JULY 01, 2021

By Sumit Dutt Majumder

Four Broad Expectations

A major tax reform is generally planned with the following expectations in mind.

First, the revenue target for the new tax must be achieved smoothly. Secondly, the new tax should be easy to understand and easy to comply with by the taxpayers. Thirdly, it should be easy to administer with modern technology.

The above expectations hold good for the Goods and Services Tax (GST) too. GST being a tax to be administered jointly by the Centre and the States, there was a fourth expectation: Cooperative Federalism between the Centre and the States will ensure smooth administering of GST.

Today, on the first day of the fifth year of introduction of GST, it would be good to have a look at where we stand on the foregoing expectations and certain other related issues.

Expectations on Revenue

On revenue targets, it was expected that in the first year of introduction of GST the target may not be achieved because of the teething problems in the initial months. But it was not expected that the technology support for administering the tax would be found inadequate. That happened solely because the tax was introduced without making all the modules of the GST Net, the IT infrastructure, fully operational, after the usual Trial Runs for each of the modules.

Thus there were technology glitches and consequent switchover to manual mode for certain business processes, from the beginning itself. Some of the delinquents among the trade took advantage of the situation and resorted to massive frauds, particularly in wrongful availment of Credit of Duty, including Transitional Credit. Use of technology as designed for the business processes could have largely prevented this fraud.

Being in the first year of introduction, when the administration's main concern naturally was smooth introduction of the new tax and its acceptance by the taxpayers, not much attention was given to the enforcement measures to curb the evasion. It was only from the beginning of the second year that massive enforcement measures led to the detection of equally massive tax evasions.

These were the broad reasons for substantial shortfall of revenue in the first year. During the second year, i.e. 2018-19, there was a gradual recovery. By the middle of 2018, when the country's economy was doing well and the technology and certain policy glitches were corrected, the revenue was doing well too. And one expected that the tax buoyancy would take off soon. But, by the beginning of 2019, the growth curve of the Indian economy started going south. And so did the GST revenue.

One must remember that GST is a tax on supply of goods and services. When the economy does not do well, it hurts the employment first, which leads to less purchasing power, which in turn leads to a lack in demand and hence a lack in supply, in respect of both goods and services. GST being a tax on supply, with less supply the tax on supply, i.e. GST revenues, will also come down.

Therefore, in spite of various reforms undertaken by the GST Council, in respect of policy and procedure, the GST revenues did not look up as expected. Some bright sparks in GST revenue were seen mainly due to extraordinary efforts of the Directorate General of GST Intelligence and the enforcement wings of the GST commissionerates in detecting GST frauds and evasion and taking punitive measures against the tax evaders. These measures had a salutary effect on the delinquents among the trade in not going over to the other side of law and, rather, complying with law.

Then came the COVID-19 pandemic, and with it the economy almost came to a standstill from the last week of March 2020, when the nationwide lockdown was imposed, and it continued for a few months. With the first wave of Covid subsiding gradually and the economy opening up in stages, hopes were aroused in the revival of GST revenues too. But, a devastating second wave of Covid swept the country from the second week of April, 2021, and the economy was again affected because of a partial or total lockdown at different places in the country. While the second wave is on the wane, scientists are now warning us about the possibility of a third wave.

In view of the foregoing, except for recovery of the GST evaded in the past, through enforcement measures and through strict auditing of the identified revenue risk entities, one cannot expect any tax buoyancy in GST in the near future, until the economy bounces back.

Expectations of a Simple GST

Turning towards the second expectation that GST would be easy to understand and easy to comply with for the taxpayers, one would have to say that at the time of introduction of GST in July, 2017, the tax was neither easy to understand nor easy to comply with for the medium and small businesses (mainly the small businesses). The corporates did not face much difficulty.

Small Business

The reasons for the discomfort of the small businesses were as follows.

