicaps to the systematic detection of frauds", it observes.

We believe that the cost of tax compliance burden should be shared by authorities too. This can be in the form of annual tax rebate for timely filing of returns.

GSTC council should also take a call on GST Compensation Fund (GST-CF) in the light of computations done by 15thFC.

According to 15thFC, "The expected significant shortfall of SGST revenue vis-à-vis the assured path in 2020-21, 2021-22 and Q1 of 2022-23, coupled with sluggishness in collections from the GST compensation cess, has already led to a considerable gap. Going by our projections, the estimated shortfall of SGST vis-à-vis the assured path – including the backlog from previous years – will amount to about Rs. 7.10 lakh crore until June 2022 (only to the States). From our projections of collections from GST compensation cess, it turns out that the compensation cess fund will have an amount of only Rs. 2.25 lakh crore by that time, from the collections of 2020-21 to Q1 2022-23".

The GST Council is yet to decide on its approach towards the requirements of GST compensation to the States, over and above the collections from the compensation cess till Q1 2022-23.

The Commission has assumed that the Centre would fully compensate the States' shortfall from the assured path of SGST. It believes that the shortfall in the requirements of compensation till Q1 2022-23 would be met by extending the levy of GST compensation cess till the year 2025-26. The Report says: "Our calculations showed that the estimated collection from the compensation cess, if extended till 2025-26, will be just enough to clear the liabilities towards the States".

There are also other observations in 15thFC report that merits attention of GSTC Council. The country expects the Council to resolve all issues at the earliest. This would certainly pave the way for the country's march towards robust GST receipts that should benefit all stakeholders.