JULY 09, 2022

By Shailesh Sheth, Advocate, M/s. SPS Legal

FIVE years ago, at the stroke of midnight on June 30, 2017, a child with a potential of changing the very face of the Indirect Tax regime of the country was born. Even before its birth, this child had already been fondly named as 'Goods and Services Tax' or 'GST'.

The birth of this child was hailed as a 'historic event' by the Government, policymakers, legal luminaries, economists, officers of the Finance Ministry, tax professionals and even taxpayers. Almost in one voice, all predicted that this child would bring about a fundamental change in the direction and face of the indirect tax regime and in the long run, of the Indian economy, and would emerge as one of the most important enabling factors for the growth of the economy.

It is, therefore, hardly surprising that amidst this atmosphere of euphoria, enthusiasm and expectations prevalent all around, hardly anyone, except a bare few, noticed certain 'birth defects' with which this child was born and if anyone noticed them, they were shunned. The voices of concern of a few for these 'defects' was almost drowned in the din created by the loud thumping and greetings with which the arrival of the child was greeted!

No doubt, despite these birth defects, this child has completed 5 (five) years today and in this relatively short age, has made some significant achievements. One would be doing injustice if these achievements are not taken note of.

Noteworthy amongst these achievements are:

a. Increase in tax compliance and reduction in the compliance cost due to unification of various indirect taxes hitherto prevalent at the Central, State and local level;

b. Mitigation of the harmful effect of the 'tax on tax' due to expansive coverage of 'input tax credit' (ITC) as compared to the erstwhile Cenvat Credit or VAT credit;

c. Digital platform-based statutory compliance leading to the elimination of the interface between taxpayers and tax officers, to a great extent, and in turn, reducing the friction frequently arising between them;

d. Deployment of technology making the task of obtaining registrations in different states, filing returns there and paying taxes simpler;

e. Relieving businesses of the need to open depots or branches in various States due to business or legal compulsions;

f. Free, easy and unhindered movement of goods across States, well almost, due to the removal of check-posts;

g. Same tax rate for the same product or service throughout the country leading to the opening of the market for all and control over tax disputes and tax evasion;

h. End of unhealthy and unproductive competition between States for attracting investments;

i. Rising revenue from GST with the law attaining stability and maturity over the years;

j. Birth of an all-important Constitutional body called ' GST Council' providing a new dimension to the powers of the Centre and the States to levy indirect tax or the 'consumption tax' (as is also known).

Undisputedly, there is substantial merit in the claim of this child having made the above important achievements in a short span of five years even if the claim is not absolutely true! If viewed only against the backdrop of these achievements, the birth of this child may have to be accepted as nothing less than a 'miracle'! It would be an understatement to say that the implementation of such a reform in India, a federal country wedded to democracy involving the Union, 29 States and 6 Union Territories ruled by different political parties was a formidable one! Given this predicament, achieving a consensus amongst all the stakeholders for willingly relinquishing their independent Constitutional right to levy indirect tax and for the adoption of a tax policy that envisages the levy of a common 'destination based value-added tax' operating through invoice-credit method on a pan-India basis is indeed a 'miracle' for a country like India!

However, can we simply rest on our laurels over these achievements and continue to gloat over them ad infinitum? The birth of this child might be a miracle but as it is attaining maturity, it is time to take a serious look at the defects with which it was born and it is vitally important to eliminate them as far as and as early as possible.

Let us have a brief look at the roots and nature of these defects in the child.

Almost all countries who have adopted 'VAT' or 'GST' as a tax policy, have done so with the chief objective of raising revenue as this tax policy is considered a ' Money Machine' . However, in contrast to this universal understanding, India adopted this tax policy with two main objectives: one, unification of various indirect taxes prevalent at the Central, State and Local level in one single tax and; two, mitigation of the harmful cascading effect of 'tax on tax', thereby ensuring the availability of the goods and services to consumers at reasonable prices and so as to encourage the growth of businesses.

Considering these avowed objectives, 'GST' has been justifiably lauded as 'A Game Changer', 'A Reform of the Century', 'The biggest Indirect Tax Reform of Independent India' and so on and so forth. However, all these varied descriptions by which 'GST' was described, created a strong impression that 'GST' is only a 'Tax Reform', albeit, a historic and ambitious one! Perhaps, here lie the roots of some basic misunderstandings about the impact of this tax policy and the disregard of the birth defects engulfing it. That, 'GST' is not merely a 'Tax Reform' but is also a 'Business Reform' and even an 'Economic Reform ' did not dawn upon the majority of stakeholders. But more than this, no one really realized that in a country like India, 'GST' will be nothing less than a fundamental ' Cultural Reform' for the tax policymakers, tax officers and taxpayers! No one really thought that in making the laws and implementing and interpreting them, the lawmakers, tax officers and taxpayers hitherto guided by traditional mindsets would be forced to fundamentally change their guiding philosophies and operational style! Resultantly, this particular 'mindset' deeply rooted in all the respective stakeholders over the decades is starkly visible in the laws governing this 'Tax of the 20th Century' and their implementation and interpretation!

Unfortunately, no concrete and consistent efforts were made to create awareness amongst taxpayers and taxmen and sensitize them about the fundamentals of this tax policy, its objectives, its short term and long-term effects, the basic characteristics of GST laws and understanding as well as the preparedness for their implementation. Large business entities, with abundant resources at their disposal, did not find it difficult to understand, accept and implement the new tax regime within their respective organizations. However, the micro, small and medium size businesses (MSME), the backbone of India's economic growth suddenly found their world turned upside down on the overnight introduction of this revolutionary new tax regime! As the majority of units in this sector are unorganized and form part of the 'informal economy', the impact of the new tax regime on them was severe. Things were not helped any less because of the digitization of the tax regime. In fact, 'GST' is also proudly described as 'Digital Tax'. But no one really thought or cared about that small, unorganized businessman with an annual turnover of say Rs.50 lakhs or even couple of crores and how he would adopt this technology-based tax regime? The poor businessman is in the habit of buying a ready bill book from the stationery shop in the neighborhood and issues (if at all!) a bill/invoice by placing carbon paper between two leaves and it was almost taken for granted that he would be ready to upload the tax invoice on the GSTN Portal post-midnight of June 30, 2017! Obviously, the harried taxpayers in the MSME Sector were forced to rush to tax professionals for help, which in turn, increased their compliance cost not at all commensurately with their gross annual turnover and what they earned out of it.

And not only in case of the taxpayers but even in case of tax officers at Central and State level (particularly the latter), no concrete and meaningful efforts were apparently undertaken to create any understanding amongst them in respect of the essential features of the new tax policy, its various nuances and intricacies and the implementation of the new tax laws. At the end of 5 years, this lack of preparedness and understanding amongst tax officers is becoming clearly visible considering the arbitrary exercise of powers by them in large numbers of cases and demands raised in a mechanical manner!

As if this was not enough, no one appeared to have seriously thought about the capacity and preparedness of the GSTN Portal - the backbone of this 'digital tax' - to face the formidable challenges arising from the implementation of the new tax regime. Looking at the glaring technical glitches arising so frequently and making the lives of taxpayers and tax professionals miserable and nightmarish, it is now evident that an illusion had been created about the capacity and preparedness of the GSTN Portal for the successful implementation of the new regime.

[To be continued…]