First, the threshold for coming under the ambit of GST was too low at an annual turnover of merely Rupees Twenty Lakhs. Besides, for interstate supply of goods and services, this exemption was not applicable, meaning thereby that for a supplier to supply goods and services worth, say, even Rupees Fifty Thousand from Delhi to, say, Faridabad, in another state Haryana, he will not be entitled to the benefit of the threshold of Rupees Twenty Lakhs. This had hit small business badly and many small scale industries had to close down. Later this condition regarding inter-state trade was waived only for the service providers. Further, the threshold was increased to Rupees Forty Lakhs only for a supplier of goods, but not for a supplier of services who continued to have a threshold of Rupees Twenty Lakhs. Further, the condition regarding inter-state supplies continued for a supplier of goods.

This is one example of a complicated GST. Another example was the collection of GST on Reverse Charge Mechanism from the recipient of the goods and services and not the supplier. This was applicable to notified goods and services in respect of cases where the supplier was outside GST because of threshold exemption, but the receiver was a taxpayer. This policy made the recipients not buy from the small businesses who were outside GST. This, again, hurt small business badly.

Besides, the small businesses had a major problem in dealing with the business processes through the IT platform. Before introduction of GST the services of the GST Suvidha Providers were promised and they were to facilitate the small businesses in this regard. But due to the initial IT glitches they were not available for quite some time. This had put the small businesses in tremendous difficulty.

GST Rates

Complications were also created in the field of GST rates. First, it has a four tier rate structure with rates at 5%, 12%, 18% and 28%. There were two issues. First, too many items - more than 250 - were put in the 28% slab, and similarly for the 18% slab. These were causing a massive problem. After several meetings of the GST Council, the number of items in the 28% slab was brought down from 250 to merely 28 items. The second issue was regarding the number of slabs which was considered too many, particularly in the context of the single GST rate prevalent in many countries. It was however rightly felt that in the Indian context it would not be advisable to have a single GST rate, but it was also felt that four slabs were too many. It was observed that most of the classification disputes arose in determination of the classification of an item - whether it would be under 18% slab or 12% slab. This is unnecessary complication. It is high time that the two slabs are merged into one slab, possibly 15%. Once this is done classification would be much simpler. There will be some loss and some gains in revenue, in as much as, the current 12% slab items would move up to whatever higher rate slab is fixed, and the current 18% slab items would come down to the newly fixed rate.

Petroleum and Alcohol

The next pending issue, before the policymakers, is bringing in petroleum and alcohol within the ambit of GST. The state governments are likely to oppose the inclusion of alcohol but there is no valid reason for not bringing petroleum in GST. Because of petroleum, and its products being outside GST the input credit chain is broken in the use of petroleum in the manufacture of many items under the ambit of GST. Consequently credit for petroleum inputs are denied and that credit amount is added to the cost of the manufactured item. No doubt, bringing of Petroleum within GST will bring down the revenue for both the Centre and the States. But this position cannot be allowed to continue indefinitely, to the detriment of the interest of a decent GST model for India.

Initiatives for the Facilitation of Taxpayers

While still on the second expectation of easy compliance by the taxpayers, it is heartening to note that a few well intentioned initiatives have been taken for the facilitation of taxpayers in the past one year. These include the following.

The most important initiative has been in the field of GSTR-3B Return related measures. It includes the Quarterly Return Monthly Payment (QRMP) Scheme which has been envisaged to reduce compliance burden of the smaller taxpayers having an aggregate turnover of upto Rs. 5 Crores. It has been introduced on 1st January, 2021. It has been estimated that about 90% of the taxpayers under GST are eligible to avail of this scheme. A Nil filing GSTR-3B Returns through SMS has also been introduced from 8th June, 2020. Further, in order to help taxpayers in determining and self assessing their available input tax credit, an Auto-Drafted Input Tax Credit Statement in Form GSTR-2B is being made available to the taxpayers from August 2020. Besides, Auto-Population of GSTR-3B Return on the Portal is happening from 12th December, 2020, based on the details given by the taxpayers in the Form GSTR-1 and from the details given by their suppliers in their Form GSTR-1, as made available to the taxpayer in his Form GSTR-2B.

