The year 2017 will always be remembered as the year which saw the implementation of the biggest and most important reform since Independence—the Goods and Services Tax (GST). The reform, which took more than a decade of intense debate to come to fruition, was finally implemented with effect from 1 July 2017, subsuming almost all indirect taxes at the central and state level.
GST, which was publicised as ‘one nation, one tax’ by the NDA government, led by Hon’ble Prime Minister Narendra Modi, aims to provide a simplified, single tax regime in line with the tax frameworks present in several major economies across the globe.
On the first anniversary of this landmark reform, it is worthwhile to reflect upon the year gone by to take a holistic view of the experience so far, the emerging challenges which India Inc. may face in the coming years and the areas of improvement to make GST ‘a real success’ for the nation as a whole.
A year is perhaps too short a time to evaluate the impact of GST on a macroeconomic level. However, an estimate indicated that India’s GDP increased from 6.5% in Q2 to 7.2% in Q3 of 2017–18.1 The corresponding figures for 2016–17 were 7.6% and 6.8% respectively. The meagre dip in GDP in the initial phase of the GST implementation was expected given the scale of the changes that GST brought in the business and tax administration. Post a slow start, the revenue collections surpassed the target 1 lakh crore INR mark in April 2018 (March 2018 revenue).
GST, also dubbed as a ‘good and simple tax’, has led to a fundamental shift in the way business is being conducted. Industries took the implementation of GST as an opportunity to redefine their supply-chain models, customise their IT processes, and evaluate their internal and external arrangements to safeguard interests and minimise tax costs.
As the GST journey progressed, there was a growing realisation of its far-reaching impact. Industries faced various challenges ranging from understanding new and unique concepts and complex documentation to high rates of certain goods and services, and complex or unclear treatment of several common transactions.
One of the major areas of concern faced by industries was relating to the functioning of the online compliance portal. The experience in using the online compliance portal has not been smooth and the government had a difficult time in fixing the bugs and providing timely remedial measures. These technical glitches resulted in frequent deferment of due dates of returns in the initial months of the GST implementation.
The government has been able to provide resolution to some of the technical challenges initially faced by India Inc., while some issues such as a slow response rate, especially nearing the return filing date, are still an area of concern for the government.
Another challenging aspect relating to GST is its complex tax structure. Presently, the Indian GST system has four tax slabs—namely, 5%, 12%, 18% and 28%—for goods and services while most countries around the world have a single GST rate across goods and services. As per a recent publication by the World Bank, India has one of the highest tax slabs—that is, 28%—among the countries which have implemented GST or VAT.2 In addition to the four tier rate structure, the GST law also prescribes levy of a compensation cess on certain specific categories of goods and services, including motor vehicles, tobacco and aerated drinks. While this has been coined as a ‘cess’ (which should typically apply to the tax element), it is levied on the base value of goods. Therefore, the compensation cess is in effect another tier of tax on such goods, that too with limited credit eligibility avenues.
Upon the introduction of GST, the government introduced the unique matching concept for taxpayers to claim input tax credit. However, due to technical challenges, the matching concept could not take off.
Refunds under GST were another area of concern where taxpayers, especially exporters, faced lot of challenges in filing their refund claim application due to technical difficulties. The exporters’ community raised their concerns and the government, realising their need, organised a ‘special refund fortnight drive’, wherein the central and state GST officers were instructed to expedite the clearance of pending applications for GST refunds.
The introduction of GST has also brought in some new and unique concepts which were never heard of in the history of the Indian taxation system. These include anti-profiteering provisions, which require a taxpayer to pass on the GST benefit to the end customers by way of commensurate reduction in the price of goods and services. While this concept has been borrowed from the Australian GST law to keep the inflation in the country under control, the Indian GST law does not provide enough clarity on the granularity of data to be used for the computation of revised prices—that is, if prices are to be reassessed at an entity, product or SKU level.
Other new concepts include the taxability of transactions between branches of the same entity (i.e. self-supply) and levy of GST on the import of services from related parties without any consideration.
The GST law is constantly evolving and the authorities have been quick to address public concerns by issuing a series of notifications, clarifications, press releases and FAQs to resolve a wide range of issues. The government’s extensive use of social media, especially Twitter, was unheard of till now. Furthermore, the government has launched various web-based mobile applications to facilitate the dissemination of information on a real-time basis. While there is a gap between the expectations of India Inc. and the actual delivery on the aspects of simplification, ease of doing business and overall reduction in prices, below are some of the emerging challenges that we need to be mindful of:
Due to IT-related glitches, the government decided to defer the requirement of the matching concept till necessary technological upgrades were carried out to cater to such a huge flow of information. In a recent GST Council meeting held in May 2018, the government decided to formally put on hold the matching concept.
Due to technical glitches encountered on the GSTN portal, the government decided to defer filing of GSTR 2 and GSTR 3 and prescribed a consolidated return in Form 3B, which was to be filed along with GSTR-1 in the interim period. To the surprise of industries, some state governments have begun issuing notices for discrepancy, based on returns filed by recipients in Form 3B vis-à-vis transactions disclosed by suppliers in their outward supply statement (GSTR 1).
The GST laws do not provide specific transitional provisions on several relevant aspects—for instance, enabling a recipient to avail credit of a tax demand on a transaction for which a supplier did not pay tax because of a bona fide mistake or belief, or allowing payment of a demand because of denial of CENVAT credit through the reversal of Central GST credit.
Despite initial teething problems, the implementation of GST has been largely successful. As a step further, the government should focus on simplifying processes and removing the ambiguity around widely debated tax-related issues to enable a painless experience for India Inc. The following are some areas to be looked upon in the coming year:
At present, certain products such as petroleum products, alcohol and immoveable property are outside the GST net, which defeats the very objective of implementation of a single tax law in India. It is therefore expected that the government will look towards the expansion of the GST base by bringing these products within its ambit in the year 2018–19.
The government has taken the initiative to consolidate all periodical returns into a single return. Further, it is also working on a new compliance format and IT-related changes, which may come into effect in the next six to nine months.
Digitalisation of the Indian economy has been one of the main goals of the Modi government and the implementation of GST was in line with this goal. In the future, it will be interesting to see how the government plans to use granular data to its benefit. One of its uses can be as a tool to eliminate tax evasion. The implementation of GST has restored the ‘premium on honesty’ through better tax compliance and transparency in the taxation system. As recently mentioned by the Finance Ministry in its press release dated 18 June 2018, GST has resulted in the formalisation of the economy and, consequently, the flow of information will eventually augment not only indirect tax but also direct tax collections.3
The implementation of GST has truly been a remarkable achievement of the government and India Inc. Although it is still in its early days, GST started on a positive note and the benefits for all stakeholders are evident. It is now time for the government to stabilise the system, remove uncertainty, facilitate compliance by easing processes and expand the tax base to make GST a real success for both the government and India Inc.
1 World Bank. (March 2018). India development update. India’s growth story. Retrieved from http://documents.worldbank.org/curated/en/814101517840592525/pdf/123152-REVISED-PUBLIC-MARCH14-IDU-March-2018-with-cover-page.pdf
3 Press Information Bureau, Government of India. Ministry of Finance. GST leads to the formalisation of economy and widening of tax base. Retrieved from http://pib.nic.in/newsite/PrintRelease.aspx?relid=180011