There has also been facilitation in issues relating to Annual return related matters in respect of form GSTR-9, Reconciliation statement in form GSTR-9C and self-certification of Reconciliation statement.

A few measures relating to the e-invoicing facility have been introduced for B2B supplies from 1.10.20. for the taxpayers having an annual aggregate turnover of Rs. 500 crores or more. Further, the threshold limit for generating e-invoice has been brought down to Rs. 100 crores from 1.1.2021 and to Rs. 50 crores from 1.4.2021.

These apart, the following initiatives are also worth mentioning - Refund related matters, Amnesty Scheme to provide relief to taxpayers regarding Late Fee for pending returns, Rationalisation of Late Fee imposed under section 47 of the CGST Act and Retrospective Amendment of Section 50 to provide interest payment on Net Cash Basis.

Covid Relief Measures

It is also appreciated that the GST Council and the Government acknowledged the devastation created by COVID-19, causing lots of inconveniences to the taxpayers. Keeping this in mind there has been a slew of COVID Relief Measures in GST Compliance. The measures included Reduction in Rate of Interest, Waiver of Late Fee, extension of due date of filing in respect of GSTR-1, IFF, GSTR-4 and ITC-04, and Extension in statutory time limits under section 168 A of the CGST Act.

These apart, in case of listed COVID treatment related goods and services, the rates of GST have been reduced. Considering that these goods and services related to the saving of human lives in a pandemic situation, one had expected that these items could have been zero-rated for a particular period of time. Revenue loss, in this regard, would not have been that huge. On the other hand, it would have been a big relief for COVID patients in the category of poor and middle class. This could have also earned tremendous goodwill for the government.

In light of the foregoing discussions on the second expectation of easy compliance by the taxpayers, it can be said that although there were quite a few glitches and hurdles on the way to the taxpayers' easy compliance in the initial years, over time quite a few of those glitches have been removed and more steps are being taken to facilitate the taxpayers.

Expectation of Easy Administering of GST

On the third expectation of easy administering of GST by the taxman, with the help of modern technology, it may be said by referring to the foregoing discussions on the first and second expectations that the experiences in the initial years were not good. But in later years, with lots of reforms and procedural simplifications, both in policy matters as well as in technology aspects, administering by the taxmen has improved and it is getting simpler and easier.

Cooperative Federalism

Now let us look at the fourth expectation, that the Cooperative Federalism between Centre and the States would ensure a smooth administering of GST. Before GST came in 2017, both the Centre and the States had sovereign power to tax in areas well demarcated in the Constitution. That individual sovereignty was surrendered on the platform of GST when both the Centre and the States agreed to a shared sovereignty where both the Centre and the States collected GST as Central GST and States GST respectively. Thus, Cooperative Federalism became the 'Soul of GST'.

Until August, 2019, the Cooperative Federalism was eminently displayed in the meetings of the GST council under the chairmanship of the late ArunJaitley, then Union Finance Minister. While there is a provision of voting in the GST Council, the Finance Minister ensured that all the decisions of the Council were taken on the basis of consensus, and not voting. After ArunJaitley, one saw a break in that tradition when the issue of taxation on Lottery went for voting. Since then, a crack has been perceived in the spirit of Cooperative Federalism. That crack was seen clearly in the 43rd and 44th GST Council Meetings on May 28 and June 12 of 2021 respectively. The fact that the GST council did not meet for six months, between October 20 and April 21, did not help the cause of GST either. Moreover, the States have expressed grievances over nonpayment of compensation in full. A feeling is gaining ground that the Centre and the States are not on the same page on many issues. This is not a healthy sign for promoting Cooperative Federalism. It is hoped that the Union Finance Minister will take the initiative of discussing the issues in dispute with the States and sort them out soon. This will go a long way in ensuring a smooth administering of GST through Cooperative Federalism between the Centre and the States.

[The author is Former Chairman, Central Board of Excise & Customs and Author of Books on GST and Customs Valuation ]